A new white paper explores jurisdictional conflicts and the regulatory status of digital assets.
Members of the American Bar Association’s (ABA’s) Derivatives and Futures Law Committee recently published a white paper exploring the US regulatory landscape for digital assets (White Paper), including a 50-state survey and overview of certain non-US crypto regulatory regimes. The White Paper primarily focuses on the jurisdictional overlap between the US Commodity Futures Trading Commission (CFTC) and the US Securities and Exchange Commission (SEC) pertaining to the regulation of digital assets.
The CFTC has regulatory jurisdiction over the US derivatives and futures markets and retains general enforcement authority to police fraud and manipulation in cash or “spot” commodities markets. Because virtual currencies are “commodities” under the Commodity Exchange Act, as amended (CEA), the CFTC has regulatory oversight over derivatives and retail transactions involving digital assets, and has been active in exercising its antifraud and anti-manipulation enforcement authority in the virtual currency “spot” markets. On the other hand, the SEC retains broad jurisdiction over all “securities,” a term that includes a wide range of instruments (such as stocks and bonds), as well as a catch-all for so-called “investment contracts.” As with the CEA, the Securities Act of 1933, as amended (Securities Act), and the Securities Exchange Act of 1934, as amended (Exchange Act), do not expressly address digital assets (including virtual currencies). Accordingly, the determination of whether a digital asset qualifies as a security (and thus is subject to SEC regulation) generally turns on whether the product falls under the investment contract definition.
Because the Investment Company Act of 1940, as amended (ICA), sets forth a broader definition of “security,” issuers of, and vehicles investing in, digital assets may qualify as “investment companies” subject to SEC regulation under the ICA, regardless of whether they fall outside the scope of SEC jurisdiction under the Securities Act and the Exchange Act. Persons providing advice in the digital asset market could also find themselves subject to regulation by the SEC under the Investment Advisers Act of 1940, as amended.
While the ABA authors did not set forth a definitive resolution of the CFTC-SEC jurisdictional overlap, the White Paper does (1) include reflections on how past CFTC-SEC jurisdictional conflicts have been resolved (e.g., the hybrid instrument exemption) and (2) detail the statutorily prescribed process for inter-regulator cooperation to ascertain the regulatory status of “novel derivative products” under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.