September 22, 2021

Volume XI, Number 265

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September 21, 2021

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September 20, 2021

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Cryptocurrencies and Other Digital Assets: A New Regime

Cryptocurrencies and digital assets will continue to be an area of intense regulatory focus, but a new administration may bring new regulations. SEC Chairman Gensler has extensive experience with cryptocurrencies and blockchain, including a teaching stint at MIT. However, Gensler has alternated between censure and praise, referring to cryptocurrencies and blockchain both as an “innovative irritant” and as a “catalyst for change” while noting that crypto markets have been “rife with scams, fraud, hacks and manipulation.” Nonetheless, the main area of focus will likely remain whether, and which, digital assets are subject to SEC regulation as securities.

The SEC’s recent action against Ripple Labs Inc. may illustrate the next wave of regulatory disputes. Liability in Ripple hinges on whether or not XRP (which Ripple describes as a digital asset built for payments) can be considered a security under the “Howey Test”; i.e., whether it is an investment in a common enterprise “with the expectation of profits derived solely from the efforts of others.” The dispute over XRP illustrates the “grey area” into which some digital assets may fall.  Ripple argues that it created a fully-functioning currency, while the SEC can argue that investors were seeking to profit through the issuer’s efforts to manage and develop the market for that asset. Gensler stated in 2018 that there was a “strong case” that both XRP and Etherium (a decentralized cryptocurrency) were securities, but the cryptocurrency landscape has undergone sweeping changes since that time.

Fund managers should also consider how active the CFTC has been in this space, regulating derivatives linked to crypto as well as exercising its authority to prosecute fraud and manipulation in crypto spot markets. The Department of Treasury’s Financial Crimes Enforcement Network is also active (e.g., for anti-money laundering purposes). Meanwhile, participants in these markets would do well to proceed with caution, not simply because of market factors but also due to a dynamic and uncertain regulatory landscape.

© 2021 Proskauer Rose LLP. National Law Review, Volume XI, Number 123
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About this Author

Margaret A Dale, Commercial Litigation, Proskauer Rose Law Firm
Partner

Margaret Dale is a Partner in the Litigation Department, resident in the New York office. Her practice focuses on commercial litigation, including class action defense, as well as intellectual property, privacy and data security, corporate governance litigation, securities litigation, and regulatory and internal investigations. She also represents and counsels clients in art law matters. 

212.969.3315
Michael R. Hackett, Litigation Attorney, Proskauer Law Firm
Associate

Michael R. Hackett is an associate in the Litigation Department and a member of the Asset Management Litigation practice. His practice focuses on disputes and regulation involving private funds, including private equity, venture capital, hedge, real estate and private credit funds, as well as other limited partnerships, where he regularly advises funds, fund sponsors, investment advisers and institutional and individual investors.

Mike’s experience representing private fund clients runs the gamut, from control contests within advisers, to...

617-526-9723
Kirsten Lapham FInancial Services Attorney Proskauer Rose Law Firm, United Kingdom
Partner

Kirsten Lapham is a partner specialising in financial services regulation. She advises a broad range of both institutional and individual clients on a variety of financial services regulatory and compliance issues. Her practice has a specific emphasis on the regulatory issues arising under the AIFMD, and MiFID II for a range of EU and indirectly impacted firms outside of the EU.

Experience in this area includes advising multiple clients on the EU marketing and registration regimes and overlaying local regulatory considerations, such as the U.K. retail distribution...

+44.20.7280.2031
William Komaroff Litigation White Collar Attorney Proskauer Law Firm New York
Partner

Bill Komaroff is a partner in the Litigation Department and White Collar Practice Group. He has a nationwide federal practice focused on corporate defense and investigations, counseling and defending institutional and individual clients in connection with a broad array of complex government investigations, prosecutions and civil disputes.

Bill also has served as a member of the Criminal Justice Act Panel for the District Court for the Southern District of New York.

From 2003 to 2007, Bill served as an Assistant U.S....

212-969-3975
Timothy W. Mungovan, Litigation Attorney, Proskauer Law Firm
Partner

Timothy Mungovan is a Partner in the Litigation Department, co-head of the Private Investment Funds Disputes practice and a member of the Private Investment Funds Group. Tim has an international practice in complex commercial litigation, advising public and private companies in a variety of areas, including securities, corporate governance, fiduciary obligations, investment management and financial services, fraud and trade secrets.

In addition to his regular commercial litigation practice, Tim focuses on disputes involving private investment...

617-526-9412, 212-969-3201
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