The Securities and Exchange Commission (SEC) recently announced that it will be adding 20 positions to its newly renamed Crypto Assets and Cyber Unit, including fraud analysts, investigative staff attorneys, trial counsels, and supervisors. With the SEC's current Chair Gary Gensler on record stating that he believes the law is clear enough and only needs enforcement, it is important to highlight that all of these positions are enforcement-related and none of the new staff will be charged with carrying out the SEC's statutory duties to propose rules and interpret the law for industry participants. As reported by Axios, this comes on the heels of news that current Crypto Assets and Cyber Unit Chief Kristina Littman is stepping down with plans to leave the SEC in early June.
Background
Over the past five years of its existence, the Crypto Assets and Cyber Unit has initiated enforcement actions against more than 80 crypto asset offerings and platforms and obtained more than $2 billion in settlements. Virtually all financial technology-related SEC enforcement actions are settled without admitting or denying the government's allegations due to the cost of mounting a defense, notably including lending protocol BlockFi's agreement to pay $50 million to settle with the SEC, and $50 million more to settle with 32 states, for violating the Investment Company Act of 1940.
Another high-profile lawsuit, SEC v. Ripple, is expected to go to trial in November 2022. Legal observers will be watching that case closely for clues about the SEC's positions in the Biden administration and how judicial rulings will shape the law. The court's opinion will be binding precedent, unlike the SEC orders issued in connection with settlements, which are written by the SEC staff and do not carry the weight of law.
These SEC moves follow President Biden's Executive Order on Digital Assets (examined at length here), which noted that 40 million Americans now invest in crypto assets and overall have a market value of approximately $2 trillion. Crypto assets have been the fastest-growing – and the most profitable – asset class over the past several years, expanding rapidly since they were first invented in 2010. In a sign of growing mainstream acceptance, Fidelity, the largest retirement plan provider in the U.S., recently announced that by mid-2022 it will allow employers to offer up to 20% of their investors' 401(k) retirement funds in bitcoin.
Biden's Executive Order directed the administration to study the marketplace carefully and work with industry participants to develop a comprehensive federal approach to regulating crypto assets. However, as an independent agency the SEC is not bound to follow the White House's direction. Still, the growing emphasis on "regulation by enforcement" rather than "regulation by regulation" is noted by many observers as being inconsistent with the Executive Order, as well as the SEC's own traditions.
Impact
Including these 20 new positions, the Crypto Assets and Cyber Unit will have a total of 50 staff employees and seeks to increase its focus on the growing crypto market, specifically:
- Crypto asset offerings
- Crypto asset exchanges
- Crypto asset lending and staking products
- Decentralized finance (DeFi) platforms
- Non-fungible tokens (NFTs)
- Stablecoins
The first four categories are established targets of recent SEC enforcement action, with NFTs and stablecoins having generated some attention to date and appear to be in line to receive additional scrutiny.
The SEC's jurisdiction over this entire field is unclear in light of the absence of modern judicial precedent, especially so concerning NFTs and stablecoins. Many participants in the NFT industry sees their business as one of collectibles, not securities. Further, stablecoins offer no profit opportunity and are not likely to be ultimately defined as investment contract securities.
Still, the SEC under Chair Gensler has been aggressive and expansive in its enforcement reach, seeming to compete with the arguably more technologically adept Commodities and Futures Trading Commission (CTFC). In its announcement Chair Gensler cites investor protection as the justification for the additional positions at the Crypto Assets and Cyber Unit, stating, "By nearly doubling the size of this key unit, the SEC will be better equipped to police wrongdoing in the crypto markets while continuing to identify disclosure and controls issues with respect to cybersecurity."
The United States lags behind other major financial centers with respect to its crypto regulatory framework. The laws in Switzerland and the Bahamas, for example, offer investors more clarity and accommodation than the United States currently offers. As a result, crypto businesses founded in the United States may move off-shore and the expansion of the Crypto Assets and Cyber Unit (and likely ramp up of enforcement) may drive more to so. In any event, the additions to the Crypto Assets and Cyber Unit will be another moving piece in the fluid and dynamic crypto asset markets.
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