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Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets (EventID=117661)

Connect with the House Financial Services Committee Get the latest news: https://democrats-financialservices.h... Follow us on Facebook:   / housefinanci.  . Follow us on Twitter:   / fscdems   ___________________________________ On Wednesday, September 18, 2024, at 10:00 a.m. (ET) Subcommittee on Digital Assets, Financial Technology and Inclusion Chair Congressman Hill and Ranking Member Congressman Lynch will hold a hearing entitled, “Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets." ___________________________________ Witnesses for this one-panel hearing will be: ● Mr. Michael Liftik, Partner, Quinn Emanuel Urquhart & Sullivan LLP ● Honorable Dan Gallagher, Chief Legal, Compliance, and Corporate Affairs Officer, Robinhood Markets, Inc. ● Mr. Teddy Fusaro, President, Bitwise Asset Management ● Ms. Jennifer Schulp, Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives ● Mr. Lee Reiners, Lecturing Fellow, Duke University ___________________________________ Introduction The Securities and Exchange Commission (SEC) has long struggled with the application of the United States’ securities laws to the digital asset ecosystem. Under Chair Gensler, the SEC has prioritized and pursued an enforcement and regulatory agenda to the detriment of the digital asset ecosystem. Existing Regulatory Ambiguities The Securities Act of 1933 (the “Securities Act”) requires every offer or sale of securities to be registered with the SEC or meet a condition for exemption from registration.1 The Securities Act further defines a security to include an “investment contract,” which was later defined by the seminal Supreme Court in SEC v. W.J. Howey Co.2 Under the case law developed by Howey and the cases that followed, an arrangement qualifies an investment contract if it is: 1) an investment of money; 2) in a common enterprise; 3) with the expectation of profits; 4) derived from the efforts of others. The test is not a “balancing test,” rather, all four factors must be present for the arrangement to constitute an investment contract.3 At issue, is fact that several characteristics of a digital asset may not meet the definition of an investment contract as set out by the Howey test. This includes the functional use of a digital asset that negates the expectation of profit; as well as its decentralized nature such that the digital asset no longer relies on the efforts of others. In 2019, the SEC, under former Chairman Jay Clayton, released the Framework for Investment Contract Analysis of Digital Assets. The framework identified several distinct factors and additional sub-factors that should be considered under the Howey test as it applies to digital assets. The framework does not provide guidance on how the factors should be weighed or the combination of factors that would categorize a digital asset to be a security. During Chair Gensler’s tenure, the SEC has not released guidance on how the SEC determines whether a digital asset meets the definition of a security. Rather, Chair Gensler and the SEC have publicly opined, including before Congress, that the “vast majority” of digital assets are securities. Additionally, Chair Gensler has opined on numerous occasions that the “test to determine whether a crypto asset is a security is clear.” However, Republican SEC Commissioner Hester Peirce disagrees, citing requests “[the SEC] receives for clarity and the consistent outreach to the Commission staff for no-action and other relief.” Commissioner Peirce has frequently emphasized her concerns with the SEC’s enforcement-centric approach and highlighted guiding principles for regulating the digital asset ecosystem. Commissioner Uyeda has echoed this sentiment maintaining, “for too long, the Commission’s approach to crypto asset regulation has been to use enforcement actions to introduce novel legal and regulatory theories.” Legislative Proposals H.R.5741 - Uniform Treatment of Custodial Assets Act (Flood) – The bill would prohibit Federal banking agencies, the National Credit Union Administration, and the SEC from requiring banks to include assets held in custody or safekeeping as a liability on the institution’s balance sheet. H.R.___ - The New Frontiers in Technology (NFT) Act (Timmons) – This discussion draft clarifies that a covered non-fungible token (NFT) is not an investment contract or a transaction in a security. The draft also requires the GAO to conduct a study on NFTs, which will include an analysis of the size, scope, role, nature, and use of NFTs, the similarities and differences between... ___________________________________ Hearing page: https://democrats-financialservices.h...