SEC and CFTC Say Most Crypto Assets Are Not Securities

The SEC and CFTC have issued guidance clarifying that most crypto assets do not qualify as securities under federal law.

“The SEC explains how it's viewing a crypto security: State of Crypto Joint SEC-CFTC interpretive guidance outlines how the agencies will determine whether a cryptocurrency is a security”

@coindesk

According to the SEC's Joint Guidance, digital collectibles like 'meme coins' are valued based on supply and demand rather than managerial efforts.

@coindesk

Digital tools such as Ethereum Name Service domains and CoinDesk's 'Microcosms' NFT Consensus Ticket are also not considered securities.

The guidance emphasizes that crypto assets become securities only when they meet specific criteria involving investment contracts.

Stablecoins represent a nuanced category where regulatory status depends on the type of issuer and compliance with the GENIUS Act.

The SEC clarified that 'Covered Stablecoins' issued by permitted payment stablecoin issuers do not involve securities transactions.

JD Supra

However, stablecoins not issued by permitted payment stablecoin issuers may still qualify as securities depending on specific facts and circumstances.

This distinction reflects the regulators' approach of providing clear pathways for compliant stablecoin operations while maintaining oversight.

The regulators established clear boundaries for protocol mining and staking activities, determining these do not constitute securities transactions.

“The SEC explains how it's viewing a crypto security: State of Crypto Joint SEC-CFTC interpretive guidance outlines how the agencies will determine whether a cryptocurrency is a security”

@coindesk

Protocol Mining Activities on proof-of-work networks involve miners contributing computational resources to validate transactions and receive rewards programmatically distributed by the network.

Similarly, Protocol Staking Activities on proof-of-stake networks where node operators stake digital commodities to validate blocks are considered administrative or ministerial activities.

The SEC emphasized that these activities do not involve reasonable expectations of profits from essential managerial efforts of others.

The SEC provided detailed guidance on how non-security crypto assets can become subject to investment contracts through issuer representations.

According to the Joint Guidance, how an issuer markets and promotes a contract, transaction, or scheme is relevant to assessing whether it constitutes an investment contract.

JD Supra

A non-security crypto asset can become subject to an investment contract when an issuer induces investment with representations of managerial efforts.

The SEC specified that representations must be conveyed prior to or contemporaneously with the offer to shape purchaser expectations.

The guidance addresses wrapping activities and secondary market transactions, providing clarity on when these operations may involve securities.

“The SEC explains how it's viewing a crypto security: State of Crypto Joint SEC-CFTC interpretive guidance outlines how the agencies will determine whether a cryptocurrency is a security”

@coindesk

The SEC clarified that the offer or sale of 'Redeemable Wrapped Tokens' that are receipts for non-security crypto assets not subject to investment contracts do not constitute securities transactions.

@coindesk

However, Staking Receipt Tokens that are receipts for digital securities or non-security crypto assets subject to investment contracts are considered securities.

The guidance emphasizes that separation from investment contracts can occur when issuers fulfill their represented managerial efforts.

This regulatory framework reflects the SEC and CFTC's approach to balancing innovation with investor protection.

The guidance demonstrates a nuanced understanding of the crypto ecosystem, distinguishing between different types of digital assets.

While most crypto activities are not considered securities transactions, the regulators maintain oversight through the investment contract framework.

This approach aims to provide regulatory certainty for legitimate crypto businesses while preventing fraud and protecting investors.