SEC increasingly comfortable navigating crypto regulation… except ETFs
This week, we offer our thoughts on four SEC-related headlines we observed this week: the Commission settled charges with a healthcare-focused blockchain firm over an unregistered SAFT, it filed an emergency lawsuit against Brooklyn-based Veritaseum to prevent the firm from spending ICO-raised funds, its framework for digital assets was used in a lawsuit filed by a group of XRP investors arguing that Ripple is an unregistered security, and it again delayed a decision on three bitcoin ETF proposals.
The two enforcement actions underscore the SEC’s continued vigilance in monitoring unregistered token issuances, particularly when there is a significant fundraising effort (i.e., when investor protection is a factor). We particularly note the action against SimplyVital’s SAFT offering, which follows months of indications about a potential crackdown against SAFTs, which many have described as an ICO “spinoff” that would certainly draw regulatory scrutiny.
As one of the first widely-publicized applications of its “Framework for Investment Contract Analysis of Digital Assets,” the XRP situation is fascinating given the particular use by investors applying it in their long-running case against Ripple. CoinDesk quoted an attorney analyzing the case, who said “the complaint reads like a love letter to the SEC,” and its use of Tweets by Ripple’s CEO — when considered along with SEC’s use of Kik’s Tweets in that separate case — could establish multiple precedents for the use of the Framework.
And then we have Chairman Clayton’s continued concern about market manipulation and lack of investor protections, which continues to prevent the approval of any of the numerous ETF proposals that have been submitted (SEC is currently considering proposals from Bitwise, VanEck/SolidX, and Wilshire Phoenix). As we wrote last May, Clayton’s focus on the maturity of the market as a whole, and specifically the integrity of the bitcoin spot market, is overly focused on the protection of retail investors and misses the point made by Commissioner Hester Peirce in her dissent that “the Commission’s approach undermines investor protection by precluding greater institutionalization of the bitcoin market.” Through BitOoda’s role as a leader in groups like ADAM, which is working to finalize a Code of Conduct that will set standards to mitigate manipulation and develop fair and orderly markets, we are pioneering new ways to institutionalize the digital asset market, and we applaud the firms who continue to pursue the first ETF approval.
ETFs aside, what can we learn from SEC’s continued monitoring of ICOs, its understanding and scrutiny of SAFTs, and the growing number of applications of its Framework? Our clients won’t be surprised to hear that our key takeaway was: follow the rules! Our regulatory stack (registered IB and BD with multiple licenses) allows us to trade various types of digital assets in a regulated manner, and our advisory and risk management solutions — in addition to our experience in token placement, marketing and strategy — position us to help our clients confidently navigate the growing body of SEC rules and guidance.