Non-Fungible Insights: Blockchain Decrypted

Regulatory uncertainty has haunted the digital asset space since its inception. The U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have been engaged in a multi-year turf war over which agency has the power to regulate various aspects of digital assets.

Although the U.S. Securities and Exchange Commission in 2022 approved two exchange-traded funds (ETF) holding bitcoin futures, the Commission has rejected several efforts to list bitcoin spot ETFs.

On August 10, 2023, French securities regulator Autorité des marchés financiers (AMF) published a press release announcing amendments to Book VII of its General Regulation as it relates to digital assets service providers (DASPs) to be consistent with the enhanced registration requirements introduced by the DDADUE Law.

On August 7, 2023, the Securities and Futures Commission of Hong Kong (SFC) issued a warning to virtual asset trading platforms (VATPs) engaging in “improper practices” under the SFC’s new regulatory regime for VATPs. In its statement, the SFC specifically called attention to the potential legal and regulatory consequences associated with false license application claims, established entity non-licensing, and the impacts of current VATP noncompliance on respective future license applications.

On May 18, 2023, House Majority Whip Tom Emmer (R-MN) and Representative Darren Soto (D-FL) proposed the bipartisan Securities Clarities Act (the “Act”). The purpose of the Act is to “clarify and codify that an asset sold pursuant to an investment contract….including an asset in digital form…, that is not otherwise a security…does not become a security as a result of being sold or otherwise transferred pursuant to an investment contract.”

On May 30, 2023, the U.S. Securities and Exchange Commission (SEC) settled its case against a former Coinbase employee and his brother for alleged “insider trading” of digital assets. At the heart of the dispute was whether several digital assets trading on the platform were properly regarded as “securities” under U.S. law.

On May 18, 2023, Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam clarified his position on the CFTC’s authority over digital asset markets. Behnam’s comments are consistent with Securities and Exchange Commission Chair Gary Gensler’s recommendation of greater CFTC authority over cryptocurrency and pushes for increased regulation of digital asset markets generally.

On May 15, 2023, the Securities and Exchange Commission responded to Coinbase, Inc.’s request for writ of mandamus instructing the SEC to act on Coinbase’s previously filed rulemaking petition. In its response, the SEC argued that its regulatory regime is not egregiously delayed and that the SEC is not withholding any decisions already made.

On April 20, 2023, the European Parliament greenlighted the first, harmonized European Union (EU) framework governing crypto-assets, known as the Markets in Crypto-Assets Regulation (MiCA), with 517 votes in favor, 38 votes against, and 18 abstentions.

On February 23, 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (collectively, the “agencies”) issued their second joint statement of the year regarding crypto-asset market vulnerabilities.

In this more recent joint statement, the agencies have drawn their attention to the liquidity risks created by funding from crypto-asset-related entities, and the methods to mitigate such risks.

On February 17, 2023, the Securities and Exchange Commission charged former NBA star Paul Pierce—nicknamed “the Truth”—with violations of Section 17(b) of the Securities Act of 1933, as amended, which makes it unlawful for any person to promote a “security” without fully disclosing the receipt and amount of compensation received for such a promotion. Section 17(b) is known as the SEC’s “anti-touting rule.”

On February 13, 2023, Paxos Trust Company, LLC, a New York State-chartered trust company regulated by the New York State Department of Financial Services, confirmed via a statement that it received a Wells Notice from the Securities and Exchange Commission on February 3, 2023.

On February 9, 2023, the U.S. Securities and Exchange Commission announced charges against Payward Ventures, Inc. and Payward Trading Ltd. for failing “to register the offer and sale of their crypto asset staking-as-a-service program.”

On January 3, 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a joint statement on crypto-asset risks to banking organizations.

On November 7, 2022, the United States District Court for the District of New Hampshire ruled that the digital asset LBRY Credits (LBC), offered to purchasers by LBRY, Inc., is an unregistered security for U.S. federal securities law purposes. This summary judgment follows a March 2021 Securities and Exchange Commission (SEC) enforcement action in which the agency claimed that LBRY’s offer and sale of LBC violated Sections 5(a) and 5(c) of the Securities Act of 1933 prohibiting unregistered offerings or sales of securities in interstate commerce. Ruling in favor of the SEC, the court determined that LBRY offered LBC as a security and rejected LBRY’s argument that it lacked “fair notice.”

On October 11, 2022, BNY Mellon, the oldest bank in the United States, launched its digital custody platform, allowing select clients to safeguard their ether and bitcoin holdings. BNY Mellon is the first large U.S. bank to custody digital assets alongside traditional investments on the same platform.

Summary of the U.S. Department of the Treasury’s Action Plan to Address Illicit Financing Risks of Digital Assets. 

In its Report, the White House recognizes that digital assets require a significant amount of energy resources with potential harmful environmental effects, while at the same time potentially playing an important role in climate-monitoring and mitigating initiatives.

Winston & Strawn’s Digital Assets & Blockchain Technology Group reviews the DOJ’s Report issued pursuant to the Executive Order on Ensuring Responsible Development of Digital Assets.

In the Executive Order on Ensuring Responsible Development of Digital Assets, the Biden-Harris Administration stressed the need for research and development concerning the potential design and deployment options of a U.S. CBDC.