Future crypto regulatory structure anticipated
There is no question that the Trump Administration is taking a markedly different approach to crypto regulation compared to the Biden Administration. The turning of the tide began when the White House nominated former PayPal chief operating officer David Sacks as the “AI and crypto czar,” former SEC Commissioner Paul Atkins as new Chair of the SEC, and Brian Quintez as Chair of the CFTC. All have been outspoken proponents of the crypto industry.
New Commission, New Mission
On January 23, 2025, in keeping with his promise to prioritize and strengthen U.S. leadership in the digital assets industry, President Trump established a “President’s Working Group on Digital Asset Markets,” chaired by Sacks, and gave the group 180 days to propose a regulatory and legislative framework for digital assets.[1] On February 4, 2025, the SEC announced the formation of a new Crypto Task Force, helmed by current SEC Commissioner and former Atkins counsel Hester Peirce (discussed in our earlier post).[2] Peirce’s first statement about the Task Force began with lauding the recission of Staff Accounting Bulletin 121, which had previously advised financial institutions to reflect client crypto assets they hold as balance sheet liabilities. The statement goes on to outline a number of considerations for a path forward to a different kind of regulation for the industry; namely, one that more precisely defines whether assets or transactions are “securities” and proposes pathways to registration and compliance (for example, Regulation A of the Securities Act or Regulation Crowdfunding). Commissioner Peirce also invited the industry and the public to engage with the Task Force via written submissions and public meetings on topics ranging from crypto custody and crypto lending to tokenized securities and sandbox, as well as related international issues. To date, there have been more than 25 comments or meeting requests posted to the Task Force’s website (SEC.gov | Crypto Task Force Meeting Logs). Many of the comments are from notable market participants requesting to discuss practical issues facing the industry, including special purpose broker-dealers for crypto, staking, crypto listing criteria, and tokenization. Investor advocates have also weighed in, including industry group Better Markets, who has approached the Task Force to consider fraud prevention.
On February 21, 2025, Peirce followed the Task Force’s first announcement with a statement titled “There Must Be Some Way Out of Here.”[3] In this statement, Peirce poses specific questions concerning the essential issue of whether an asset is a security or is being offered or sold as part of an investment contract (making the contract, but not necessarily the asset, a security). Peirce explicitly asks for input about how to answer these questions apart from applying the Howey standard—underscoring the tectonic break with the last administration’s approach. She asked the public to remark on what might be a “predictable, legally precise and economically rational” approach to determining the status of a crypto asset or transaction and to discuss the cost and feasibility of registering digital/token offerings. Finally, she invited comment on her previously proposed “safe harbor” that would provide a temporary no-action type of relief from requirements of the Securities Act on offers and sales of digital assets. That proposal contemplates temporary relief for entities that voluntarily report information about themselves and their offerings with a view toward specifically identifying products as non-securities until “more permanent” rules or legislation is finalized. More recently, the SEC has issued announcements about the Task Force’s leadership and staffing (SEC.gov | Commissioner Hester Peirce Announces Crypto Task Force Staff), and its inaugural roundtable on March 21, which will focus on defining security status in the crypto space (SEC.gov | SEC Crypto Task Force to Host Roundtable on Security Status).
Enforcement: Refocusing or Retracting
Aligned with these pronouncements from the White House and the SEC, a flurry of “high-five session” posts from formerly discouraged industry participants have surfaced, declaring that the SEC waved a “white flag” and “surrendered” in the ongoing registration investigations and litigation. First, a major crypto exchange announced that the SEC had committed to dropping its long-running registration suit (that some would say developed a “crusade” quality) against the platform last week. Next, the non-fungible token platform OpenSea made a similar announcement that the SEC was closing an investigation into the firm after receiving a Wells notice of potential enforcement action in August for allegedly supporting trading in unregistered securities when buying or selling NFTs using their platform. And last week, decentralized finance platform Uniswap Labs, also received a Wells notice last April, of possible action for failure to register its platform, also announced the closure of an investigation. Clearly, the SEC will not be authorizing registration actions like these against crypto firms until further regulatory clarity is provided. In the meantime, it remains unclear which, if any, kinds of actions will be pursued.
