The Ever-Shifting Landscape of U.S. Crypto Regulation

Summary: This article explores potential changes in cryptocurrency regulatory policies under different administrations, recent litigation, and lingering questions about the future of digital asset regulation in the United States.

After years of ambiguity, the Securities and Exchange Commission (SEC) has left no doubt about its stance on cryptocurrencies, categorizing the vast majority as securities, and staking its claim to regulate them. But the SEC is not the final word on all matters crypto. And an election just weeks away may lead to a different approach to crypto at the SEC and across the federal government.

White House Policy After the Election

A new administration may advocate for less regulation. When Donald Trump was president, he initially displayed skepticism toward digital assets, branding them a “scam.” Trump appointed Jay Clayton as SEC Chair, and Clayton then took a cautious approach toward crypto asset securities. Clayton oversaw critical regulatory actions, including the SEC’s lawsuit against Ripple Labs over its XRP tokens.

But Trump’s 2024 campaign message has a more open stance on crypto regulations. Trump has been an outspoken critic of Clayton’s successor, SEC Chair Gary Gensler, a Biden appointee, whose view has been that the SEC should heavily regulate digital assets to protect investors. In July, the Republican Party unveiled a party platform detailing its crypto objectives: “We will defend the right to mine Bitcoin and ensure every American has the right to self-custody of their digital assets, and transact free from government surveillance and control.” That same month, at a Bitcoin event, Trump vowed to fire Gensler and to make the U.S. “the crypto capital of the planet.” 

Trump’s own plans purportedly include introducing his own crypto platform to be built on Aave and the Ethereum blockchain. The platform would feature a “credit account system” and a governance token called WLFI to allow holders to “suggest and vote on adding new DeFi lending markets or integrating new blockchains.” Trump himself has launched multiple NFTs, and in May, he hosted an event at Mar-a-Lago for collectors of his NFTs, which generated millions of dollars in sales. 

Some high-profile crypto enthusiasts have backed Trump. Cameron and Tyler Winklevoss, the founders of the Gemini exchange, have each donated $1 million to his campaign, and Marc Andreessen and Ben Horowitz, the founders of venture capital firm Andreesen Horowitz, have also endorsed the former president, citing concerns about the regulation of crypto asset securities and artificial intelligence, as well as increased taxation on their holdings.

For his part, Trump’s running mate, U.S. Senator J.D. Vance, a disciple of fintech billionaire Peter Thiel, also has a personal interest in crypto. He has disclosed holdings of $100,000 to $250,000 in Bitcoin, and he has stated that he believes that there is too much government regulation of cryptocurrency.

A Harris White House may also change the U.S. approach to crypto. As California Attorney General and U.S. Senator, Vice President Kamala Harris took a hands-off approach to tech companies, and she solicited donations from the state’s tech elite during her campaigns. Harris’s campaign recently stated that she would ensure that a regulatory framework protects owners of investors in digital assets. 

Congressional Actions

Congress has generally continued its years-long history of ceding crypto policymaking to the agencies and the courts, but some in Congress have aimed to change that approach.

One senate bill, the Strategic Bitcoin Reserve Act, introduced in July by Sen. Cynthia Lummis of Wyoming—a staunch crypto advocate—calls for the U.S. Treasury to establish a secure, decentralized network of Bitcoin vaults. The reserve of one million Bitcoin would be composed of crypto assets that the government collects through forfeitures. Critics of the bill point out that Bitcoin’s volatility makes it a risky holding for the federal government. The bill remains in committee.

In May, the House passed H.J.Res. 109 with bipartisan support. The bill, authored by Rep. Mike Flood of Nebraska, is meant to negate the SEC’s SAB 121, which requires financial institutions to include on their balance sheets customers’ digital assets. This increases capital reserve requirements and constrains lending, making crypto custody services less feasible for many firms. On May 31, President Biden vetoed the bill and Congress failed to marshal the supermajority needed to overturn the veto. But in July, several banks met with the SEC, and the agency gave them the green light to ignore SAB 121 if they implemented certain other protections for their customers’ crypto assets.

The Financial Innovation and Technology for the 21st Century Act (FIT21) is a bill to explicitly address the treatment of digital assets; the House passed it with bipartisan support in May over the vocal opposition of President Biden and Gensler. The bill proposes that the Commodity Futures Trading Commission (CFTC) regulate digital assets as commodities if the blockchains on which they run are functional and decentralized; the SEC would regulate digital assets as securities if their associated blockchains are functional but not decentralized. The bill moves to the Senate just as Chairman of the House Financial Services Committee Patrick McHenry, a cosponsor of the bill and a key supporter of the cryptocurrency industry who announced his retirement last December, gets set to leave office in January.

In 2022, the Senate Agriculture Committee considered the Digital Commodities Consumer Protection Act, another bill that would place the regulation of crypto assets under the authority of the CFTC. The bill’s sponsor, Senate Agriculture Committee Chair Debbie Stabenow, has not re-introduced it this session. 

