Clayton sec cryptocurrency

From celebrity endorsements to Super Bowl ads to NFTs, crypto has become decidedly more mainstream in the last few years. However, this explosive market growth has also come with a ramp-up in regulatory scrutiny by financial authorities, as well as an executive order "Executive Order on Ensuring Responsible Development of Digital Assets" signed on March 9 by President Joe Biden calling for federal agencies to more closely examine the risks and benefits of cryptocurrencies.

This lack of oversight has allowed cryptocurrency to operate on an almost instantaneous basis among a large cohort of users. However, for these same reasons, crypto has also shown itself to be extremely volatile, susceptible to fraud, and lacking sufficient investor protections.

The SEC is leading the charge for more regulatory oversight of cryptocurrency products and platforms that may be engaging in the sale and offering of securities. Securities — as opposed to other assets such as commodities — are strictly regulated and require detailed disclosures to inform investors of potential risks. Since the first cryptocurrency Bitcoin launched in , the question of how exactly to fit the components of this new, decentralized financial ecosystem into traditional categories has been widely debated.

Back in , at the PLI 49th Annual Institute on Securities Regulation, then-SEC Chair Jay Clayton warned cryptocurrency exchanges that many of their products likely qualified as securities and should therefore be registered under federal securities laws. This includes cryptocurrencies such as Bitcoin, Ether, and Litecoin. But since terms like "coin," "token," "currency," and "asset" are regularly used interchangeably to describe the thousands of products in the crypto world, it's difficult to accurately categorize them based on nomenclature alone.

Instead, one must look at function. When determining whether a digital asset is a security, the SEC considers whether the asset constitutes an "investment contract. Howey Co. The Howey Test requires that there must be 1 the investment of money 2 in a common enterprise 3 with a reasonable expectation of profits to be derived from the efforts of others.

Echoing his predecessor's sentiments, current SEC Chair Gary Gensler reiterated to CNBC in August that the SEC considers many cryptocurrency coins and tokens to be securities under the Howey Test, saying, "If somebody is raising money selling a token and the buyer is anticipating profits based on the efforts of that group to sponsor the seller, that fits into something that's a security" "SEC chair Gary Gensler on his vision for cryptocurrency regulation" Aug.

The SEC has already waged several successful legal battles against crypto creators and platforms on this front. These cases provide a glimpse of what's likely to come. Kik Interactive Inc. Kik claimed that the funds from the offering would help create a "Kin Ecosystem" revolving around — and driving up the value of — its new token.

The SEC successfully argued that, under the Howey Test, Kik's offering met all three criteria for an investment contract: Money had been invested in a single integrated offering with the expectation by investors that they would see a return generated by Kik's future projects.

On Sept. Beyond cryptocurrency issuers, the SEC has also started focusing its enforcement efforts on other players in the crypto world, including crypto lenders and exchanges. Cryptocurrency lending platform BlockFi Lending LLC recently faced the first crypto lending enforcement action of its kind by the SEC, as well as a civil suit from its own account holders.

BlockFi is a platform that offers interest-bearing accounts through which investors can lend their crypto assets to BlockFi in exchange for monthly interest payments. These interest payments are generated through BlockFi's subsequent lending and investment activities. In February , an SEC cease-and-desist order alleged that BlockFi had failed to register its interest accounts as securities. Under his chairmanship, the SEC adopted a strict stance against Cryptocurrencies Cryptocurrencies By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology.

Comprised of decentralized networks, blockchain technology is not overseen by a central authority. Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.

These then must be approved by a disparate network of individual nodes computers that maintain a copy of the ledger. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years. Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies. Cryptocurrencies promise a wide range of technological innovations that have yet to be structured into being.

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As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds. Considerations for Market Professionals I believe that initial coin offerings — whether they represent offerings of securities or not — can be effective ways for entrepreneurs and others to raise funding, including for innovative projects.

However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require. A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed.

Specifically, we concluded that the token offering represented an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Following the issuance of the 21 a Report, certain market professionals have attempted to highlight utility characteristics of their proposed initial coin offerings in an effort to claim that their proposed tokens or coins are not securities. Many of these assertions appear to elevate form over substance.

Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U. On this and other points where the application of expertise and judgment is expected, I believe that gatekeepers and others, including securities lawyers, accountants and consultants, need to focus on their responsibilities.

