The total capital for digital assets in 2021 reached $1.95 trillion market value, including collection from cryptocurrencies and NFTs.
A short time later, it has doubled, and until now, it is still growing.
Users, creators, and supporters of these digital assets have advanced into an up-to-date rationale for using such. The following are important reasons as to why:
- dodge inflationary risks
- considered as the modern equivalent of art or baseball card collecting
- help solve racial wealth and income inequality
- level the skewed playing field favouring banking niche
However, there are several other concerns about the usage of digital assets, such as
individuals fleeing with investors’ assets
- theft
- limited tax compliance
- expediting money laundering and other illegal activities
- evasion of federal sanctions.
- contribution to climate change
The risks involved have also increased with the growing market capitalization of digital assets.
Scroll down for more information about the recent developments between the SEC and Digital Assets Compliance.
Therefore, the SEC announced that it is expanding its Crypto Assets and Cyber Unit by 20 law enforcement positions. None of the new employees will be responsible for SEC’s statutory duties.
In recent months, the SEC has proposed several new rules. Also, it plans to expand its powers while potentially suffocating the crumbling digital asset industry.
Let’s make sense of the law of digital assets by providing a short update on the potential responses from Congress, the Executive, and the private industry.
Table of Contents
SEC’s Overhauled Crypto Assets and Cyber Unit
They’ve been operating for five years and have initiated actions against several crypto-asset offerings and online platforms. This resulted in more than $2 billion in settlements.
Because of the cost of mounting a defence, almost all SEC enforcement actions are settled without admitting or denying the government’s allegations.
SEC orders issued in connection with settlements are written by SEC staff and lack the legal precedential value of court orders and federal judicial opinions.
Past and Present Charges SEC Filed Against Tech Companies
Here’s a quick list of past and present charges filed by the SEC against several tech companies and crypto corporations.
Nvidia Corp.
They issued an order on May 6, 2022, regarding the settlement of charges it brought against Nvidia Corporation.
NVidia Corp. is one of the world’s largest producers of graphics processing units, from which the Unit extracted a $5.5 million penalty for alleged inadequate disclosures about the impact of crypto-mining on its publicly filed financial results.
According to the order, the SEC alleged that the company failed to make clear that demand from crypto miners was responsible for a significant portion of the increase in sales of its GPUs, which were also used for gaming, during two consecutive quarters in 2018.
MCC International Corp (Mining Capital Coin Corp.)
The SEC sanctioned the company, its founders, and related entities. They were accused of fraud with allegedly unregistered offerings and fraudulent sales of investment plans known as mining packages.
BlockFi
BLockFi indicates that a company is to pay $50 million to settle SEC charges. In addition to that is another $50 million to settle state law charges.
Ripple
Ripple and the SEC’s case are now a top-level lawsuit. November 2022 will be their recent trial. Thus the case is being closely watched for indications of the SEC’s shifting positions in the new administration and judicial rulings.
This action follows the President’s Executive Order. The Ensuring Responsible Development of Digital Assets states that 40 million Americans now invest in cryptocurrency.
What’s Happening Now
Since their inception in 2010, crypto assets have been the fastest-growing asset class. To prove the point, nearly all significant university endowments and the majority of the largest hedge funds now own digital assets.
Fidelity has the largest retirement plan provider in the United States. They recently announced that by the end of summer 2022, employers would be able to offer up to 20% of their investors’ 401(k) retirement funds in Bitcoin.
The executive order directed the President’s administration to conduct extensive research on the industry and collaborate with it to develop a comprehensive federal approach to regulating crypto assets.
The SEC is an independent agency not governed by White House orders.
But, many individuals involved in digital assets see SEC’s actions as a growing emphasis on “regulation by enforcement” and not a “regulation by regulation.”
As a result, they believe that the SEC is not on par with the executive order. Why? Because when the SEC adopts rules and regulations to govern financial markets, they often carefully study and consult with stakeholders, but they don’t.
