In light of recent events that have occurred in the crypto world – the collapse of FTX, a cryptocurrency exchange which was forced to file for bankruptcy after suffering an $8 billion dollar shortfall, and the recent court decision in Securities and Exchange v. LBRY, Case No. 21-cv-260-PB, 2022 WL 16744741 (D. N.H. Nov. 7, 2022), where the United States District Court for the District of New Hampshire granted the SEC’s motion for summary judgment and held that “no reasonable trier of fact could reject the SEC’s contention that LBRY offered LBC as a security” (id. at 8) – it is important to consider whether digital tokens – defined as “[a] digital representation of value or rights that is offered and sold for the purpose of facilitating access to, participation in, or development of a distributed ledger, blockchain, or other digital data structure” or raising capital for the development of the network or platform”[1] – should be regulated as securities or commodities. As discussed below, two U.S. Government agencies argue that they should be granted additional regulatory power in the cryptocurrency market over, and a Senate bill may provide one of them with significant regulatory authority in this space.
Securities – financial instruments (e.g. stocks) that hold monetary value – are regulated in the U.S. by the Securities and Exchange Commission (SEC), which Gary Gensler has been the Chairman of since April 17, 2021. As Chairman of the SEC, Gensler favors more regulation of the crypto market[2] by the SEC. For example, Gensler has asked Congress to grant the SEC more power to oversee the cryptocurrency market and has recently said that companies helping with transactions in the crypto market (i.e. crypto intermediaries) should register with the SEC.[3]
Indeed, and as noted in its fiscal year 2022 agency financial report, the SEC has brought actions against crypto companies, e.g. the crypto asset lending platform Blockfi Lending LLC, which earlier this year settled with the SEC for $50 million. To this end, on November 18th of this year the SEC “instituted administrative proceedings against American CryptoFed DAO LLC…to determine whether a stop order should be issued to suspend the registration of the offer and sale of two crypto assets”, with the SEC alleging that American CryptoFed DAO LLC filed a Form S-1 registration statement that did not contain the required information about the company’s management, financial, and business condition and which “contained materially misleading statements and omissions, including inconsistent statements about whether the tokens are securities.” The SEC Press Release – “SEC Seeks to Stop the Registration of Misleading Crypto Asset Offerings” – can be accessed here and the corresponding Order can be accessed here.[4]
Clearly, both the SEC and CFTC want to further regulate crypto. And indeed, there appears to be space for both agencies to do this. For example, SEC Chair Gensler has supported giving the CFTC more authority to regulate crypto non-security tokens, while maintaining that most crypto tokens are securities and therefore fall under his agency’s purview.[8] But which agency would the cryptocurrency companies prefer to be regulated under? For example, do cryptocurrency companies prefer to have their digital tokens regulated as a commodity because there may be less regulatory requirements than if their tokens were registered as a security, which could explain why the former FTX CEO supports the DPCCA?[9] To what lengths will cryptocurrency companies go to have their tokens be labeled as commodities as opposed to securities? It is important to consider these questions and others as the case law in this space develops and as the DPCCA continues to be viable legislation.
[1] Thomson Reuters, “Digital Token”, https://uk.practicallaw.thomsonreuters.com/w-024-0323?transitionType=Default&contextData=(sc.Default)#:~:text=Also%20sometimes%20referred%20to%20as,or%20other%20digital%20data%20structure.
[2] Thomas Franck, “The SEC needs more power from Congress to fully regulate crypto, Chair Gensler says”. CNBC, Aug. 3, 2021, https://www.cnbc.com/2021/08/03/the-sec-needs-more-power-from-congress-to-fully-regulate-crypto-chair-gensler-says.html.
[3] Niket Nishant, “SEC Chair Gensler slams ‘non-compliant’ crypto industry amid FTX turmoil- CNBC”. Reuters, Nov. 10, 2022, https://www.reuters.com/technology/sec-chair-gensler-slams-non-compliant-crypto-industry-amid-ftx-turmoil-cnbc-2022-11-10/; Michelle Price, “Crypto intermediaries should register with U.S. SEC, agency chair says”. Reuters, Sept. 8, 2022, https://www.reuters.com/technology/crypto-intermediaries-should-register-with-us-sec-agency-chair-says-2022-09-08/.
[4] See “Order Fixing Time and Place of Public Hearings and Instituting Administrative Proceedings Pursuant to Section 8(d) of the Securities Act of 1933” at p. 3, ¶ 12.
[5] Brian Croce, “CFTC chairman says agency well positioned to regulate crypto market”. Pensions&Investments, Oct. 24, 2022, https://www.pionline.com/regulation/cftc-chairman-rostin-behnam-says-agency-well-positioned-regulate-crypto-market.
[6] Brian Croce, “CFTC chairman says agency well positioned to regulate crypto market”. Pensions&Investments, Oct. 24, 2022, https://www.pionline.com/regulation/cftc-chairman-rostin-behnam-says-agency-well-positioned-regulate-crypto-market.
[7] One wrinkle in this bipartisan bill is that former FTX CEO Bankman-Fried was a key supporter of the bill and donated substantial sums of money to the two key architects of the bill: Senator Debbie Stabenow (D-Mich.) and Senator John Boozman (R-Ariz.). On November 10th, in the midst of the catastrophic unraveling of FTX (and just a day before FTX filed for bankruptcy), Senator Boozman released a statement that "[t]he events that have transpired this week reinforce the clear need for greater federal oversight of the digital asset industry" and that both he and Senator Stabenow "remain committed to advancing a final version of the DCCPA that creates a regulatory framework that allows for international cooperation and gives consumers greater confidence that their investments are safe."
[8] Brian Croce, “CFTC chairman says agency well positioned to regulate crypto market”. Pensions&Investments, Oct. 24, 2022, https://www.pionline.com/regulation/cftc-chairman-rostin-behnam-says-agency-well-positioned-regulate-crypto-market; Brian Croce, “SEC chairman backs CFTC getting some crypto authority”. Pensions&Investments, Sept. 8, 2022, https://www.pionline.com/regulation/sec-chairman-gary-gensler-signals-support-added-cftc-crypto-authority.
[9] Brian Croce, “CFTC chairman says agency well positioned to regulate crypto market”. Pensions&Investments, Oct. 24, 2022, https://www.pionline.com/regulation/cftc-chairman-rostin-behnam-says-agency-well-positioned-regulate-crypto-market. According to this article, CFTC Chairman Behnam said the following:
"Our securities laws were built around bridging information gaps between issuers and investors and you just don't have that need in the commodity market," Mr. Behnam said. "On top of the typical and very necessary investor disclosure about risk associated with investing in commodities, we don't have that need or that policy necessity to bridge that information gap about a centralized executive team, about an audited financial statement, about research and development plans and physical assets or liabilities."
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