Digital Assets and SEC Regulation
June 23, 2021
In recent years, financial innovation in capital markets has fostered a new asset class—digital
assets—and introduced new forms of fundraising and trading.
Digital assets, which include
Eva Su
cryptocurrencies,
crypto-assets, or
digital tokens, among others, are digital representations of
Analyst in Financial
value. Regardless of the terms used to describe these assets, depending on their characteristics,
Economics
some digital assets are subject to securities laws and regulations.
Securities regulation generally applies to all securities, whether they are digital or traditional. The
Securities and Exchange Commission (SEC) is the primary regulator overseeing securities
offerings, sales, and investment activities. The SEC’s mission is to protect investors; maintain fair, orderly, and efficient
markets; and facilitate capital formation. The existing securities regulatory regime, including the SEC’s digital asset
regulation, generally aligns with the mission. The SEC has used existing authorities to evaluate new product approval,
provide individual regulatory relief, and solicit public input for policy solutions more tailored to digital assets. It has also
asked Congress for more authorities pertaining to digital assets.
Digital assets have a growing presence in the financial services industry. Their increasing use in capital markets raises policy
questions regarding whether changes to existing laws and regulations are warranted and, if so, when such changes should
happen, what form they should take, and which agencies should take the lead. The current innovative environment is not the
regulatory regime’s first encounter with changing technology since its inception in the 1930s. Some technological
advancements led to regulatory changes, whereas others were dealt with through the existing regime.
The general consensus is that regulatory oversight should be balanced with the need to foster financial innovation, but the
basic objectives of regulation should apply to ensure market integrity and investor protection. Some believe that certain
digital asset activities that may appear similar to traditional activities nonetheless require adjusted regulatory approaches to
account for particular operating models that may amplify risks differently. In general, policymakers contending with major
financial innovations have historically focused on addressing risk concerns while tailoring a regulatory framework that was
flexible enough to accommodate evolving technology. Current developments that raise policy issues include the following:
Digital asset “exchanges.” Some industry observers perceive digital asset trading platforms as functional equivalents to the
SEC-regulated securities exchanges in buying and selling digital assets. But these platforms are not subject to the same level
of regulation, suggesting that they may be less transparent and more susceptible to manipulation and fraud.
Digital asset custody. Custodians provide safekeeping of financial assets and are important building blocks for the financial
services industry. Digital assets present custody-related compliance challenges because custodians face difficulties in
recording ownership, recovering lost assets, and providing audits, among other considerations. The SEC is aware of the
challenges and is engaging stakeholders to discuss potential issues and solutions.
Digital asset exchange-traded funds (ETFs). ETFs are pooled investment vehicles that gather and invest money from a
variety of investors. ETF shares can trade on securities exchanges like a stock. Currently, digital assets themselves are
generally not sold on SEC-regulated national exchanges. However, if portfolios of digital assets were made available as
ETFs, they may be sold on national exchanges. The SEC has not yet approved any digital asset ETFs because of market
manipulation and fraud concerns.
Stablecoins in securities markets. Stablecoin is a digital asset designed to maintain a stable value by linking its value to
another asset or a basket of reserve assets. In policy discussions, some suggest applying ETF regulatory frameworks to
certain stablecoins; others argue for more disclosure of reserve asset breakdowns to expose potential deceptive activities.
Initial coin offerings (ICOs). ICOs as a digital asset fundraising method can be offered in many forms using existing public
and private securities offerings channels. Although ICOs may be useful fundraising tools, some of them raise regulatory
oversight and investor-protection concerns.
Non-fungible Tokens (NFTs). NFTs are digital assets linking to certificates of authenticity using blockchain technology.
NFTs are “non-fungible,” meaning each token and the authenticated object it represents are unique. Under certain narrow
circumstances, NFTs could be subject to securities regulation.
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Digital Assets and SEC Regulation
Contents
What Are Digital Assets?.................................................................................................. 1
Digital Asset Securities............................................................................................... 1
Digital Assets as a New Asset Class ................................................................................... 2
Securities Regulation Background ..................................................................................... 3
The SEC’s Current Regulatory Approach............................................................................ 4
Policy Issues in the Securities Regulation Context................................................................ 5
Initial Coin Offerings ................................................................................................. 6
Digital Asset “Exchanges” .......................................................................................... 9
Digital Asset “Exchanges” Versus National Securities Exchanges ................................ 9
Regulatory Frameworks and SEC Actions .............................................................. 12
Coinbase’s Public Listing .................................................................................... 13
Digital Asset Custody............................................................................................... 13
Digital Asset Exchange-Traded Funds......................................................................... 15
Bitcoin ETF Proposals ........................................................................................ 15
Stablecoins in Securities Markets ............................................................................... 16
Facebook-Backed Diem (Formal y Libra) and Its Perceived ETF Structure ................. 17
Tether’s Reserve Asset Portfolio: Could Mandatory Disclosures Be Helpful? .............. 18
Non-Fungible Tokens (NFTs) .................................................................................... 19
Could NFTs Be Securities? .................................................................................. 20
Figures
Figure 1. Initial Coin Offering Monthly Numbers and Dollar Funding Volumes ........................ 7
Tables
Table 1. Comparison of Selected ICO Securities Offerings Options......................................... 8
Contacts
Author Information ....................................................................................................... 20
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Digital Assets and SEC Regulation
What Are Digital Assets?
