The SEC and the Commodity Futures Trading Commission have issued interpretive guidance explaining how they define what is and is not a cryptocurrency security; the CFTC has also issued no-action letters to non-custodial wallet providers for facilitating derivatives and prediction market trading; Arizona is filing criminal charges against prediction market providers; and by the way, we have some signs of progress on market structure legislation.
How good is a week?
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narrative
The U.S. Securities and Exchange Commission this week, along with the Commodity Futures Trading Commission, issued interpretive guidance on how to handle the issue of treating cryptocurrencies as securities.
why this is important
What is and is not a security has long puzzled the industry. We’ve tried to come up with some definitions of this from an SEC perspective in the past, such as Bill Hinman’s “When Howey Met Gary (Plastics)” speech, but this week’s interpretive guidance is one of the most concrete efforts to define this for the industry.
break it down
The SEC lists several categories it sees in the cryptocurrency space, one of which is digital securities. The guidance says these cryptocurrencies would meet the definition of securities in any other context but happen to be tokenized. For example, a cryptoasset is a security if it meets the requirements of the Howey test.
This is the category of tokens that the SEC will regulate.
Other categories include payment stablecoins, digital instruments, digital collectibles, and digital commodities, which generally are not securities unless the issuer or operator takes action that may be consistent with securities regulations, such as subdividing the underlying token.
“We establish a simple taxonomy for cryptoassets, most of which are not securities, and clarify how the Supreme Court’s Howey test applies when cryptoassets are part of an investment contract,” SEC Chairman Paul Atkins and Commissioners Hester Peirce and Mark Uyeda wrote in an op-ed for CoinDesk.
The U.S. Commodity Futures Trading Commission said it would sign off on the guidance and administer it under the Commodity Exchange Act.
“Market participants – from innovators and issuers to individual investors – should review this interpretation to better understand the regulatory jurisdiction between the SEC and the CFTC,” the CFTC said in a press release. “The interpretation will be published on CFTC.gov and in the Federal Register.”
Congressman Troy Downing (R-Mont.) called the guidance “very positive” but said Congress still needs to pass market structure legislation because a future administration could revoke the interpretive guidance.
“Just having another two or three years and then having ambiguity is not going to make most people want to make any large-scale investments,” he told CoinDesk. “But it’s a good start because that’s what the industry wants and it allows some people to move forward.”
Chris LaVigne, a partner at Withers LLP, said the guidance “unsurprisingly concludes that most crypto assets and many common crypto activities are not securities,” although the agency retains some discretion to take enforcement actions in this area.
“The guidance shifts securities investigations away from the assets or activities themselves (which are mostly considered digital commodities and falls outside the SEC’s purview) and refocuses the analysis on the transactions and representations resulting from or marketing of those assets or activities,” he said. “In doing so, the SEC does not entirely eliminate uncertainty or its enforcement role, as it concludes that if a crypto-asset is not a security, it can still be sold as part of an investment contract if it is marketed with the promise of profits from the issuer’s underlying management efforts.”
Cryptocurrencies sold as securities may end up being viewed as something else “once those promises are fulfilled or no longer valid,” he said. This could impact securities, not just cryptoassets.
It is unclear what would constitute goods under the guidance.
Morrison Cohen partner Jason Gottlieb said the Commodity Exchange Act defines goods as a range of products (excluding onions and movie box office receipts), services and other items “for which a contract for future delivery is or will be dealt with”.
This legal definition differs from the definition that appears to be used in the guidance. The U.S. Commodity Futures Trading Commission (CFTC)’s stance on cryptocurrencies has changed over the past decade since some early lawsuits in which it claimed jurisdiction over Bitcoin causing it to appear to have jurisdiction over non-security cryptocurrencies. But he told CoinDesk that the definition needs to be formalized through market structure legislation.
“People need to understand that jurisdiction is still uncertain. The SEC has made it clear that ‘if the token doesn’t meet these standards, we don’t have jurisdiction,'” he said. “Just because the SEC doesn’t have jurisdiction, doesn’t mean the CFTC does.”
Gottlieb said he was involved in a case before the Seventh Circuit Court of Appeals seeking clarity on the issue, but market structure legislation was needed to explicitly grant the CFTC jurisdiction over all non-security cryptocurrencies.