Perhaps lost in the crowded discourse is that on February 20, 2025, the SEC also announced a repurposed Cyber Unit in its Division of Enforcement—the Cyber and Emerging Technologies Unit to Protect Retail Investors. This new unit will prioritize fraud cases involving blockchain technology or crypto assets and especially ones involving retail customers. But there’s more to it. According to their announcement (SEC.gov | SEC Announces Cyber and Emerging Technologies Unit to Protect Retail Investors) the new Unit will also scrutinize “fraudulent disclosures” relating to cybersecurity from public companies and compliance with cybersecurity rules for regulated entities; fraud cases involving hacking or stealing MNPI used for insider trading or manipulating markets; and retail brokerage account takeovers that result in retail investors losing funds. Although many questions remain—including what are “securities” over which this Unit would have jurisdiction to bring enforcement actions—here are some key takeaways: First, it would be prudent for public companies and registered entities to continue enhancing network security and data protection, surveilling for fraud against retail customers, and carefully crafting any public disclosures about those policies or risks. Additionally, the industry that has so long clamored for legitimacy through registration/recognition should be on the lookout to refer fraud cases that would undermine the integrity of the marketspace and its new standing in the world of global finance.
Beyond Enforcement
The industry also should pay close attention to the structural issues mentioned in Commissioner Peirce’s statement. The Task Force is now ready to consider what a future crypto regulatory structure may look like. For example, we expect the Task Force will:
- Develop regulatory classifications that will provide a predictable, legally, precise, and economically rational approach to determining the security status of crypto assets.
- Address the relationship between crypto assets and other financial instruments, other than investment contracts, which may be listed in the definition of “security” in the federal securities laws.
- Address situations in which crypto assets are used in a variety of functions inherent in the operation of a Blockchain network such as mining or staking as part of the consensus mechanism or securing the network, validating transactions or other related activities on the network, and paying transaction fees or other fees on the network.
- Answer what types of technology functions are inherent in the operation of a blockchain network and which of these needs to be addressed under the securities laws.
- Address whether certain categories of crypto assets should be regulated, such as stable coins, wrapped tokens, and NFTs.
- Address whether guidance or other targeted relief should address the cost and feasibility of registration for public offerings and whether the Commission should develop tailored disclosure requirements for such offerings.
-
Address the possibility of providing a safe harbor from registration, that is, a time-limited exemption from the registration requirements under the Securities Act for offers and sales of crypto assets during the development of a Blockchain project. This would include tailored disclosures, subject to the anti-fraud provisions in the federal securities laws, but would not include insulation from securities fraud requirements.
- If a safe harbor is provided, address what disclosure requirements would be feasible for early-stage projects to provide token purchasers with material information about the project, crypto assets, and the development team. (At the expiration of the safe harbor, if the network is deemed sufficiently decentralized or functional, the registration of tokens would not be required.)
- Address whether secondary market trading or crypto activities fall within the Commission’s authority, and whether the Commission should create a new registration status with tailored registration requirements for any platform that trades crypto assets that are securities.
- Addresses broker dealer custody and other financial responsibility requirements, including net capital and recordkeeping rules.
- Address crypto lending, which challenges many traditional notions of financial products, so as to not stifle potential opportunities.
If successful, the Task Force’s work may unlock the functionality of crypto assets in a way that is faster and more profound than otherwise anticipated. Given the advances in technology and communication, the utilization of crypto assets is likely to spread exceedingly fast. The proliferation of crypto may also result in the importation of a significant number of developers into the United States. It also may have a follow-on effect as many of these developers will want to be more fully engaged in the financial markets and many will seek either bank charters or special purpose bank charters, such as national trust bank charters. Businesses wishing to engage in the crypto business going forward, such as issuers, developers, exchanges, funds, custodians, etc., would do well to study these requirements carefully and to participate, if possible, by providing comments to the SEC as the process moves forward.
[View source.]