I spent several years litigating major securities fraud cases, and I enjoyed learning about the history of the Federal securities laws. In the wake of the Great Depression that arrived in 1929, Congress acted to restore public confidence in a stock market that was rife with fraudulent conduct. It passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These two pieces of legislation, as amended, form the core of modern Federal securities regulation.
The ’33 Act requires that securities offered to the public must first be registered, and their promotion is subject to strict rules. The ’34 Act sets up a regime whereby companies issue periodic and special reports– the now-familiar “10-Ks,” “10-Qs” and “8-Ks” of modern public company existence. These Acts also created the Securities and Exchange Commission. The design was not that the federal government would pass on the merits of any security, but rather would work to ensure that investors were given proper disclosure.
Flash forward to the present, where securities regulators are confronted with financial products their predecessors couldn’t have foreseen: Digital assets. As digital assets like cryptocurrencies have grown in popularity, so has the Federal government’s seeming interest in regulating them. The Commodity Futures Trading Commission a while back classified Bitcoin as a “commodity” subject to its regulation. Recent Congressional testimony by the CFTC Chairman sought to promote “an increasingly central role in overseeing the cash digital asset commodity market” for the agency.
As to the SEC, that agency has regulatory authority over what can be called a “security.” Thus, with regard to digital assets, the threshold question becomes whether they can properly be classed as “securities” under Federal law.
The ’33 and ’34 Acts contain a definition of “security” that specifically excludes “currency.” In 2018, former SEC Chair Jay Clayton commented that “[c]ryptocurrencies … are replacements for sovereign currencies …. That type of currency is not a security.”
But the Acts’ definition specifically includes an “investment contract” which, according to the Supreme Court, exists where there is the “investment of money in a common enterprise with profits to come solely from the efforts of others.” SEC v. Howey, 328 U.S. 293, 301 (1946). In 2017, the SEC issued a report advising “those who would use . . . distributed ledger or blockchain-enabled means for capital raising[]” that the type of digital assets in that report were “investment contracts” and, therefore, were securities subject to the Federal securities laws.
In comparison to the CFTC’s jurisdiction, SEC regulation would be far more involved. The idea is particularly unwelcome to the Crypto community, given the original impetus for Bitcoin was mainly to create a currency free from centralized control by governments. And it raises a significant public policy question, namely, whether Crypto markets would ultimately be better or worse for participants if they were regulated. Further, if regulation is warranted, it’s also an open question as to whether Congress should create a specialized agency and regulatory scheme just for Crypto, rather than forcing it into the current framework for traditional securities. In the meantime, as will be chronicled in future Posts, the SEC has undertaken significant enforcement actions against some promoters of digital assets, asserting its jurisdiction over them.