My basic view of U.S. Securities and Exchange Commission regulation of crypto projects is that we are in a somewhat eerie lull. It seems to me that there are a lot of projects in the crypto world that (1) are quite large, (2) have the backing of well-financed and respectable entities, and (3) are obviously illegal unregistered offerings of securities? The SEC under its previous chair, Jay Clayton, also seems to have thought that, and brought a lot of (sometimes pretty aggressive) cases.
The SEC under its current chair, Gary Gensler, as far as I can tell also thinks that, and has not brought a lot of high-profile cases. Some, though! The SEC has decided that crypto lending programs are securities, and has moved to regulate them. But, like … governance tokens of decentralized finance projects are obviously equity securities? Ponzicoins are obviously securities? Fractionalized NFTs? Just … everything? I mean, this is not legal advice, and I guess a lot of lawyers disagree with me; maybe the SEC disagrees with me too. But my guess is that more stuff is coming. And when I say “more stuff” I do not mean hundreds of pages of notice-and-comment rulemaking designed to clarify what sorts of DeFi activities do and do not qualify as securities, and to help DeFi innovators comply with registration requirements. I mean enforcement actions in which the SEC will argue that various DeFi projects are illegal under existing rules.
The Securities and Exchange Commission today announced the allocation of 20 additional positions to the unit responsible for protecting investors in crypto markets and from cyber-related threats. The newly renamed Crypto Assets and Cyber Unit (formerly known as the Cyber Unit) in the Division of Enforcement will grow to 50 dedicated positions.
Since its creation in 2017, the unit has brought more than 80 enforcement actions related to fraudulent and unregistered crypto asset offerings and platforms, resulting in monetary relief totaling more than $2 billion. The expanded Crypto Assets and Cyber Unit will leverage the agency’s expertise to ensure investors are protected in the crypto markets, with a focus on investigating securities law violations related to:
- Crypto asset offerings;
- Crypto asset exchanges;
- Crypto asset lending and staking products;
- Decentralized finance (“DeFi”) platforms;
- Non-fungible tokens (“NFTs”); and
Notice that it’s all in the Division of Enforcement. As far as I can tell the Division of Writing DeFi Rules continues to have roughly zero dedicated position. The way you will know what SEC’s crypto rules are is that in like five years you will be able to look at a bunch of enforcement actions. Each enforcement action will begin by describing what the company did that was bad, and you’ll know that is illegal. Each settled enforcement action will end by describing what the company agreed to do to remedy the problem, and you’ll know that is legal. And you’ll try to do the legal things and not do the illegal things and make your best guess about things that aren’t described in any of the enforcement actions. But it seems to me that the major enforcement actions are still mostly in the future, so good luck figuring it out now.