Digital assets are assets issued and transferred using distributed ledger or blockchain technology.1
They are often referred to as
crypto asset,
cryptocurrency, or
digital token, among other
terminology.2 Digital assets can be securities, currencies, properties, or commodities. Although
market participants use different terms to describe them, financial regulators have stated that—
regardless of what they are cal ed—financial activities, services, and market participants must
adhere to applicable laws and regulations. In the case of digital assets, depending on their
characteristics, this can include securities laws and regulations.3 One key difference between
digital and traditional assets is an asset’s ownership and exchanges of ownership. Whereas
traditional assets are general y recorded in private ledgers maintained by central intermediaries,
digital assets’ ownership and exchange are general y recorded on a decentralized digital ledger.
Digital Asset Securities
The Securities and Exchange Commission (SEC) is the primary regulator overseeing securities
offers, sales, and investment activities, including those involving digital assets. However, many
digital assets are not securities. In general, a security is “the investment of money in a common
enterprise with a reasonable expectation of profits to be derived from the efforts of others.”4
When a digital asset meets the criteria defining a security, it would be subject to securities
regulation, per existing SEC jurisdiction. For example, most of the initial coin offerings (ICOs)
are securities, but Bitcoin is not a security, mainly because it does not have a central third-party
common enterprise.5
Market intermediaries (e.g., investment advisers, trading platforms, and custodians) involved with
digital asset investment, trading, and safekeeping could also be subject to relevant securities
regulation. Securities regulations could apply if the intermediaries are directly engaged in the
security-based digital asset transactions or if they use digital assets (including non-security-based
digital assets) to facilitate securities transactions.6
1 U.S. Securities and Exchange Commission (SEC),
Framework for “Investment Contract” Analysis of Digital Assets,
April 3, 2019, at https://www.sec.gov/files/dlt-framework.pdf. For more information on blockchain technology, see
CRS Report R45116,
Blockchain: Background and Policy Issues, by Chris Jaikaran.
2 Board of the International Organization of Securities Commissions,
Issues, Risks and Regulatory Considerations
Relating to Crypto-Asset Trading Platform s, May 2019, at https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD627.pdf.
3 SEC, “Leaders of CFT C, FinCEN, and SEC Issue Joint Statement on Activities Involving Digital Assets,” public
statement, October 11, 2019, at https://www.sec.gov/news/public-statement/cftc-fincen-
secjointstatementdigitalassets#_ftn4.
4 For more details, see SEC,
Framework for “Investment Contract” Analysis of Digital Assets, April 3, 2019, at
https://www.sec.gov/files/dlt-framework.pdf.
5 SEC Division of Corporate Finance Director William Hinman, “Digital Asset T ransactions: When Howey Met Gary
(Plastic),” speech delivered at Yahoo Finance All Markets Summit: Crypto, San Francisco, CA, June 14, 2018, at
https://www.sec.gov/news/speech/speech-hinman-061418.
6 For example, a digital asset securities trading platform could be subject to securities regulation. Bitcoin is not a
security, but the Bitcoin exchange-traded fund share is a security, and would be subject to securities regulation. In
addition, as former SEC Chair Jay Clayton stated, “ regulated financial entities that allow for payment in
cryptocurrencies, allow customers to purchase cryptocurrencies on margin or otherwise use cryptocurrencies to
facilitate securities transactions should exercise caution, including ensuring that their cryptocurrency activities are not
undermining their anti-money laundering and know-your-customer obligations.” SEC Chairman Jay Clayton,
Chairman’s Testimony on Virtual Currencies: The Roles of the SEC and CFTC, February 6, 2018, at
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This report focuses on digital assets and activities that are or may be subject to securities
regulation. It discusses the objectives and policy rationale of securities laws and regulations; SEC
initiatives to address specific regulatory chal enges arising from certain unique digital asset
features that raise questions concerning the adequacy of the existing regulatory framework; and
policy issues for congressional and industry consideration in selected areas, including initial coin
offerings, stablecoins, digital asset exchange-traded funds, digital asset custody, and digital asset
trading.
