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Scrutinizes nft over token offerings

For that reason, they have generally been considered outside the realm of the SEC’s jurisdiction. But Chair Gensler previously remarked that the SEC will regulate any stablecoin deemed to be a security, especially because there may be investor protection issues and possible illicit activity associated with stablecoins.15 Given these recently-expressed concerns, it is unsurprising that the Unit will focus on securities violations involving stablecoins.

Immediately following announcement of the Unit’s expansion, SEC Commissioner Hester Peirce, often referred to as Crypto Mom due to her generally favorable stance towards cryptocurrency, again voiced her concern that the SEC is engaging in regulation by enforcement: “The SEC is a regulatory agency with an enforcement division, not an enforcement agency.

Sec scrutinizes nft market over illegal crypto token offerings

As the market has boomed, some NFT marketplaces have taken steps to remove projects that might put them in regulators’ crosshairs, such as those that offer royalties or that involve raising funds for a business.

A key legal question is whether digital assets including NFTs are securities, and therefore subject to the same rules as stocks. Although the SEC has said that many tokens fall under its purview, some crypto enthusiasts argue regulations meant to police the equity markets shouldn’t also apply to virtual currencies.

The SEC applies the so-called Howey test, which comes from a 1946 U.S. Supreme Court decision, to decide whether something is a security.

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Congress addressed some 90 years ago.”

Key Takeaways

Crypto Exchanges and Tokens

The announcement of the dramatic expansion of SEC Enforcement’s Crypto Assets and Cyber Unit along with Gensler’s recent comments mean we will see more activity from the SEC, in the form of regulations and/or enforcement actions, targeted at crypto platforms, stablecoins and tokens. Put simply, Gensler believes that crypto platforms are like traditional, regulated stock exchanges and that investors should be protected the same way when trading cryptocurrencies. Gurbir Grewal, the Director of the SEC’s Division of Enforcement, echoed this belief in the announcement of the unit’s expansion, noting that “[c]rypto markets have exploded in recent years, with retail investors bearing the brunt of abuses in this space.
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DFIN Solutions Capital Markets CSR


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DeFi)” are likely trading securities: “many of the tokens trading on these platforms may well meet the definition of ‘securities.’ While each token’s legal status depends on its own facts and circumstances, given the Commission’s experience with various tokens that are securities, and with so many tokens trading, the probability is quite remote that any given platform has zero securities.”11 Chair Gensler further stated that he had asked SEC staff to work on “getting the platforms themselves registered and regulated much like exchanges.”12 Finally, it has been reported that the SEC has already opened an investigation into one of the largest DeFi platforms.13

NFTs: While the SEC has already brought cases relating to the categories listed above, it has not yet waded into NFTs through guidance or enforcement.

Crypto Assets and Cyber Unit will be at the forefront of protecting investors and ensuring fair and orderly markets in the face of these critical challenges.” As such, we can expect to see more settlements, like the BlockFi settlement, in which platforms are charged with failing to register.

As to the tokens themselves, while Gensler noted that the SEC would evaluate each token on a case-by-case basis, he made clear that he believes most are investment contracts under Howey and must also be registered with the SEC. Stablecoins in particular will be subject to enhanced scrutiny because of concerns that they permit illicit activity and also concerns that they are not, in fact, pegged to value of the underlying currency.2

DeFi Exchanges

Although not the primary focus of his comments, Gensler also addressed DeFi platforms in his comments at UPenn.

His comments indicate that he believes most cryptocurrency exchanges must register with the SEC, and that almost all crypto tokens are securities subject to SEC oversight.

As discussed below, while his recent comments are most directly applicable to cryptocurrency exchanges and tokens, they also likely apply to DeFi platforms and NFT markets and we should expect to see increased regulation in these areas as well, especially because Gensler highlighted these two areas as focal points for the expanded Crypto Assets and Cyber Unit.

Chair Gensler’s Speech at the Penn Law Capital Markets Association Annual Conference

In his speech at the University of Pennsylvania on April 4, 2022, Chair Gensler addressed three areas that the SEC is focused on: (1) crypto trading and lending platforms; (2) stablecoins; and (3) crypto tokens.

Cyber Unit in order to pursue cases involving crypto asset offerings, crypto asset exchanges, crypto asset lending and staking products, decentralized finance (DeFi) platforms, non-fungible tokens (NFTs) and stablecoins.1 SEC Chair Gary Gensler stated that with this increase “the SEC will be better equipped to police wrongdoing” in cryptocurrency markets and from cyber-related threats. While Gensler did not specify the types of wrongdoing this expanded unit will pursue, his recent public statements provide helpful guidance.

Last month, in a sweeping speech at the University of Pennsylvania, Gensler ominously compared the crypto ads during the Super Bowl this year to Super Bowl ads run by subprime lenders in the lead-up to the financial crisis and dotcom companies in 2000, revealing a skepticism toward these markets and the potential harm they can cause investors and the economy.

NFTs as a whole should probably not be classified as securities in the context of the test, but the exchange supervisory authority could come to a different conclusion for certain NFTs.

Does Ripple’s rating point the way?

For some time now, the SEC has been wrestling with possible responsibilities in the crypto sector. There is also the question of whether cryptocurrencies are securities that need to be regulated by the SEC. The stock exchange supervisory authority has been involved in a legal dispute with Ripple for around a year.
Specifically, the Securities and Exchange Commission has sued the crypto company because, in its view, its cryptocurrency is a security and a sale of the Ripple token (XRP) by executives should therefore first have been approved.

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