Come the new Congress in January, one or both chambers may be open to new approaches to crypto legislation, especially in light of the substantial involvement of the industry in this election: Fairshake, a PAC funded by the crypto industry, has raised more than $200 million to elect pro-crypto candidates—Democrats and Republicans—in congressional races.

Intensified CFTC Enforcement

Amid this legislative uncertainty, CFTC Chair Rostin Behnam warned of another cycle of CFTC enforcement actions against digital asset firms. In May, he said, “We’re going to probably see in the next six to 18 months, or six to 24 months, another cycle of enforcement actions because of this cycle of asset appreciation and interest by retail investors.” According to CFTC Enforcement Director Ian McGinley, digital asset cases accounted for almost 50% of the CFTC’s enforcement actions in the last fiscal year, and many of those cases involved basic fraud. While the CFTC continues to bring fraud cases, it has responded to the maturation of the digital asset marketplace by shifting its focus to three areas of enforcement: (1) evasion of the Commodity Exchange Act (CEA); (2) third-party intermediaries who connect U.S.-based market participants to unregistered entities; and (3) compliance with regulatory requirements, including Know Your Customer, Anti-Money Laundering laws, and required registrations such as futures commission merchant (FCM) registration or introducing broker registration. 

In March, the CFTC filed an enforcement action against KuCoin for violating CEA and CFTC regulations. Among the allegations: KuCoin solicited and accepted orders for commodity futures, swaps, and leveraged retail commodity transactions without registering with the CFTC as an FCM, and also that KuCoin operated a facility for the trading of swaps without registering with the CFTC as a swap execution facility or designated contract market. The CFTC is seeking disgorgement, penalties, permanent trading, and registration bans against KuCoin, along with a permanent injunction.

The FTC also issued an order in May against Falcon Labs for failing to register as an FCM. The order contends that from October 2021 through at least March 2023, Falcon Labs solicited orders for digital asset derivatives from customers in the U.S. Throughout this period, Falcon Labs functioned as an intermediary, facilitating trades by U.S. customers on various digital asset exchanges. The exchanges generally did not require, and Falcon Labs generally did not provide, customer-identifying information for the sub-account holders. Falcon Labs was ordered to cease and desist from acting as an unregistered FCM and pay $1,179,008 in disgorgement and $589,504 in civil penalty. 

On September 4, the CFTC settled charges against Uniswap Labs for violating the CEA by offering leveraged or margined retail commodity transactions in digital assets via a decentralized digital asset trading protocol. Uniswap Labs allowed users to trade in hundreds of liquidity pools on its protocol. Among the digital assets traded were a limited number of “leveraged tokens,” which exposed users to multiples more price volatility than the underlying digital assets such as Ether and Bitcoin. Since these leveraged or margined commodity transactions did not result in actual delivery within 28 days, they could only be offered to retail purchasers through a registered contract market, which Uniswap Labs was not. The order requires Uniswap Labs to pay a $175,000 civil penalty and to stop violating the CEA.

As the digital asset market evolves and new legislative proposals call for expanding its oversight over the crypto futures market, the CFTC is taking an increasingly aggressive stance in enforcement.

The SEC and the Courts

Gensler has said, “There is nothing about the crypto asset securities markets that suggests that investors and issuers are less deserving of the protections of our securities laws.” But SEC Commissioners from both parties have disagreed with Gensler’s approach to crypto, for different reasons. For instance, in a statement dissenting from the SEC’s settlement with NFT creator Stoner Cats 2, LLC, Republican Commissioners Hester M. Peirce and Mark T. Uyeda complained that existing securities laws are too broad for crypto asset securities, arguing instead that new laws must be written. Democratic Commissioner Caroline A. Crenshaw dissented from the SEC’s approval of Spot Bitcoin Exchange-Traded Products, criticizing the underlying Bitcoin markets as susceptible to fraud and manipulation, highly concentrated, and lacking meaningful regulation.

Courts have agreed with some of the SEC’s actions and invalidated others.

In March, the district court in SEC v. Coinbase, Inc., denied Coinbase’s motion to dismiss on claims that its staking program operated as an unregistered security intermediary, but it granted Coinbase’s motion to dismiss on claims related to the company’s wallet application acting as an unregistered broker. In short, the court supported the SEC’s authority over crypto, but it declared that its ruling—and the rulings of future courts—might be different if the key allegations about an asset (and that asset’s susceptibility to failing the Howey test) were different.