The SEC’s Crypto and Cyber Unit, along with its new members, will aim to seek to increase their focus on the growing crypto market, with a particular emphasis on checking the following:
- Offerings of crypto assets
- Exchanges of digital assets
- Products for lending and staking crypto assets
- Platforms for decentralized finance (DeFi)
In addition to that is the monitoring of the following:
- Non-transferable tokens (NFTs)
- Stablecoins
The first four categories are well-known SEC enforcement targets. NFTs and stablecoins have also received some attention and will presumably continue to do so.
The SEC’s enforcement action against Nvidia highlights the vast array of tools at its disposal to flex its enforcement muscle, including against some of the world’s largest companies in hyper-competitive industries.
The SEC’s jurisdiction over NFTs and stablecoins is debatable due to the lack of legislation governing these instruments, as interpreted by modern judicial precedent.
Moreover, the NFT industry regards itself to be in the business of collectable, not in securities.
Stablecoins provide no profit opportunity and thus are not investment contract securities. Nonetheless, the SEC has aggressively posited novel legal theories to justify expanding its reach and enlarging its turf.
Other countries are taking a more cautious approach to crypto asset regulation.
For example, Switzerland and the Bahamas are frequently mentioned as places to conduct crypto industry business because their regulations are more transparent and more accommodating than SEC enforcement actions in the United States.
Since SEC has increased its staff and suggested two amendments to existing regulations, they have made trading crypto assets more challenging.
One of their proposals aims to expand the definition of “exchange,” which will now include the following:
communication protocol systems that are made available for trading
the system will consist of any security.
This system will then consist of crypto assets classified as investment contract securities.
Critics and commentators have raised concerns about this move. They see it as the SEC’s failure to assess the impact of this decision on the crypto industry.
This move also shows the SEC’s lack of authority in revising legal terms beyond their settled interpretations, such as “exchange.”
The other proposal further aims to expand the specification of the term “dealer” to include most patented trading firms and other day traders. They are arguing that they are “dealer-like” and thus should be regulated as such.
Analysts have pointed out that Congress should properly determine which entities would be dealers (and which should not be). Traders of digital assets could not comply with the SEC’s revision due to the following:
- capital requirements
- custody
- market price quotations for digital assets
California’s Stand
While the SEC continues on the path of discouraging digital asset industry growth at every opportunity, California Governor Gavin Newsom makes a difference.
California has the world’s fifth-largest economy and is home to the world’s leading technology companies like Apple, Google, Amazon, and more. And on May 4, Governor Newsom signed an executive order to continue strengthening California’s innovation technology and protect consumers.
Governor Newsom announced the launch of a new regulatory approach in California that will aim to do the following:
spur responsible innovation
protect California consumers
assess the deployment of blockchain technology (state and public institutions)
build research and workforce development pathways
Various potential industry responses to increasing SEC intervention may be based on legal limits on federal agency powers. But each side has players to move to play this game.
Final Thoughts
Markets for these assets are a developing area of interest for investors and an ever-increasing source of concern for legislators and regulators.
Investors will fail to understand its risks without the proper market oversight and transparency that new SEC regulations will bring. Obviously, the benefits of digital assets will also fail to launch.
Fortunately, while they may require new legislation in the future, regulators already have some legal authority to address any issues digital assets raise by enforcing existing rules and drafting new regulations.
Furthermore, while they may require new legislation in the future to address digital asset markets, regulators need one thing from Congress right now: adequate appropriations to address the magnitude of the digital asset markets.
Since 2008, the market for digital assets has grown to more than $2 trillion, but congressional appropriations have not kept pace.
Regulators require resources to write rules, inspect and examine market actors for compliance, and bring enforcement actions in this developing area while guaranteeing traditional markets’ smooth and proper operation.
Thus, Congress must ensure regulators have the resources to carry out existing laws.