Digital Assets as a New Asset Class
Digital assets have emerged as a growing asset class for investors, with a total market value of
more than $2 tril ion for cryptocurrencies in May 2021, compared with around $260 bil ion a year
before and around $20 bil ion in early 2017.7 The size of the cryptocurrencies market is
significant but stil relatively smal given the size of traditional asset markets. For example, the
U.S. fixed income market is worth about $50 tril ion, and the Standard & Poor’s 500 index—an
index including 500 large U.S. publicly traded companies—is worth about $35 tril ion as of May
2021.8 Some investors view crypto assets as “digital gold” due to some of their characteristics.
The size of the cryptocurrencies market is comparable to the value of gold held by private
investors, which is estimated to be around $3 tril ion.9
Digital assets have reportedly experienced a rapid ramp-up in institutional adoption. For example,
institutional investors are increasingly directly investing in digital assets or providing inflow for
digital asset managers such as Grayscale, a company that provides trusts that al ow investors to
gain exposure to digital assets without directly owning them.10 Grayscale is the world’s largest
digital asset manager, with about $40 bil ion in assets under management as of March 2021.11
Relative to owning the digital assets directly, digital asset managers provide services in trading,
storing, and safekeeping digital assets, among other things.12
Institutional investors enter into digital asset markets to seek investment returns and to al ocate
assets to achieve perceived diversification benefits. Some of their major concerns as they begin
this investing include uncertainty of the future of the technology, security and safekeeping of
assets, and regulatory uncertainty.13 As more institutional investors (including asset managers,
pension funds, endowments, and insurance companies) have entered into crypto asset markets,
large financial institutions that offer related services (such as digital asset custody and
safekeeping) have begun to expand their infrastructure to accommodate this investing. For
https://www.sec.gov/news/testimony/testimony-virtual-currencies-oversight-role-us-securities-and-exchange-
commission.
7 CoinMarketCap, “ Global Cryptocurrency Charts,” at https://coinmarketcap.com/charts.
8 SIFMA, “Fixed Income Outstanding,” at https://www.sifma.org/resources/research/fixed-income-chart.
9 Bernstein,
An Early Spring for Cryptoassets, April 14, 2021, at https://www.alliancebernstein.com/library/An-Early-
Spring-For-Cryptoassets.htm.
10 Kate Rooney, “Crypto Investment Firm Grayscale Sees 900 % Jump in Assets to $20 billion Amid Bitcoin Frenzy,”
CNBC, January 14, 2021, at https://www.cnbc.com/2021/01/13/grayscale-sees-900percent-jump-in-inflows-as-wall-
street -flocks-to-bitcoin.html.
11 Grayscale, “About Grayscale,” at https://grayscale.com/about.
12 Grayscale,
Grayscale Investor Deck, December 2020, at https://grayscale.co/wp-content/uploads/2020/12/Grayscale-
Investor-Deck-December-2020-Products-Closed.pdf.
13 Bernstein,
Cryptoassets: Discretion of the Better Part of Valor, at https://www.bernstein.com/bernstein/email/
cryptoassetsvalor.pdf.
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example, the large financial institutions Fidelity, State Street, and Bank of New York Mel on have
al set up digital divisions to handle the increased client demand that reportedly tripled within two
to three months in some cases.14 The level of engagement with reputable institutional investors,
and the industry’s creation of new digital products and service infrastructure, may indicate that
the acceptance of the digital asset market has achieved or is nearing achieving a critical mass at
which digital asset investing becomes general y acceptable by a wide range of investors.
Securities Regulation Background
Securities regulation general y applies to al securities and related intermediaries, whether they
are digital or traditional. This section broadly discusses the objectives and policy rationale behind
securities laws and regulations.
