SEC, CFTC clarify treatment of crypto assets under securities laws

The Securities and Exchange Commission and the Commodity Futures Trading Commission issued an official interpretation Tuesday of how federal securities laws should apply to cryptocurrency assets, taking a more industry-friendly approach under the Trump administration than the Biden administration.

The SEC said it represented a major step in its efforts to provide greater clarity on the treatment of crypto assets. The effort comes even as Congress has struggled to pass legislation of its own, beyond the GENIUS Act governing stablecoins. The CFTC joined in the SEC's interpretation, although one of the main sticking points in the market legislation under consideration is which regulator will be responsible for crypto oversight. Under the guidance, many forms of crypto assets are explicitly exempted from being classified as securities.

"After more than a decade of uncertainty, this interpretation will provide market participants with a clear understanding of how the Commission treats crypto assets under federal securities laws," said SEC chairman Paul Atkins in a statement. "This is what regulatory agencies are supposed to do: draw clear lines in clear terms. It also acknowledges what the former administration refused to recognize — that most crypto assets are not themselves securities. And it reflects the reality that investment contracts can come to an end. This effort serves as an important bridge for entrepreneurs and investors as Congress works to advance bipartisan market structure legislation, which I look forward to implementing with Chairman Selig in the near future."

Mary Turner/Bloomberg

The interpretation aims to provide a coherent token taxonomy for digital commodities, digital collectibles, digital tools, stablecoins and digital securities. It also addresses how a "non-security crypto asset" — that is, a crypto asset that itself isn't a security — can become subject to, and how it may cease to be subject to, an investment contract.

In addition, it clarifies the application of federal securities laws to airdrops, protocol mining, protocol staking and the wrapping of a non-security crypto asset.

"For far too long, American builders, innovators, and entrepreneurs have awaited clear guidance on the status of crypto assets under the federal securities and commodity laws," said CFTC chairman Michael Selig in a statement. "With today's interpretation, the wait is over. Chairman Atkins and I are committed to fostering a regulatory environment that allows the crypto industry to flourish in the United States with clear and rational rules of the road. Today's joint agency action reflects a shared commitment to developing workable, harmonized regulations for the new frontier of finance."

According to a fact sheet accompanying the interpretation, the Commission classified crypto assets into categories based on their characteristics, uses and functions, and analyzed each category under the definition of "security" under the federal securities laws. Under the interpretation, digital commodities are not considered to be securities, if the crypto assets are intrinsically linked to and derive their value from the programmatic operation of a crypto system that is "functional," as well as supply and demand dynamics, rather than from the expectation of profits from the essential managerial efforts of others. Nor are digital collectibles considered to be securities, such as nonfungible tokens, or NFTs, crypto assets that are designed to be collected and/or used and may represent or convey rights to artwork, music, videos, trading cards, in-game items, or digital representations or references to internet memes, characters, current events or trends, among other things. 

Similarly, digital tools are not considered to be securities when the crypto assets perform a practical function, such as a membership, ticket, credential, title instrument or identity badge. Under the GENIUS Act, stablecoins are also not considered to be securities and are defined in the GENIUS Act as "payment stablecoin issued by a permitted payment stablecoin issuer."  Digital securities (or "tokenized securities") include financial instruments enumerated in the definition of "security" that is formatted as or represented by a crypto asset, where the record of ownership is maintained in whole or in part on or through one or more crypto networks. 

The SEC addressed how a non-security crypto asset may become subject to, and how it may cease to be subject to, an investment contract. It becomes subject to an investment contract when an issuer offers it by inducing an investment of money in a common enterprise with representations or promises to undertake essential managerial efforts from which a purchaser would reasonably expect to derive profits. 

The Commission also provided guidance on the nature of the representations or promises necessary to form an investment contract, including the source of the representations or promises, the medium by which they are communicated, and the level of detail they must provide. It explained how a non-security crypto asset ceases to be subject to an investment contract when the investment contract terminates because either the issuer has fulfilled its representations or promises or the issuer has failed to satisfy its representations or promises.