Signs are pointing to a long and strategic effort to regulate what has been called the “Wild West” of the crypto market. Congress has approved a bigger budget for the Securities and Exchange Commission (SEC), and Gary Gensler, chair of the SEC, recently said of the agency’s focus on crypto enforcement, “It’s about compliance. There’s so much non-compliance in this field. It’s part of the business model.”
Those statements came just a few days before the SEC charged two major digital asset firms — Gemini and Genesis — with securities law violations. For his part, Gemini’s co-founder called the agency’s charges “totally counterproductive,” referring to the allegations as a “manufactured parking ticket.”
What is a security? SEC and crypto executives don’t see eye to eye.
The SEC has claimed jurisdiction over the cryptocurrency market because, the agency says, most crypto tokens are securities. The SEC uses the “Howey Test” to determine whether an investment contract exists in the crypto market. This kind of assessment derives from a U.S. Supreme Court decision from 1946. On the basis of the “Howey Test,” SEC officials have said that most crypto tokens should be treated as securities by crypto platforms, and that such tokens must be registered.
However, crypto firm executives say that the SEC has yet to adequately identify which specific tokens are securities, and that the SEC has not adequately clarified how crypto firms should register with the agency. Crypto executives argue that a token’s characteristics and use may change over time, so the SEC’s methods of assessment may be flawed.
Gensler has pushed back on that criticism, calling complaints about lack of clarity a “false narrative.” Rather than establishing new rules specifically for crypto regulation, the SEC is aiming to bring crypto firms into the existing regulatory regime.
Regulators currently pursuing dozens of crypto cases
All signs would indicate that the SEC’s efforts to regulate the crypto industry are just ramping up. Many cases are underway, and more are expected. If you have questions or concerns about legal exposure in these matters, we encourage you to contact the crypto securities law attorneys at Ford O’Brien Landy LLP. With offices in New York City and Austin, Texas, we advise and represent clients nationwide.
Source: Politico, “‘They’re boiling the frog’: SEC’s new crypto crackdown roils industry,” Jan. 18, 2023