Congress established the SEC and the main framework for capital markets and securities
regulation to restore market confidence after the stock market crash of 1929.15 The regulatory
framework’s key objectives are to promote disclosure of important market-related information,
maintain fair dealing, and protect against fraud.16 As a result, the existing securities regulatory
regime focuses on disclosure-based rules, an antifraud regime, and rules governing securities
market participants (e.g., exchanges, broker-dealers, and investment advisors).17 The SEC’s
mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital
formation.18
For example, one of the cornerstones of securities regulation—the Securities Act of 1933—is
often referred to as the “truth in securities” law.19 As the phrase suggests, disclosures al ow
investors to make informed judgments about whether to purchase specific securities by ensuring
they receive financial and other significant information on securities offered for sale. The SEC
does not make investment recommendations.20 The disclosure-based regulatory philosophy is
consistent with Supreme Court Justice Louis Brandeis’s famous dictum that “sunlight is said to
be the best of disinfectants; electric light the most efficient policeman.”21
The current developments in digital asset trading and fundraising are not the first time securities
regulators have had to accommodate new technology. Capital markets infrastructure has
experienced continuous innovation since the securities regulatory framework was first formed in
the 1930s. For example, securities trading platforms experienced a major revolution in the late
1960s and early 1970s, when trading processes shifted from paper and pen-based manual
settlements in isolated markets to electronic platforms, which incorporate new data-processing
and communications technologies that link al markets together.22 Congress responded to these
14 Gary Silverman, “State Street to Set up Digital Unit to Capitalize on Crypto Craze,”
Financial Times, June 10, 2021,
at https://www.ft.com/content/52b1b8a9-2322-496c-ac16-a847c658d186.
15 T he framework was established in the Securities Act of 1933 (P.L. 73-22) and the Securities Exchange Act of 1934
(P.L. 73-291). The terms
capital m arkets and
securities m arkets are used interchangeably in this CRS report.
16 SEC, “What We Do,” at https://www.sec.gov/Article/whatwedo.html.
17 SEC Chairman Jay Clayton, “Remarks at the Economic Club of New York,” New York, NY, July 12, 2017,
at https://www.sec.gov/news/speech/remarks-economic-club-new-york.
18 SEC, “About the SEC,” at https://www.sec.gov/about.shtml.
19 15 U.S.C. §§77a et seq.
20 SEC,
Registration Under the Securities Act of 1933, at https://www.sec.gov/fast-answers/answersregis33htm.html.
21 Louis Brandeis, “What Publicity Can Do,”
Harper’s Weekly, December 20, 1913. For more on securities disclosure,
see CRS In Focus IF11256,
SEC Securities Disclosure: Background and Policy Issues, by Eva Su.
22 Excerpt from Wyatt Wells, “Certificates and Computers: T he Remaking of Wall Street, 1967 to 1971,”
Business
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advancements by amending Section 11A of the Securities Exchange Act to establish a national
market system.23 The congressional objectives were to encourage efficient, competitive, fair, and
orderly markets that are in the public interest and protect investors.24
The SEC’s Current Regulatory Approach
Although digital assets as a capital market innovation evolved quickly, the SEC to date has not
been active in promulgating new digital-asset-specific rules. One rationale for this approach is
that, because it is uncertain how the characteristics and use of digital assets wil evolve, highly
prescriptive regulations could become obsolete, and potential y inefficient.25
The SEC’s current regulatory framework that governs traditional and digital securities include the
Securities Act of 1933,26 the Securities Exchange Act of 1934,27 the Investment Company Act of
1940,28 and the Investment Advisers Act of 1940.29 It has also used existing tools and a number of
initiatives besides rulemaking to address specific regulatory issues arising from certain unique
digital asset features. The SEC’s approaches include the following:
Innovation office. The SEC created the Strategic Hub for Innovation and Financial
Technology (FinHub) in 2018 to engage in financial technology (
fintech), consolidate
and clarify communications, and inform policy research. In 2019, FinHub conducted
outreach meetings in multiple cities and published a framework for analyzing
whether a digital asset is a security.30 FinHub became a standalone office in
December 2020.31
Enforcement. The SEC has brought enforcement actions against securities token
issuers and digital asset traders and asset managers, among others. The SEC
History Review, vol. 74, no. 2 (Summer 2000), p. 193, at https://hbswk.hbs.edu/archive/the-remaking-of-wall-street-
1967-to-1971; T estimony of former SEC Chairman Arthur Levitt, in U.S. Congress, Senate Committee on Banking,
Housing, and Urban Affairs,
Preserving and Strengthening the Natio nal Market System for Securities in the United
States, hearings, 106th Cong., 2nd sess., May 8, 2000, at https://www.sec.gov/news/testimony/ts082000.htm; and Bob
Pisani, “Man Vs. Machine: How Stock T rading Got So Complex,”
CNBC, September 13, 2010, at
https://www.cnbc.com/id/38978686.
23 15 U.S.C. §78k-1 and P.L. 94-29.
24 T he Securities Acts Amendments of 1975 (P.L. 94-29) states that “ It is in the public interest and appropriate for the
protection of investors and the maintenance of fair and orderly markets to assure: economically efficient execution of
transactions; fair competition among broker-dealers, among exchanges, and between exchanges and other markets;
ready availability of quotation and transaction information to broker -dealers and investors; the ability of broker-dealers
to execute orders in the best market; and an opportunity, consistent with the other goals, for investors t o execute orders
without the participation of a dealer.”
