SEC and CFTC Clarify Crypto Security Definitions, Announce Collaboration
The U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have jointly issued interpretive guidance to clarify how they will determine whether a cryptocurrency is considered a security. This move comes alongside a Memorandum of Understanding (MOU) between the two agencies aimed at fostering innovation, maintaining market integrity, and protecting investors and .
Defining Digital Securities
The guidance outlines several categories of crypto assets, with “digital securities” being those cryptocurrencies that meet the existing definition of a security, but are tokenized. This means if a crypto asset meets the criteria of the Howey test, it will be classified as a security and subject to SEC oversight.
Other categories identified include payment stablecoins, digital tools, digital collectibles, and digital goods. These are generally not considered securities unless the issuer or operator engages in actions that would fall under securities regulations, such as subdividing the underlying tokens.
CFTC and SEC Collaboration
SEC Chair Paul Atkins, along with Commissioners Hester Pierce and Mark Ueda, stated that the guidance establishes a concise taxonomy of crypto assets, clarifying the application of the Howey test to investment contracts involving crypto assets. The CFTC has signed onto the guidance and will administer it under the Commodity Exchange Act.
The agencies emphasized the importance of market participants reviewing the interpretation to understand the regulatory jurisdiction of each agency.
Legislative and Enforcement Considerations
Even as the guidance is seen as a positive step, Representative Troy Downing (R-Mont.) noted that Congress still needs to pass market structure legislation to prevent future administrations from overturning the interpretation. He believes the current clarity is crucial for encouraging investment.
Legal experts, such as Chris Lavini of the law firm Wizards, suggest the guidance shifts the focus of securities investigations away from the assets themselves and towards the transactions and representations made during their sale. However, the SEC retains discretion to pursue enforcement actions, particularly if a crypto asset is sold as part of an investment contract with the expectation of returns based on the issuer’s efforts.
Ongoing Legal Challenges and Future Outlook
The jurisdictional boundaries between the SEC and CFTC remain a point of contention. Jason Gottlieb, a partner at Morrison Cohen, highlighted the differing definitions of “goods” used by each agency and the require for legislative clarity regarding CFTC jurisdiction over non-securities cryptocurrencies.
Legislative efforts, such as the potential markup of market structure legislation in late April, are underway. Senator Cynthia Lummis (R-Wyo.) indicated potential resolution of stablecoin yield issues through agreements among issuers. The Clarity Act could also prompt the SEC to reconsider its definition of securities in the crypto space.
Arizona Files Criminal Charges Against Prediction Market Provider
In a separate development, the state of Arizona has filed criminal charges against Kalshi, a prediction market provider, alleging violations of state law related to election betting and other contracts. A Nevada judge has also barred Kalshi from offering certain event contracts.
Senator Catherine Cortez-Masto of Nevada has criticized prediction markets, arguing they violate state and tribal laws and lack the consumer protections of regulated gambling operations.