This issue discusses a variety of legal, regulatory and enforcement developments in the digital asset space in the U.S. and Europe.
Regulating the Digital Asset Space
The advent of bitcoin more than a decade ago spawned an explosion in decentralized, peer-to-peer financial structures using distributed ledger technology, such as blockchain, that pose a stark challenge to the traditional financial regulatory landscape. U.S. regulators have sought to apply principles and rules from a different era to protect the financial markets for public investment without stifling innovation.
Federal regulatory agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have used their enforcement authority to combat fraud in the digital asset space, and the SEC has challenged what it has determined to be unregistered securities offerings. Nevertheless, the absence of clear rules or regulatory authority to impose rules for the trading and transfer of digital assets has left regulators, market participants and the public exposed and frustrated. Some legislation has been proposed to address the mismatch between the current federal regulatory framework and the digital asset revolution, but none has yet come close to becoming law.
Leading regulators have recently voiced their concerns about this mismatch, with Acting CFTC Chairman Rostin Behnam expressly calling for a new regulatory regime for digital assets, and the newly confirmed SEC chairman, Gary Gensler, using his confirmation hearing to highlight the importance of laws keeping pace with profound technological changes. Given the recent volatility in digital asset prices and the burgeoning investor demand for access to digital asset products, the environment is ripe for regulatory reform.
The Patchwork Approach of Regulation in the United States
Digital asset innovation has put pressure on the fragmented nature of U.S. regulation of financial markets. Across the nation, individual states have adopted varying approaches to the new products and technology, while Congress to date has left the task to numerous federal agencies with a range of regulatory mandates designed for a 20th century financial system.
At the state level, two approaches have emerged. One is the approach taken by states such as California and New York, which have pursued robust enforcement. For example, in February 2021, the New York Attorney General’s Office (NYAG) announced an $18.5 million fine against the issuer of the tether stablecoin (Tether) and the owner of the Bitfinex Trading Platform (iFinex), which the NYAG had been investigating for false statements relating to the nature of the stablecoin and the alleged loss of customer funds. (For more, see “New York Attorney General’s Office Settles Fraud Charges Against Cryptocurrency Exchange and Cryptocurrency Issuer.”) The companies did not admit wrongdoing as part of a settlement agreement that prohibits Tether and Bitfinex from trading with New York customers. The settlement came one month after the NYAG sued another actor in the cryptocurrency space, Coinseed Inc., alleging that its initial coin offering (ICO) should have been registered as securities and subject to broker-dealer registration requirements.1 In connection with the suit, Attorney General Letitia James warned that “[u]nregulated and fraudulent virtual currency entities, no matter how big or small, will no longer be tolerated in New York.”2 The NYAG has since issued two public alerts in response to the “extreme risk” posed to New Yorkers investing in virtual or cryptocurrencies.3
Other states, such as Colorado and Wyoming have enacted pro-cryptocurrency legislation to attract investment. Wyoming has been particularly welcoming to cryptocurrency businesses: It has issued charters for special purpose depository trust institutions, permitting companies…