The status of that legislation is also up in the air. Speaking at the DC Blockchain Summit earlier this week, Sen. Cynthia Lummis (R-Wyo.) said she expected price increases to likely occur in the final weeks of April. The issue of stablecoin yields may be resolved through an agreement that stablecoin issuers and their partner companies will not use banking jargon to describe their products, though she cautioned that she has not seen any specific language yet.
On the other hand, the Clarification Act could require the SEC to redraw how it defines cryptocurrency securities, some told me. But this falls into the category of bridges that can be crossed upon arrival.
Sen. Tim Scott (R-S.C.), chairman of the Senate Banking Committee, said lawmakers are also close to reaching agreement on issues such as ethics and quorum for regulators, which are some of the salient areas of disagreement in the bill.
Downing said he believed the April time frame was feasible for advancing market structure legislation. However, the closer lawmakers get to the end of the year, the less likely it is that anything will pass, he said, referring to the midterm elections. “But I don’t think it’s impossible.”
Sen. Kirsten Gillibrand (D-N.Y.) said on stage at the Washington summit that she was “optimistic” that a hike would come soon, which would lead to a merger of bills in the Banking and Agriculture committees.
She said the combined bill needs to incorporate areas of bipartisan agreement.
“I think one of the very important issues that people should be aware of is that the Senate wants a ethics clause,” she said. “I think the House would have more Democratic support if they kept the ethics provisions in the bill. It’s very important that members of Congress don’t get rich from this industry because they have access to non-public information because they have power and authority.”
Downing said that the market structure bill needs to address consumer protection and money laundering issues, but the restrictions should not be so strict that companies dare not take any action.
“No one wants bad guys to appear in their field, and no one wants bad guys to use this tool to do bad things,” he said. “…If you bring those [provisions] The scope is too narrow and no one will do anything innovative. “
He said he understood why banks might be worried about yields.
“Community lenders, community banks, are worried about depositors all leaving the market, and in that case you’re not going to offer mortgages to small farms in Montana, are you?” he said.
Late Friday, Senators Angela Alsobrooks and Thom Tillis told Politico that they had reached an agreement on the yield issue, but had not shared details with banks or the cryptocurrency industry as of press time.
Kalshi was just ordered to stop offering most prediction markets in Nevada for at least two weeks, pending a hearing on April 3.
The order came after an appeals court declined to grant an administrative motion that would have blocked state court action. Earlier this week, Arizona filed criminal charges against Kalshey, alleging that some of his election and other contracts violated state law.
In Nevada, a judge ruled that Kalshey could not, at least temporarily, offer contracts for sports, elections or entertainment-related events.
According to Judge Jason Woodbury’s order, the record so far in Nevada’s case against Kalshi shows that the company offers products regulated by state law, making its conduct subject to the jurisdiction of Nevada gaming regulators.
“The issue of federal preemption in this context is nuanced and rapidly evolving,” the judge wrote. “Currently, compelling legal authority weighs against federal preemption in this case.”
Arizona’s action goes further, alleging misdemeanors for small-dollar bets on pro football and college basketball games, upcoming elections, whether bills become law and whether public figures will appear at sporting events.
“Arizona law prohibits operating an unlicensed gambling operation and separately prohibits outright election betting,” Arizona Attorney General Chris Mace’s office said in a press release.
Kalshi co-founder Tarek Mansour called the accusations “completely out of bounds” and “have nothing to do with gambling or merit.”
There is a growing backlash against prediction markets. Senator Catherine Cortez-Masto, who represents Nevada, wrote an opinion piece calling prediction markets a “blatant violation of state and tribal laws and regulations.”
“To ensure responsible gambling, casinos, sportsbooks and online betting sites must adhere to minimum age requirements, engage in integrity monitoring and support critical consumer protections such as programs to help gambling addicts,” she said. “However, over the last year, egged on by weak and overly lax federal regulators such as the Commodity Futures Trading Commission (CFTC), so-called ‘prediction markets’ have been transformed into illegal sports betting, offering users illegal sports bets.”
this week
- There are no hearings or public meetings scheduled (at least related to cryptocurrencies).
If you have any ideas or questions about what I should cover next week, or if you have any other feedback you’d like to share, please feel free to email me: [email protected] Or find me at Bluesky @nikhileshde.bsky.social.
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See you next week!
