As part of our Spotlight series, we connect with Jeff Boujoukos, the leader of Morgan Lewis’s securities enforcement practice, to discuss the current and future state of affairs of the regulation and enforcement activities of the US Securities and Exchange Commission (SEC) regarding cryptocurrency and initial coin offerings. Jeff points to recent cases and statements that may impact and shape the cryptocurrency market going forward.
What are some of the SEC’s primary concerns regarding cryptocurrency?
The SEC recently noted that the cryptocurrency “asset class” is worth approximately $1.6 trillion, with 77 tokens worth at least $1 billion each, and 1,600 tokens with at least $1 million in market capitalization. Given the size and proliferation of this asset class, it directly implicates the SEC tripartite mission of protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient markets. The Enforcement Division’s creation of a specialized unit—the Cyber Unit—with a focus in part on securities law violations “involving distributed ledger technology and initial coin offerings,” indicates a concern regarding underlying fraud. Chairman Gensler recently described the crypto markets as the “Wild West,” with very little in the way of investor protections. He reasoned that limited disclosure regarding the underpinnings of ICOs [initial coin offerings], and a general lack of market oversight, leaves prices open to manipulation and investors vulnerable.
What are some key takeaways from the SEC’s recent comments and activities relating to cryptocurrency?
The SEC is going to continue to exercise broad jurisdiction over crypto, and Chairman Gensler reaffirmed former Chairman Clayton’s statement that the vast majority of ICOs are securities. Thus, we will continue to see SEC Enforcement cases against ICOs as unregistered securities and the application of the federal securities laws’ antifraud provisions.
More importantly, in a recent letter to US Senator Elizabeth Warren, Chairman Gensler took aim at the regulation of “crypto platforms.” The SEC has made clear that it believes it has jurisdiction over trading and lending platforms for crypto where the assets meet the definition of a security. Chairman Gensler remarked in the letter, “It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These products are subject to the securities laws and must work within our securities regime.” This unregulated area is ripe for SEC attention, as this recent case filed against an unregistered crypto exchange demonstrates.
Looking ahead, do you have any particular expectations regarding crypto-related securities regulation?
While the SEC has asked Congress for “additional plenary authority to write rules for and attach guardrails to crypto trading and lending,” I would not be surprised if we see rulemaking under existing authority. I also expect the SEC to continue to aggressively file enforcement cases in this area, using a regulation by enforcement approach. Finally, I will be closely watching the SEC case against Ripple Labs Inc., which is currently pending in the US District Court for the Southern District of New York. There, the SEC charged Ripple with selling an unregistered security in the form of its digital currency XRP. While the SEC has won a string of cases where courts found digital currencies to be securities, that fundamental underpinning of its crypto enforcement program will be tested in this case, with potentially significant consequences.
We express our gratitude to Jeff for sharing his thoughts and insights regarding SEC regulation of crypto securities and platforms, and we look forward to following the developments as the SEC’s approach is tested and evolves.
Jeff is the leader of Morgan Lewis’s securities enforcement practice and he represents publicly traded companies and financial services firms, and their officers, directors, and employees, in matters before federal and state criminal and civil authorities as well as self-regulatory organizations. Jeff began his career at Morgan Lewis as an associate and later became a partner. For a decade, Jeff served at the SEC as a trial attorney supervisor, a senior officer, and ultimately the regional director of the SEC’s Philadelphia Regional Office, where he oversaw the enforcement and examination programs.