I urge you to be guided by the principal motivation for our registration, offering process and disclosure requirements: investor protection and, in particular, the protection of our Main Street investors.

I also caution market participants against promoting or touting the offer and sale of coins without first determining whether the securities laws apply to those actions. Similarly, I also caution those who operate systems and platforms that effect or facilitate transactions in these products that they may be operating unregistered exchanges or broker-dealers that are in violation of the Securities Exchange Act of On cryptocurrencies, I want to emphasize two points.

Before launching a cryptocurrency or a product with its value tied to one or more cryptocurrencies, its promoters must either 1 be able to demonstrate that the currency or product is not a security or 2 comply with applicable registration and other requirements under our securities laws.

Second, brokers, dealers and other market participants that allow for payments in cryptocurrencies, allow customers to purchase cryptocurrencies on margin, or otherwise use cryptocurrencies to facilitate securities transactions should exercise particular caution, including ensuring that their cryptocurrency activities are not undermining their anti-money laundering and know-your-customer obligations. Speaking broadly, cryptocurrencies purport to be items of inherent value similar, for instance, to cash or gold that are designed to enable purchases, sales and other financial transactions.

They are intended to provide many of the same functions as long-established currencies such as the U. Although the design and maintenance of cryptocurrencies differ, proponents of cryptocurrencies highlight various potential benefits and features of them, including 1 the ability to make transfers without an intermediary and without geographic limitation, 2 finality of settlement, 3 lower transaction costs compared to other forms of payment and 4 the ability to publicly verify transactions.

Other often-touted features of cryptocurrencies include personal anonymity and the absence of government regulation or oversight. Critics of cryptocurrencies note that these features may facilitate illicit trading and financial transactions, and that some of the purported beneficial features may not prove to be available in practice. Whether that assertion proves correct with respect to any digital asset that is labeled as a cryptocurrency will depend on the characteristics and use of that particular asset.

In any event, it is clear that, just as the SEC has a sharp focus on how U. This extends, for example, to securities firms and other market participants that allow payments to be made in cryptocurrencies, set up structures to invest in or hold cryptocurrencies, or extend credit to customers to purchase or hold cryptocurrencies. Initial Coin Offerings. Coinciding with the substantial growth in cryptocurrencies, companies and individuals increasingly have been using initial coin offerings to raise capital for their businesses and projects.

Typically these offerings involve the opportunity for individual investors to exchange currency such as U. These offerings can take many different forms, and the rights and interests a coin is purported to provide the holder can vary widely.

In contrast, many token offerings appear to have gone beyond this construct and are more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come. It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens.

Prospective purchasers are being sold on the potential for tokens to increase in value — with the ability to lock in those increases by reselling the tokens on a secondary market — or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering. By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws.

Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved. Conclusion We at the SEC are committed to promoting capital formation. The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing.

I am confident that developments in fintech will help facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike. I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so.

When advising clients, designing products and engaging in transactions, market participants and their advisers should thoughtfully consider our laws, regulations and guidance, as well as our principles-based securities law framework, which has served us well in the face of new developments for more than 80 years. I also encourage market participants and their advisers to engage with the SEC staff to aid in their analysis under the securities laws.

Staff providing assistance on these matters remain available at FinTech sec. Who is issuing and sponsoring the product, what are their backgrounds, and have they provided a full and complete description of the product? Do they have a clear written business plan that I understand?

Who is promoting or marketing the product, what are their backgrounds, and are they licensed to sell the product? Have they been paid to promote the product? Where is the enterprise located? In the submitted resignation letter , Clayton outlined his mission to protect investors. Under his chairmanship, the SEC adopted a strict stance against Cryptocurrencies Cryptocurrencies By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology.

Comprised of decentralized networks, blockchain technology is not overseen by a central authority. Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the networks which are used to authenticate blockchain technology. Every cryptocurrency transaction that occurs is logged in a web-based ledger with blockchain technology.

These then must be approved by a disparate network of individual nodes computers that maintain a copy of the ledger. Bitcoin still contributes the majority of the overall cryptocurrency market volume, though several other cryptos have grown in popularity in recent years.

Indeed, out of the wake of Bitcoin, iterations of Bitcoin became prevalent which resulted in a multitude of newly created or cloned cryptocurrencies.