Launchy Regulatory Roundup #6 - SEC Revises Crypto ‘Securities’ Stance

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Welcome to our sixth edition of the regulatory roundup. If you know anybody who would benefit from this content, please help us spread the word!

The SEC is once again creating confusion on its securities stance.

While it finally clarified that the term "crypto asset securities" refers to the contracts and expectations surrounding a token’s sale, not the token itself, on the same day, it also uses its old stance on different cases.

In Today's Edition:

• Headline: SEC revises crypto ‘securities’ stance 🤭 

• Global Legal Roundup: CFTC vs political prediction markets, etc.

• Case Study: SEC softens stance on SAB-121 custody rules

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HEADLINE

SEC Revises Crypto ‘Securities’ Stance

State of play: The SEC has retracted its broad characterization of cryptocurrencies as "securities" amid its lawsuit against Binance for allegedly offering unregistered securities.

• In a Sept. 12 filing, the SEC clarified that the term "crypto asset securities" refers to the contracts and expectations surrounding a token’s sale, not the token itself.

• This shift followed the SEC’s 2023 complaint, which identified tokens like Solana (SOL), Cardano (ADA), and Polygon (MATIC) as securities.

• Despite this shift, the SEC continues to argue that Binance violated securities laws through the unlawful offering of investment contracts.

• The SEC is using similar arguments in its case against Kraken, which faces allegations of operating as an unregistered securities exchange.

• In the same filing, the SEC has expanded its lawsuit against Binance to include AXS, FIL, ATOM, SAND, and MANA as securities, accusing Binance and BAM Trading of promoting these tokens as investments.

Critics, including Coinbase’s legal officer Paul Grewal and Jake Chervinsky, have questioned the SEC’s inconsistent approach.

• Chervinsky noted that the SEC used the term "crypto asset securities" eight times in the eToro settlement order, issued the same day they told a federal court they would stop using it to avoid confusion.

• Grewal pointed out the inconsistency in how the SEC treats ETH compared to other crypto assets, suggesting the agency's rationale is unclear.

• Grewal also emphasized the SEC's long history of enforcing regulations by claiming tokens are securities.

What’s Next: The SEC's ongoing lawsuits against Binance and Kraken indicate that it will continue to focus on how crypto assets are sold, rather than their inherent nature.

Why it Matters: The clarification that tokens may not be securities could reduce uncertainty around compliance, but the focus on sales contracts suggests the risk of enforcement remains high.

Our Take: Both the SEC and CFTC should prioritize clear guidelines instead of relying on litigation. Until then, the crypto industry remains in regulatory limbo, potentially stifling growth and innovation in the US market.

GLOBAL LEGAL ROUNDUP

🌐 Investors Lose Record $5.6B to Crypto Scams

In 2023, investors lost a record $5.6B to crypto scams, marking a 45% increase from the previous year. Despite crypto-related frauds comprising only 10% of total financial fraud complaints, they accounted for nearly half of the total losses.

• Investment fraud, especially long-term "pig butchering" schemes, led to $4B in losses.

• Most complaints came from those aged 30-49, while victims over 60 reported the highest losses, totaling $1.24B.

• American investors, particularly in California, faced the most significant losses and complaints.

🇺🇲 eToro Settles with SEC for $1.5M, Limits U.S. Crypto Trading

eToro has settled with the SEC for $1.5M over charges related to trading certain crypto assets as securities. The company will now limit U.S. customers to trading only bitcoin, bitcoin cash, and ether.

• The restrictions affect only about 3% of customers' crypto assets by value.

• eToro did not admit or deny the SEC’s allegations.

• Toro aims to focus on innovative products and is hopeful for clearer U.S. crypto regulations.

🇺🇲 Judge Limits CFTC's Authority Over Political Prediction Markets

A federal judge ruled that the U.S. Commodity Futures Trading Commission (CFTC) exceeded its authority in blocking Kalshi from listing political prediction markets.

• The judge determined the CFTC lacked the authority to conduct a public interest review on Kalshi’s political prediction markets.

• The ruling challenges the CFTC's broader definition of "gaming" and its proposal to ban political prediction markets.

• The CFTC has filed an emergency motion to stay the judge’s order while considering an appeal.

• Kalshi remains unable to list election markets until the legal situation is resolved.

• The ruling emphasizes that the CFTC’s role is limited to enforcing existing laws, not setting new policy directions.

🇺🇲 Five U.S. States Settle With GS Partners

Five US states have settled with GS Partners, ensuring full refunds for investors. Led by the Texas State Securities Board, the investigation revealed fraud involving various crypto investments promoted by GS Partners.

• GS Partners and its owner Josip Heit have agreed to refund 100% of investments to clients in Texas, Alabama, Arizona, Arkansas, and Georgia.

• GS Partners promoted crypto investments including virtual land and tokenized shares of a Dubai skyscraper, which failed to meet sales targets.