25 For example, statements by Jay Baris, Partner at Shearman & Sterling LLP. See page 46 of SEC FinHub Forum
transcript at Bloomberg,
Securities and Exchange Com m ission Fintech Forum : Distributed Ledger Technology and
Digital Assets, June 3, 2019, at https://www.bgov.com/core/news/#!/articles/PSJCX08JMDC0.
26 P.L. 73-22.
27 P.L. 73-291.
28 P.L. 76-768.
29 P.L. 76-768. For more details on the SEC’s existing regulatory framework see SEC,
The Laws That Govern the
Securities Industry, at https://www.sec.gov/answers/about-lawsshtml.html.
30 SEC,
Framework for “Investment Contract” Analysis of Digital Assets, at https://www.sec.gov/corpfin/framework-
investment -contract-analysis-digital-assets.
31 SEC, “SEC Announces Office Focused on Innovation and Financial T echnology,” press release, December 3, 2020,
at https://www.sec.gov/news/press-release/2020-303.
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established a new Cyber Unit and increased its monitoring of and enforcement
actions against il icit cyber-based transactions.
No-action letters. The SEC uses no-action letters to provide relief for digital-asset-
related businesses and to signal its regulatory intentions to capital markets.32 For
example, the SEC issued a no-action letter to TurnKey Jet, a business-travel startup,
stating that its issued tokens are not securities.33 This was the SEC’s first no-action
letter for an ICO. The letter triggered a wave of industry discussions and potential y
set a precedent for future digital asset activities.
Solicitation for public input. The SEC released a letter to the industry in March
2019 to solicit public input regarding digital asset custody.34 The comments helped
the SEC understand the chal enges the industry faces and assess investor-protection
risks.
New product approval. The SEC could approve or reject new digital asset products.
For example, the SEC has reviewed Bitcoin ETF proposals in recent years and has
consistently rejected such proposals as of May 2021.35
Policy Issues in the Securities Regulation Context
Digital assets and their use in capital markets are a growing presence in the financial services
industry’s development. They raise policy questions, including whether new digital-asset-related
practices have outgrown or are sufficiently overseen by the existing regulatory system; how the
regulatory frameworks can achieve a level playing field where the same businesses and risks
could be subject to the same regulation;36 and how to protect investors without hindering
innovation.37
A fundamental understanding of innovative trends and the appropriate timing of the related policy
actions are also important for digital asset regulation. In analyzing technological changes, some
commentators suggest that society tends to overestimate a technology’s effects in the short run
and underestimate its effects in the long run.38 This il ustrates the delicate balance between social
pressure for change and the appropriate timing for policy responses in the face of innovation.
This section explains key examples of digital asset developments and use cases, focusing on
policy issues and legislative proposals in the securities regulation context. The most salient digital
asset-related policy issues include regulatory oversight and investor protection.
32 No-action letters are official communications stating a regulator does not expect to take enforcement actions against
particular companies in certain situations.
33 SEC, “Response of the Division of Corporate Finance,” April 3, 2019, at https://www.sec.gov/divisions/corpfin/cf-
noaction/2019/turnkey-jet-040219-2a1.htm.
34 SEC, “Engaging on Non-DVP Custodial Practices and Digital Assets,” March 12, 2019, at https://www.sec.gov/
investment/non-dvp-and-custody-digital-assets-031219-206.
35 For more on ET Fs, see CRS Report R45318,
Exchange-Traded Funds (ETFs): Issues for Congress, by Eva Su.
36 Sabine Lautensläger, “Digital Na(t)ive? Fintechs and the Future of Banking,” speech at European Central Bank
Fintech Workshop, Frankfurt, Germany, March 27, 2017, at https://www.bankingsupervision.europa.eu/press/speeches/
date/2017/html/se170327_1.en.html.
37 Some believe that reduced regulation could foster financial innovation. For example, the T oken Taxonomy Act of
2021 (H.R. 1628) proposed the exemption of digital tokens from securities regulation.
38 For example, the theorem of Amara’s law. Oxford Reference,
Oxford Essential Quotations, 2016, at
https://www.oxfordreference.com/view/10.1093/acref/9780191826719.001.0001/q-oro-ed4-00018679.
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Regulatory Oversight. Digital asset issuers and investors may face a steep learning curve in
comprehending the regulatory landscape and determining how or if securities laws apply to
them.39 It may not always be clear whether a digital asset is a security subject to SEC regulation.
