Crypto Wrestles With Legal Issues, Scoring A Few Key Victories, In 2023

For cryptocurrencies, 2023 was neither the best nor the worst of times. The overall market doubled, to $1.7 trillion though that was still a far cry from its $3 trillion zenith in 2021. Even as prices recovered, however, the industry found itself in the crosshairs of lawmakers and regulators, the latter led by the U.S. Securities and Exchange Commission. The year offered a smorgasbord of crises for crypto, including criminal cases involving the heads of some of its biggest companies, enforcement actions that called into question the legitimacy of much of the blockchain business and only limited progress in getting legislative clarity from the U.S. Congress.

In all, there was “hesitancy in building because of the regulatory uncertainty” throughout the year, says Marisa Coppel, head of legal at the Blockchain Association. Still, there were a few notable victories for the industry in court, and spot-market exchange-traded bitcoin funds may be just around the corner in the U.S., offering access to a large pool of investors and holding out the hope for wider acceptance of digital assets.

Battles in Court and on Capitol Hill

It was “the year of the exchange reckoning” in U.S. courts, says Sheila Warren, CEO of the Crypto Council for Innovation industry group.

The SEC brought cases against five crypto exchanges in 2023, including Coinbase
COIN
, Binance and Kraken, alleging that they sold unregistered securities via their platforms. The similarity in the complaints illustrates the SEC strategy, says Coppel, which aims to classify practically all tokens as securities according to what is known as the Howey Test.

Based on a Supreme Court ruling in a 1946 case involving Florida citrus groves, the Howey Test is used to determine if something qualifies as a security, and would thus fall under the agency’s oversight. If an asset is based on a transaction that includes an investment of money in a common enterprise with the expectation of profit to be derived from the labor of others, then it qualifies as an investment contract under Howey. Sell that contract to an investor and it is a security and subject to the Securities Act of 1933 and the Securities Exchange Act of 1934.

At the time of filing its cases against Coinbase and Binance, the agency alleged that over $37 billion worth of cryptocurrencies were securities.

But a July 14 federal court ruling on a separate SEC case against Ripple Labs, promoter of the xrp token ($33 billion market cap), found that the sale of that cryptocurrency was a security only when it was sold to investors, not retail traders.

“It marked a shift in how courts and the amount of difference they’re giving to agencies, especially the SEC,” says Coppel of the ruling, which for now is not binding outside of the federal district court for Southern New York and is also not necessarily applicable to other tokens .

The SEC’s suits against Ripple, Binance and Coinbase are still in their pre-trial phases. The earliest development could come from a different Coinbase action, under which the exchange is seeking to compel the SEC to provide rules tailored for the crypto industry that would allow it to do business. The agency refused to respond to the request at all, but Coinbase won a court ruling that led the SEC to deny the company’s petition, and oral arguments in the next round of the case are scheduled for January 17.

Congress could resolve the issue by enacting laws to cover crypto trading, but so far it has been unable to do so. A market-structure bill co-sponsored by House Agriculture Committee Chair Glenn Thompson (R-Pa. ), and House Financial Services Committee Chair Patrick McHenry (R- N.C.) made it out of committee for consideration by the full chamber and has some industry backing, but it is still a long way from being passed by both houses.

Not all industry participants agree that new legislation is needed. Nathan McCauley, CEO of crypto custodian Anchorage Digital, says that existing financial regulations are already “pretty instructive. “The custody rule is clear, the segregation of responsibilities is clear,” he adds. “You can run and operate a business pretty well under the existing set of regulations.” That echoes the SEC’s position, though it is not clear how the industry can operate when cryptocurrency transactions are disallowed.

Elsewhere, several countries passed significant digital-asset legislation, including Europe’s market regulations in crypto assets (MiCa) and the United Kingdom’s Financial Markets and Services Act (FMSA). Those actions provide specific crypto rules that both adapt traditional finance…