1. What is the SEC doing?
In July 2022, as part of an insider-trading case, the SEC identified nine cryptoassets that it considered to be securities. On June 6, the agency sued Coinbase Global Inc., the biggest US crypto trading platform, over allegations that it illegally listing numerous tokens. In a separate case announced a day earlier, the SEC alleged that Binance Holdings Ltd. also listed unregistered securities. All told, as of June 6, the SEC under Chair Gary Gensler had signaled that it considers coins worth $120 billion to be unregistered securities. The SEC has said that its securities rules apply as well to crypto staking, which offers customers a return for letting their tokens be used to facilitate blockchain transactions.
2. What does it mean for something be a security?
On the simplest level, whether something is or isn’t a security under US rules comes down to how much it looks like shares issued by a company raising money. To make that determination, the SEC applies a legal test that comes from a 1946 Supreme Court decision. Under that framework, an asset can be under SEC purview when it involves investors kicking in money with the intention of profiting from the efforts of the organization’s leadership. In 2020, the agency sued Ripple Labs Inc. for allegedly raising money by selling the XRP digital token without registering it as a security. The SEC claimed that the company was funding its growth by issuing XRP to investors betting that its value would rise. The case is now a massive legal battle, with Ripple having hired a former SEC chair, Mary Jo White, as an attorney.
3. Why does calling a token a security matter?
Among other things, it makes running a cryptocurrency exchange more expensive and complex. Under US rules, the label carries strict investor-protection requirements for platforms and issuers. That means exchanges would face continuous scrutiny by regulators, which could lead to fines, penalties and, in a worst case, prosecutions if criminal authorities ever got involved. Supporters of more regulation believe securities designations would result in more information and transparency for investors because of the SEC disclosure requirements that would apply.
4. Who’s against that approach?
Crypto enthusiasts say that their ventures are decentralized in a way that makes old rules a poor fit, and crypto trading platforms argue that the assets they’re listing should be considered commodities, not securities. In the US, rules governing trading of commodities and their derivatives are focused more on ensuring that companies, producers and farmers can effectively hedge against risks of price swings in commodities.
5. What does the crypto community want?
There have been efforts on Capitol Hill to give the Commodity Futures Trading Commission, the US derivatives watchdog, more power to regulate cryptoassets directly. Currently it primarily oversees crypto futures and has the ability to take enforcement action if there’s fraud or manipulation in the underlying market, as it has in dozens of crypto cases. The CFTC’s regulatory regime is considered less onerous than the SEC’s, so it’s little surprise that the crypto crowd wants to be overseen by the CFTC. In 2022, crypto executives and titans of traditional markets like Citadel Securities joined an industry push behind a bill from top lawmakers on the Senate Agriculture Committee that would give the derivatives regulator more turf — at the expense of the SEC. That effort stalled after the collapse of cryptocurrency exchange FTX, which was one of the most vocal companies pushing for the change. More recently, two key House Republicans proposed giving authority to the CFTC to oversee certain tokens and create a pathway for coins that begin as securities to eventually be regulated as commodities.
6. What is the CFTC’s view?
Chairman Rostin Behnam pushes back on the notion that the agency is a “light-touch regulator.” At a House Agriculture Committee hearing on June 6, he said the CFTC has proactively policed crypto markets, bringing more than 85 cases that resulted in more than $4 billion in penalties and restitution. He said CFTC rules “are quite extensive, are more prescriptive, and are very specific to protecting customers and protecting…
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