Multiple agencies apply different regulatory approaches to digital assets at the federal and state
levels. The SEC treats some digital assets as “securities,” the Commodity Futures Trading
Commission (CFTC) treats some digital assets as “commodities,” and the Internal Revenue
Service treats some digital assets as “property.”40 State regulators oversee digital assets through
state money transfer laws, and the Treasury Department’s Financial Crimes Enforcement
Network (FinCEN) monitors digital assets for anti-money laundering purposes.
Investor Protection. Digital asset investors—which may include less-sophisticated retail
investors, who may not be positioned to comprehend or tolerate high risks—may be especial y
vulnerable to new types of fraud and manipulation, leading to questions about investor protection.
First, there appears to be high levels of fraud, scams, and business failures.41 An early study from
Satis Group, a digital asset advisory firm, found that 81% of ICOs were scams and another 11%
failed for operational reasons.42 Second, many digital asset companies offering securities do not
comply with SEC registration and disclosure obligations, potential y affecting investors’ ability to
understand their risk exposures.43 Third, the high volatility of digital assets’ valuations can
potential y result in large gains and losses, the risk of which may not be wel understood by less-
sophisticated investors. Lastly, digital assets operate outside the traditional financial system and
thus may not offer common types of transaction protections. For example, banks may have the
option to halt or reverse suspicious transactions and associate transactions with the users’
identities, but a digital asset transaction is general y irreversible through such intermediaries.
Another example is that a significant portion of digital assets are inaccessible because of lost or
forgotten keys. Around 20% of al Bitcoins were reportedly in lost or deserted wal ets.44 This
highlights the importance of financial intermediaries such as custodians or banks that could
usual y help reset or restore passwords to gain access to traditional assets. Such traditional
services are much less common for digital assets, which are designed to enable transactions
without going through a financial intermediary or any kind of identify check.
Initial Coin Offerings
Businesses raise funding from capital markets through securities offerings, such as stocks, bonds,
and digital assets. ICOs are a new fundraising mechanism in which projects sel their digital
tokens in exchange for fiat currency (e.g., dollars) or cryptocurrency (e.g., Bitcoin).45 A typical
39 See CRS In Focus IF11004,
Financial Innovation: Digital Assets and Initial Coin Offerings, by Eva Su.
40 For example, Bitcoin is not a security but a commodity, overseen by the CFT C’s general anti-fraud and manipulation
oversight and enforcement authority. CFT C,
Custom er Advisory: Understand the Risks of Virtual Currency Trading , at
https://www.cftc.gov/sites/default/files/idc/groups/public/@customerprotection/documents/file/
customeradvisory_urvct121517.pdf.
41 Kellie Mejdrich, “Cryptocurrency Scams Skyrocketing, FT C Says,”
Politico, May 17, 2021, at
https://subscriber.politicopro.com/article/2021/05/cryptocurrency-scams-skyrocketing-ftc-says-2055917.
42 Satis Group,
Crypto-asset Market Coverage Initiation: Network Creation, July 11, 2018, at
https://research.bloomberg.com/pub/res/d28giW28tf6G7T_Wr77aU0gDgFQ.
43 Financial Industry Regulatory Authority,
Initial Coin Offerings (ICOs)—What to Know Now and Time-Tested Tips
for Investors, Investor Alert, August 16, 2018, at http://www.finra.org/investors/alerts/initial-coin-offerings-what -to-
know.
44 Nathaniel Popper, “Lost Passwords Lock Millionaires Out of T heir Bitcoin Fortunes,”
New York Times, January 14,
2021, at https://www.nytimes.com/2021/01/12/technology/bitcoin-passwords-wallets-fortunes.html.
45 SEC, “Investor Bulletin: Initial Coin Offerings,” July 25, 2017, at https://www.sec.gov/oiea/investor-alerts-and-
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ICO transaction involves the issuer sel ing new digital “coins” or “crypto tokens” to individual or
institutional investors. Investors pay for these tokens with either cryptocurrencies or traditional
currencies. ICOs are often compared with initial public offerings (IPOs) of the traditional
financial world because both are methods by which companies acquire funding. The main
difference is that ICO investors receive digital assets in the form of virtual tokens or the promise
of future tokens, unlike IPO investors who receive an equity stake representing company
ownership. These coins or tokens are new digital currencies each company creates and sel s to the
public. Coin purchasers could redeem the coins for goods or services from crypto enterprises or
hold them as investments hoping the coins would increase in value. Although every crypto
enterprise is different, they general y make transfers without an intermediary or any geographic
limitation.46
Figure 1 il ustrates the growth and decline of ICO activities.
