iOn May 3, the SEC announced that the Cyber Unit in the Division of Enforcement is renamed the “Crypto Assets and Cyber Unit” and will expand by 20 positions to approximately 50 positions.[1] Regulation of digital assets has been a key initiative of SEC Chair Gary Gensler, who previously chaired the CFTC.
The press release emphasizes the explosion of crypto markets in recent years and says that the Crypto Assets and Cyber Unit will be vital to protect investors and efficiently regulate financial markets. The expanded unit will concentrate on investigating securities violations relating to:
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Crypto asset offerings;
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Crypto asset exchanges;
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Crypto asset lending and staking products;
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Decentralized finance platforms, commonly known as “DeFi” platforms;
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Non-fungible tokens, commonly known as “NFTs”; and
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Stablecoins
While the unit has brought more than 80 enforcement actions involving fraudulent and unregistered digital asset offerings, many of those have been Ponzi schemes and other offering frauds. That is not to say that the newly reconstituted unit will not be aggressive; it surely will be.
There is considerable uncertainty and litigation over whether some of these assets constitute “investment contracts” and are therefore securities under the federal securities laws. Expanding and renaming the Cyber Unit to focus on enforcement of cryptocurrencies and other digital assets could be criticized as “regulation by enforcement.” Indeed, in response to the SEC’s announcement, SEC Commissioner Peirce tweeted, “The SEC is a regulatory agency with an enforcement division, not an enforcement agency. Why are we leading with enforcement in crypto?”
SEC Announcement Comes as Congress Contemplates Expanding CFTC Authority over Crypto Assets
In addition to the federal securities laws, digital asset market participants must comply with commodities law, as well as other federal and state laws. It is recognized that many digital assets fall within the very broad definition of “commodity” under the Commodity Exchange Act. Under the CEA, as it currently stands, the CFTC’s authority over ‘spot’ markets is largely limited to cases of fraud and manipulation, as opposed to futures and other ‘commodity interest’ markets over which the CFTC has authority to impose registration requirements and regulate actively.
The timing of the SEC’s announcement of its expanded enforcement unit is noteworthy. It comes shortly after House lawmakers reintroduced bipartisan legislation, the Digital Commodity Exchange Act of 2022, to allow and in some cases require “digital commodity exchanges” to be registered and regulated by the CFTC.
In that bill, digital commodities are defined as “fungible intangible personal property” that can be held and transferred in peer-to-peer transactions without an intermediary. The definition excludes crypto assets that represent ownership in a business, as well as some other types of interests traditionally regulated by the SEC.
The bill would also place many “stablecoins”—digital assets whose price is typically tied to another currency, usually the US dollar—under the CFTC’s regulatory regime.
It will be interesting to see how the regulatory overlap in oversight of digital assets develops and is ultimately resolved. In the meantime, the SEC is bolstering its practical ability to take enforcement action against platforms and other businesses involved in digital assets, regardless of allegations of fraud or investor losses.
