Readers of my last, irresistibly juicy blog post, “First-Ever Court Ruling Means Your Utility Token May Be an Unregistered Security,” know that the Securities and Exchange Commission (“SEC”) recently landed a blow against blockchain-based media company LBRY when a district court in New Hampshire held that LBRY’s native “utility token,” LBC, was an unregistered security.
Finally, we had a clear answer. [1] Hurray! Digital assets are securities, and now we can all get ice cream and start suing people for securities fraud.
Sadly, things turned out not to be that clean after all. Read on to find out what the regulators have been up to in the crypto space and about the ongoing fog that surrounds what is and is not a security.
The Commodity Futures Trading Commission (“CFTC”) has recently filed charges against FTX’s Nishad Singh for fraud and has sued an individual who manipulated digital asset exchange Mango Markets to artificially inflate leveraged positions in swap contracts on the platform.[2] [3] The agency also filed charges in California related to bitcoin (BTC)- and ether (ETH)-related fraud. [4] More on that later.
The SEC’s enforcement activities of late have ramped up significantly. In the last three months, the SEC has:
One crypto enthusiast has described this recent campaign as an “SEC blitzkrieg,” a choice of words that enlivens the drabness of federal bureaucracy in a way that I, for one, appreciate and will attempt to emulate herein.
But while these knight-errant agencies roam the land of crypto righting wrongs to maintain the integrity of the financial markets and protect retail consumers, recent signals from both the SEC and the CFTC indicate that all may not be well in government Camelot.
Enter SEC Chair Gary Gensler. In a February 23, 2023, interview with New York Magazine, Gensler asserted that “[e]verything other than bitcoin” is a security.[11] The interviewer elaborated Gensler’s position, characterizing it this way: “pretty much every sort of crypto transaction already falls under the SEC’s jurisdiction except spot transactions in bitcoin itself and the actual purchase or sale of goods or services with cryptocurrencies.” And, in late February news broke that the SEC was in talks with the company behind Binance’s stablecoin regarding potential securities violations.[12] The CEO has vowed to defend its position that stablecoins are not commodities in court if necessary. Sounds like the SEC may be about to take the field.
And over here on the left we have CFTC Chair Rostin Behnam, weighing in at, honestly, I’m not going to venture a guess, but he could definitely take me in a fight. [13]
At a March 8, 2023, hearing before the Senate Agriculture Committee, Behnam stated that the CFTC considered BTC, ETH, and all stablecoins to be commodities, thereby placing them within its jurisdiction and outside the purview of the SEC. This isn’t, in fact, a new position for the CFTC, just a more vocal one. Back in 2021, the CFTC charged Tether on the basis that its stablecoin, USDt, was a commodity. [14] Similarly, in its December 2022 suit against FTX founder Sam Bankman-Fried, the CFTC took the position that BTC, ETH, and USDt were commodities under the Commodity Exchange Act. [15] The CFTC reiterated its position on BTC and ETH in its most recent digital asset suit, filed last month, in which it charged a California-based company and its CEO for allegedly running a Ponzi scheme. [16]
The public wrangling between the two agencies creates an uncertain regulatory framework. The issue could be resolved through legislation, but the likelihood of such a bill passing in the near future is slim. At this time, the most likely outcome looks like a patchwork of court decisions across the country, which may in time trend toward a case law consensus that settles the issue.
[1] Or did we? Stay tuned for SEC vs. Ripple Labs, now pending before a court in the Southern District of New York. Summary judgment motions on the issue of whether Ripple’s native token, XRP, is a security were fully briefed as of the end of last year, and observers, including yours truly, wait with bated breath for that decision.
[13] If you are wondering how many mixed metaphors one lawyer can cram into a single blog post, the answer is a boatload, a boatload of mixed metaphors.
ABOUT THE AUTHOR
PARTNER
Rachel is an experienced trial lawyer, having litigated jury trials and bench trials, and represented clients in private arbitrations. She has worked with U.S. and international clients and with businesses of all sizes, from early-stage ventures to publicly traded companies.
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