• The refund process will be managed by AlixPartners LP and is expected to start in October, lasting 90 days.

🇨🇳 China Considers New AML Law for Fintech

Chinese lawmakers are considering updates to anti-money laundering laws to better monitor and manage risks associated with new financial technologies, including cryptocurrencies.

• This move follows a Supreme People’s Court ruling classifying virtual assets as potential money laundering tools and a broader crackdown on crypto in China.

• The proposal aims to enhance detection methods and requires collaboration among the central bank, financial regulators, and financial institutions.

• China has a history of hostility towards cryptocurrencies, including past crackdowns on digital asset exchanges.

🇭🇰 Hong Kong Weighs New OTC Crypto Licensing Regime

Hong Kong's Securities and Futures Commission (SFC) is exploring a new licensing regime for cryptocurrency over-the-counter (OTC) trading services, collaborating with the Customs and Excise Department (C&ED).

• The SFC has published an “alert list” of suspicious and unlicensed virtual asset trading platforms.

• Operating an unlicensed virtual asset trading platform in Hong Kong is now a criminal offense.

• Hong Kong aims to strengthen its regulatory framework to attract and secure global crypto investment.

🇷🇺 Russia Targets Widespread Digital Ruble by July 2025

The Bank of Russia plans to introduce the digital ruble for widespread use by July 2025. The central bank aims for these institutions to support digital ruble accounts, transfers, and transactions.

• Smaller banks will gradually implement the digital ruble thereafter.

• The digital ruble is a central bank digital currency (CBDC) being tested with 12 banks and 9,000 participants.

• The digital ruble will be available for retail and commercial use, alongside cash and non-cash funds.

🇬🇧 UK Court Rules Tether as Property; Government Bill Advances Digital Asset Rights

The UK High Court has ruled that Tether (USDT) qualifies as property under English law, setting a precedent for the treatment of cryptocurrencies. This decision follows the introduction of a UK government bill aimed at clarifying the legal status of digital assets designating them as personal property.

• The High Court's ruling establishes Tether as a distinct form of property capable of being traced and held in trust.

• This ruling is the first English law decision on cryptocurrency status following a full trial.

• The UK government has introduced a bill to define digital assets, including cryptocurrencies and NFTs, as personal property under British law.

• The bill aims to provide legal protection in disputes and fraud cases involving digital assets.

• The ruling and bill align with earlier conclusions from the Law Commission on digital assets as personal property.

🇪🇺 EU to Finalize Stablecoin Standards by Year-End

The European Banking Authority (EBA) expects that technical standards for stablecoin issuers will be officially published in the EU's official journal by the end of 2024.

• The EBA has submitted 15 technical standards to the European Commission.

• The standards cover authorization, stress testing, and transaction estimation for stablecoin issuers like Tether and Circle.

• The standards must be reviewed and adopted by the European Commission, Parliament, and Council before publication.

• These standards are part of the broader MiCA act.

• The publication will formalize stablecoin regulations in the EU's official journal.

More Regulatory Updates:

• Bill proposes SEC-CFTC joint committee for digital assets.

• tZero said to become crypto broker dealer under SEC oversight.

• Hawaii emerging as crypto hub following new crypto regulations.

• Gary Gensler and SEC probed over alleged politically-biased hiring.

• UK regulator charges first individual sith funning Iilegal crypto ATMs.

• Coinbase must face shareholder lawsuit over regulator risk concerns.

• Uniswap CEO denies allegations of charging for protocol deployments.

• UAE’s central bank approves custodial risk insurance product for digital assets.

CASE STUDY

SEC Softens Stance on SAB-121 Custody Rules

State of play: The SEC appears to be easing its position on Staff Accounting Bulletin-121 (SAB-121), which initially restricted banks from offering digital asset custody services.

Recent guidance from SEC chief accountant Paul Munter indicates potential exemptions for certain financial entities, potentially benefiting the crypto industry. However, large national banks might still face stringent requirements.

• Banks and brokers can bypass SAB-121 provisions under certain conditions.

• Banks need state regulator approval and must meet specific custody and risk assessment standards.

• Introducing brokers must not handle private keys or act as transaction intermediaries and need legal opinions.

• Large national banks might not qualify for exemptions and could face continued scrutiny from the SEC.

• The SEC’s adjustments follow significant political and industry pressure.

• SAB-121, introduced in 2022, faced repeal efforts in Congress, which were ultimately vetoed by President Biden.

Our Take: This adjustment could reduce financial entities' operational burdens while maintaining oversight. It also highlights how political and industry pressure is shaping the evolving landscape of digital asset regulation.

Take a peek at our referral reward at the bottom of this issue. Share this newsletter and receive our comprehensive database of crypto regulations around the world👇

NOTEWORTHY READS & MEME

• DLx Law read on L2 sequencing.

• Rebecca Rettig’s hearing in Congress.

• DLx Law read on the status of fungible crypto assets.

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.