The US Securities and Exchange Commission and the Commodity Futures Trading Commission published an interpretive guide explaining how they could define what is or is not a security in crypto; The CFTC also issued a no-action letter to a non-custodial wallet provider to facilitate derivatives and prediction markets transactions; Arizona is filing criminal charges against a prediction market provider; and by the way, we have signs of movement in legislation on market structure.
What a week, huh?
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the narrative
The U.S. Securities and Exchange Commission this week released interpretive guidance, joined by the Commodity Futures Trading Commission, outlining how it addressed the question of which cryptocurrency it will consider a security.
Why is it important
What a security is and what it is not has plagued the industry for a long time. In the past, the SEC has struggled to define this in some way (Bill Hinman’s “When Howey Met Gary (Plastics)” speech, for example), but this week’s interpretive guidance is one of the more specific efforts to define this for the industry.
breaking it
The SEC presented several categories that it saw in the crypto space, one of these categories being digital securities. These are cryptocurrencies that meet the definition of value in any other context, but happen to be tokenized, according to the guidance. For example, if a crypto asset meets the requirements of the Howey test, it is a security.
This is the category of tokens that the SEC will oversee.
Other categories include payment stablecoins, digital tools, digital collectibles, and digital commodities, which are generally not securities unless issuers or operators take steps that may comply with securities regulations, such as fractionalizing the tokens in question.
“We establish a simple taxonomy of cryptoassets (most of which are not securities) and clarify how the Supreme Court’s Howey test applies when a cryptoasset is part of an investment contract,” SEC Chairman Paul Atkins and Commissioners Hester Peirce and Mark Uyeda wrote in an op-ed for CoinDesk.
The CFTC said it would sign the guidance and administer it under the Commodity Exchange Act.
“Market participants, from innovators and issuers to individual investors, should review this interpretation to better understand the regulatory jurisdiction between the SEC and the CFTC,” the CFTC said in a press release. “The interpretation will be published on CFTC.gov and in the Federal Register.”
Rep. Troy Downing (R-Mont.) called the guidance “very positive,” but said Congress still needed to pass market structure legislation because a future administration could undo the interpretive guidance.
“Just spending another two or three years with this and then having ambiguity doesn’t make most people comfortable making any kind of big investment,” he told CoinDesk. “But it’s a great start because this is exactly what the industry wants and it allows some people to move forward.”
Chris LaVigne, a partner at law firm Withers, said the guidance “concludes unsurprisingly that most cryptoassets and many common cryptographic activities are not securities,” although the agency maintained some discretion to take enforcement action in this area.
“The guidance moves securities investigation away from the asset or activity itself (which are mostly considered digital products that are not within the SEC’s purview) and refocuses the analysis on the transactions and representations in which these assets or activities arise or are traded,” he said. “In doing so, the SEC did not completely eliminate uncertainty or its enforcement role, because it concludes that a cryptographic asset that is not a security may nevertheless be sold as part of an investment contract if it is marketed with promises of profits derived from the issuer’s essential administrative efforts.”
A cryptocurrency that was traded as a security may eventually be considered something else “once those promises are fulfilled or cease to be operational,” he said. This could affect securities more broadly than just crypto assets.
It is less clear what may constitute a commodity under the guidelines.
Jason Gottlieb, a partner at Morrison Cohen, said the Commodity Exchange Act defines commodities as a list of goods (excluding onions and movie box office receipts), services and other matters “in which contracts for future deliveries are currently or hereafter negotiated.”
This legal definition differs from the definition apparently used in the guide. The CFTC’s approach to cryptocurrencies over the past decade has evolved from some of the first lawsuits, in which it claimed jurisdiction over bitcoin. leading it to apparently have jurisdiction over non-security cryptocurrencies. But this definition needs to be codified by market structure legislation, he told CoinDesk.
“People need to understand that jurisdiction is still uncertain. The SEC is clearly saying ‘we have no jurisdiction if the token does not meet these criteria,'” he said. “Just because the SEC doesn’t have jurisdiction doesn’t mean the CFTC does.”
Gottlieb said he was part of a case before the Seventh Circuit Court of Appeals that sought to clarify this issue, but that market structure legislation would be needed to clearly give the CFTC jurisdiction over all cryptocurrencies that are not securities.
