Over the past year, digital assets have exploded on the mainstream and many believe that cryptocurrencies are the currency of the future.1 The number of cryptocurrencies that are being created are multiplying; in fact, there are thousands of different cryptocurrencies currently in existence. Although the crypto economy continues to be unpredictable in certain respects, one thing is certain - government regulation is rapidly increasing. Accordingly, it is important that industry participants ensure compliance with the existing regulatory landscape and, perhaps more importantly, stay abreast of regulatory changes - including the introduction of new laws and/or additional restrictions on an ongoing basis.
While there are frequent and increasing calls for a dedicated crypto regulatory body to bring clarity to the space, there are also concerns that the end result will just be yet another regulator added to the existing and growing list. Indeed, numerous regulatory authorities have already taken steps to issue statements, guidance, and/or regulations about the offer, sale and/or taxation of these assets - including the Commodity Futures Trading Commission (CFTC)2, the Consumer Financial Protection Bureau (CFPB)3, the Financial Crimes Enforcement Network (FinCEN)4, the Office of the Comptroller of the Currency (OCC), the Internal Revenue Service (IRS), the Federal Deposit Insurance Corporation (FDIC), the U.S. Department of Justice (DOJ), and other individual state regulatory bodies. Like any other financial instrument, the use of digital currency brings with it the inherent risks of fraud and abuse, and thus, federal and state securities laws require all offers and sales of securities, including some digital assets, to either be registered under its provisions or to qualify for an exemption from registration.
The U.S. Securities and Exchange Commission ("SEC"), under the leadership of current Chair Gary Gensler, has taken a more aggressive role and has made clear that digital assets fall within the "broad remit" at the SEC.5 Indeed, in line with his stated focus on establishing a regulatory framework for crypto, on January 3, 2022, Gensler appointed Corey Frayer to serve as a crypto-focused senior adviser, further signaling that the SEC could step up its efforts to regulate the industry in 2022. The SEC's remit, however, depends on whether the particular digital asset or assets at issue meet the definition of a "security" under the Securities Act of 1933 and the Securities Exchange Act of 1934. The criteria utilized by the SEC and the federal courts to evaluate if a digital asset classifies as a security is based on a host of factors, including whether the asset qualifies as an "investment contract."6 The SEC has previously concluded that certain digital assets do in fact constitute securities, specifically in its Report of Investigation of The DAO,7 and in the SEC's Order Instituting Administrative and...