Figure 1. Initial Coin Offering Monthly Numbers and Dollar Funding Volumes
Source: PWC, 6th ICO/STO Report, Spring 2020 Edition.
Industry practitioners are increasingly using the term
security token offerings (STOs) to describe
ICOs.47 This change of terminology reflects the industry’s acceptance that many ICOs are
securities offerings and thus subject to securities laws and regulations.48 Securities laws require
al securities offers and sales to either be registered under their provisions (as a public offering) or
qualify for an exemption from registration (as a private offering).49 ICOs can take many forms.
They can be listed on national exchanges as public offerings or be issued pursuant to the private
securities offering exemptions. Operational and regulatory conditions—including investor access,
maximum offering amounts, and filing requirements—differ depending on the type of offering an
ICO selects.
50 Table 1 il ustrates examples of ICO fundraising options. ICOs could potential y
use al the existing securities offering venues. They have already reportedly been issued under
several of the private exemptions (e.g., Regulation D, Regulation Crowdfunding, and Regulation
A).51 Although public offering ICOs are possible, as of May 2021, no ICOs have yet issued under
bulletins/ib_coinofferings.
46 SEC Chairman Jay Clayton, “Statement on Cryptocurrencies and Initial Coin Offerings,” December 11, 2017, at
https://www.sec.gov/news/public-statement/statement -clayton-2017-12-11.
47 Roger Aitken, “ After ‘Crypto’s Winter’, ICOs Growing Less But Maturing With Shift T o ST Os,”
Forbes, March 8,
2019, at https://www.forbes.com/sites/rogeraitken/2019/03/08/after-cryptos-winter-icos-growing-less-but-maturing-
with-shift-to-stos/#3e666a687bcf.
48 T erminologies change or evolve relatively rapidly in the digital assets industry. Other illustrative examples include
Initial Exchange Offerings (IEOs), which are ICOs launched exclusively on digital trading platforms. SEC Division of
Corporate Finance Director William Hinman, “ Digital Asset T ransactions: When Howey Met Gary (Plastic),” speech
delivered at Yahoo Finance All Markets Summit: Crypto, San Francisco, CA, June 14, 2018, at https://www.sec.gov/
news/speech/speech-hinman-061418.
49 SEC,
Federal Securities Laws, at https://www.sec.gov/page/federal-securities-laws?auHash=
B8gdT zu6DrpJNvsGlS1-JY1LnXDZQqS-JgJA ga SX img.
50 For more details on public and private securities offerings, see CRS Report R45221,
Capital Markets, Securities
Offerings, and Related Policy Issues, by Eva Su.
51 Paul Vigna, “SEC Clears Blockstack to Hold First Regulated T oken Offering,”
Wall Street Journal, July 10, 2019, at
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Digital Assets and SEC Regulation
this method. The previously discussed policy issues relating to regulatory oversight and investor
protection also apply to ICOs.52
Table 1. Comparison of Selected ICO Securities Offerings Options
Type of
Maximum
Offering
Amount
Key Filing Requirements
Investor Access
Public Offering
No limit
Ful SEC registration requirements, including, Ful Access
but not limited to, Regulation S-K
(nonfinancial disclosure), S-X (financial
disclosure), and S-T (electronic filing
regulations).
Initial Public
No limit, but
Scaled-down SEC registration, including test-
Ful Access
Offering (IPO)
subject to
the-waters provisions, two years rather than
On-Ramp
emerging growth three years of audited financial statements,
company status
and certain reduced executive compensation
eligibility
disclosure provisions, among others.
Regulation A-
$20 mil ion
Form 1-A (an offering circular that contains
Ful Access
Tier 1
within 12
information about the offering and the
months
related risks, use of proceeds, business
description, and financial statements, among
Regulation A-
$50 mil ion
other things). Financial statements disclosed
Nonaccredited investors
Tier 2 (Mini-
within 12
in a Tier 2 offering must be audited, whereas subject to investment limits
IPO)
months
financial statements disclosed in a Tier 1
offering can be unaudited.
Regulation
$1,070,000
Form C (include two years of financial
Does not specify
Crowdfunding
within 12
statements that are certified, reviewed, or
accredited investor status,
months
audited, as required). Scaled disclosure
but subject to a range of
requirements for offerings of $107,000 or
investor income, net
less, $107,000-$535,000, and more than
worth, and investment
$535,000.
amount limitations
Regulation D-
$5 mil ion within
Form D (a brief notice that general y
Ful Access
Rule 504
12 months
includes only the names and addresses of
key personnel and some details about the
offering).