The status of that legislation also remains up in the air. Sen. Cynthia Lummis (R-Wyo.), speaking at the DC Blockchain Summit earlier this week, said she anticipated a surge could occur in the final weeks of April. The issue of stablecoin performance may be resolved with an agreement whereby stablecoin issuers and their associated companies would not describe their products using banking terminology, although he cautioned that he had not yet seen any specific language.
The flip side, several people told me, is that the Clarity Act could require the SEC to go back to the drawing board on how it defines securities in crypto. But this falls into the category of bridges that can be crossed once reached.
Sen. Tim Scott (RS.C.), chairman of the Senate Banking Committee, said lawmakers are also close to reaching agreements on issues such as ethics and quorums at regulatory agencies, some of the remaining areas of disagreement in the bill.
Downing said he considered an April deadline to advance market structure legislation feasible. However, the closer lawmakers get to the end of the year, the less likely anything will be passed, he said, pointing to the midterm elections. “But I don’t think it’s impossible.”
Sen. Kirsten Gillibrand (D-N.Y.) said on stage at the D.C. summit that she was “optimistic” that there would soon be a margin of profit, which would then lead to the Banking and Agriculture Committee’s bills being combined.
The combined bill would need to incorporate areas of bipartisan agreement, he said.
“One of the issues that I think is very important that people should keep in mind is that the Senate wants an ethics provision,” he said. “I think the House would have had even more support on the Democratic side if they had kept their ethics provisions in their bill. It’s very important that members of Congress not get rich off of this industry, because they have access to non-public information, because they have positions of power and authority.”
Downing said the market structure bill needed to address consumer protection and money laundering, without being so restrictive that businesses were afraid to do anything.
“No one wants bad actors in their space and no one wants that reputation of bad actors using this as a tool to do bad things,” he said. “…If you bring those [provisions] “If it’s too narrow, no one is going to do anything innovative.”
He said he understood why banks might be concerned about performance issues.
“Community lenders and community banks are worried that all the depositors will leave the market, in which case mortgages wouldn’t be made on small farms in Montana, right?” said.
On Friday night, Senators Angela Alsobrooks and Thom Tillis told Politico that they had reached an agreement on the performance issue, although the details had not been shared with the banking or crypto industries as of press time.
Kalshi was just ordered to stop offering most of its prediction markets in the state of Nevada for at least two weeks, pending a hearing on April 3.
The order came after an appeals court refused to grant an administrative motion that could have blocked the state court’s action. Earlier this week, the state of Arizona filed criminal charges against Kalshi, alleging that some of his election contracts and others violate state law.
In Nevada, a judge ruled that Kalshi cannot offer contracts for events related to sports, elections or entertainment, at least temporarily.
According to Judge Jason Woodbury’s order, the record of Nevada’s case against Kalshi so far suggests that he offers products defined by state law, making his conduct subject to Nevada gaming regulators.
“The question of federal preemption in this regard is nuanced and rapidly evolving,” the judge wrote. “At the moment, the balance of compelling legal authority weighs against federal preference in this context.”
The Arizona action goes further, alleging misdemeanor violations in small bets placed on professional football and college basketball games, upcoming elections and whether the bills become law and whether public figures will appear at sporting events.
“Arizona law prohibits operating a gambling business without a license and, separately, directly prohibits betting on elections,” Arizona Attorney General Kris Mayes’ office said in a news release.
Kalshi co-founder Tarek Mansour called the charges a “complete excess” that “has nothing to do with the game or the merits.”
There is a growing and broader reaction to prediction markets. Senator Catherine Cortez-Masto, who represents Nevada, wrote an op-ed saying that prediction markets “blatantly violate state and tribal laws and regulations.”
“To ensure responsible gaming, casinos, sportsbooks, and online gaming sites must follow minimum age requirements, engage in integrity monitoring, and support critical consumer protections, such as programs that help people with gambling addictions,” he said. “However, in the past year, emboldened by weak and overly permissive federal regulators like the Commodity Futures Trading Commission (CFTC), so-called ‘prediction markets’ have transformed into illegal betting houses, offering their users illicit sports bets.”
This week
- There are no hearings or public meetings scheduled (at least as far as cryptocurrencies are concerned).
If you have any ideas or questions about what I should discuss next week or any other comments you would like to share, please feel free to email me at [email protected] or find me on Bluesky @nikhileshde.bsky.social.
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See you next week!