Three months later, Judge Amy Berman Jackson of the U.S. District Court for the District of Columbia partially granted Binance’s motion to dismiss the SEC’s complaint in its enforcement action seeking to impose federal securities regulations on a variety of transactions involving foreign (Binance.com) and domestic (Binance.us) trading platforms. But Judge Jackson allowed claims based on Binance’s own post-ICO sales of its token BNB to proceed and dismissed claims based on other parties’ subsequent sales of BNB. The court concluded that the SEC had not plausibly alleged that purchasers on secondary markets expected Binance to use their “investment” to generate profits—reasoning that largely tracked another district court’s rationale in deciding a motion to dismiss the SEC’s case against Ripple Labs (“Ripple”). In that case, the court concluded that the SEC’s claim based on Ripple’s sales of the XRP token to institutional purchasers could proceed, but its claim based on Ripple’s anonymous sales of XRP to retail purchasers via exchanges could not. On October 2, the SEC filed a notice of appeal in its case against Ripple, and Ripple filed its notice of cross-appeal on October 10. 

Amid the SEC’s lengthy and ongoing litigation against crypto trading platforms, it is notable that at least one has resolved an SEC investigation by restricting the scope of the trading activity it supports. Trading platform eToro settled SEC charges that it had operated as an unregistered broker and unregistered clearing agency in connection with its trading platform, which facilitated buying and selling certain crypto assets as securities. The company settled for $1.5 million and announced that the only crypto assets that U.S. customers can trade on the company’s platform will be Bitcoin, Bitcoin Cash, and Ether. This settlement suggests that the SEC does not consider ETH to be a security. 

The SEC has not only pursued digital asset issuers and trading platforms; in some cases, the agency has increasingly targeted other industry plays, including investment advisers and over-the-counter traders. The SEC settled charges against Galois Capital Management LLC, a former registered investment adviser for a private fund that primarily invested in crypto assets. The agency claimed that Galois had failed to comply with requirements to safeguard client assets—including crypto assets that were offered and sold as securities—by neglecting to ensure that the assets held by the private fund it advised were maintained with a qualified custodian. Galois agreed to pay a civil penalty of $225,000. 

Opening a new front in its enforcement efforts against hedge funds and other big market players, the SEC brought suit against Cumberland DRW, the crypto-focused subsidiary of high-speed trading giant DRW Holdings. The SEC claimed that Cumberland bought and sold digital assets in unregistered securities transactions through its online trading platform, Marea, which allowed counterparties to trade against it. In addition to alleging that Cumberland had failed to register its “single-dealer platform,” the agency claimed that the firm traded crypto assets that were offered as unregistered investment contracts.

In response to the SEC’s increasingly aggressive stance against digital assets, crypto companies have begun taking formal steps to push the agency to either do more than “regulate by enforcement” or acknowledge the limits of its jurisdiction. For example, on September 23, Coinbase Global asked a federal appeals court to force the SEC to create new rules for digital assets. Although the panel of three judges noted during the hearing that the SEC can set its own rulemaking priorities, it asked the regulator why cryptocurrency was not among those priorities. Roughly two weeks later, after receiving a notice from the SEC claiming that tokens traded on its platform qualified as securities, Crypto.com filed a lawsuit against the agency, alleging that the agency has expanded its jurisdiction beyond statutory limits and that it had established an unlawful rule by declaring that trades in nearly all crypto assets are securities transactions. Separately, the company filed a petition with the CFTC and SEC to ascertain each agency’s jurisdiction, seeking a joint interpretation to confirm that the CFTC alone regulates certain cryptocurrency derivative products.

Implications

So, where are we? The SEC has taken a skeptical approach to crypto over the last two administrations, but the results of this election could affect the SEC’s approach. And, the Supreme Court’s recent overturning of the Chevron Doctrine could have significant implications for every agency’s authority, including the SEC’s. The SEC may now face more scrutiny, its decisions may be challenged more frequently, and its rulemaking abilities may be curtailed. And it remains unclear whether recent SEC enforcement actions could extend to other digital assets, such as the tokenization of real-world assets.

As has been said many times before, legislation may be necessary to establish comprehensive crypto regulations, but political gridlock, even post-election, could inhibit any progress anytime soon.

Political will is just one factor influencing the future of crypto asset securities regulation. The SEC’s mixed record in court, potential shifts in regulatory policies under different administrations—not to mention existential questions about the very authority of regulatory agencies—have only extended the uncertainty for the crypto industry in the U.S.

By conducting rigorous due diligence, understanding the legal and operational intricacies, and partnering with experienced professionals in the digital asset space, companies can reduce risks and maximize the potential of this rapidly evolving asset class.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Jim Bowman, an O'Melveny partner licensed to practice law in California; Mark A. Racanelli, an O’Melveny partner licensed to practice law in New York; Andrew J. Geist, an O'Melveny partner licensed to practice law in New York; David L. Kirman, an O'Melveny partner licensed to practice law in California; Rebecca Mermelstein, an O’Melveny partner licensed to practice law in New York and New Jersey; Sid Mody, an O'Melveny partner licensed to practice law in Texas; Scott Sugino, an O'Melveny partner licensed to practice law in California and Japan; AnnaLou Tirol, an O'Melveny partner licensed to practice law in the District of Columbia and California; Bill Martin, an O'Melveny counsel licensed to practice law in New York; and Vy N. Malette, an O'Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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