Regulation D-
No limit
Form D
No more than 35
Rule 506
sophisticated but
nonaccredited investors—
506(b)
Source: Congressional Research Service (CRS), based on Securities and Exchange Commission’s (SEC’s)
reporting.
Notes: The descriptions in the table apply to general conditions only; they are not inclusive of al conditions and
exceptions. For more on defining
accredited investors, see CRS In Focus IF11278,
Accredited Investor Definition and
Private Securities Markets, by Eva Su. For a more detailed listing of securities offerings, see Table 1 of CRS Report
R45221,
Capital Markets, Securities Offerings, and Related Policy Issues, by Eva Su.
https://www.wsj.com/articles/sec-clears-blockstack-to-hold-first-regulated-token-offering-11562794848; and Francine
Mckenna and Katie Marriner, “ ICO offerings way down, but some still using SEC back door to raise funds,”
MarketWatch, October 26, 2019, at https://www.marketwatch.com/story/ico-offerings-way-down-but-some-still-using-
sec-back-door-to-raise-funds-2019-10-22?mod=francine-mckenna.
52 For more on ICO legal background, see CRS Report R45301,
Securities Regulation and Initial Coin Offerings: A
Legal Prim er, by Jay B. Sykes.
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Digital Assets and SEC Regulation
Digital Asset “Exchanges”
Many digital asset trading platforms are offering digital asset trading and referring to themselves
as “exchanges.” A platform that offers trading in digital asset securities and operates as an
“exchange” (as defined in the federal securities laws) must register with the SEC as a national
securities exchange or obtain exemption.53 However, many such platforms offer trading in digital
assets that are not securities. Some platforms are registered as money-transmission services
(MTSs) instead of SEC-regulated national securities exchanges.54 MTSs are money transfer or
payment operations that are mainly subject to state, rather than federal, regulations, although they
do have to register with FinCEN and face certain reporting requirements to that office.55 Because
MTS regulations were not designed with digital asset trading activities in mind, some argue that
they are insufficient in regulating the transfer of digital assets.56 In addition, these services may
raise investor-protection concerns because they are not subject to the more rigorous oversight as
national securities exchanges.57 The SEC issued a statement clarifying that the online platforms
for buying and sel ing digital assets that qualify as securities could be unlawful.58
These digital asset trading platforms face problems with fraud and manipulation. Although the
CFTC has authorities to regulate against fraud and manipulation in digital commodities markets,59
some think applying SEC regulation would help, but others are concerned that regulation could
stifle financial innovation.60
Digital Asset “Exchanges” Versus National Securities Exchanges
Although current technological advancements may seem to have blurred the terminology used,
certain platforms trading digital assets appear to behave as functional equivalents to national
53 T he SEC states that “if a platform offers trading of digital assets that are securities and operates as an ‘exchange,’ as
defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or
be exempt from registration.” For more details, see SEC, “ Statement on Potentially Unlawful Online Platforms for
T rading Digital Assets,” March 7, 2018, at https://www.sec.gov/news/public-statement/enforcement-tm-statement-
potentially-unlawful-online-platforms-trading.
54 For more on money transmitters, see CRS Report R46486,
Telegraphs, Steamships, and Virtual Currency: An
Analysis of Money Transm itter Regulation, by Andrew P. Scott .
55 Marco Santori, “What Is Money T ransmission and Why Does It Matter?,”
Coin Center, April 7, 2015, at
https://coincenter.org/entry/what -is-money-transmission-and-why-does-it-matter.
56 Peter Van Valkenburgh, “ T he Need for a Federal Alternative to State Money T ransmission Licensing,”
Coin Center
Report, January 2018, at https://coincenter.org/files/2018-01/federalalternativev1-1.pdf.
57 A national securities exchange is a securities exchange that has registered with the SEC under §6 of the Securities
Exchange Act of 1934. See SEC Fast Answers,
National Securities Exchanges, at https://www.sec.gov/fast-answers/
divisionsmarketregmrexchangesshtml.html.
58 T he SEC states that “if a platform offers trading of digital assets that are securities and operates as an ‘exchange,’ as
defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or
be exempt from registration.” For more details, see SEC, “ Statement on Potentially Unlawful Online Platforms for
T rading Digital Assets,” March 7, 2018, at https://www.sec.gov/news/public-statement/enforcement-tm-statement-
potentially-unlawful-online-platforms-trading.
59 Because a cryptocurrency meets the definition of a “commodity” under the Commodity Exchange Act (CEA; P.L.
93-463), the Commodities Futures T rading Commission has authority over them. For more information, see CRS Legal
Sidebar LSB10227,
CFTC and Virtual Currencies: New Court Rulings and Im plications for Congress, by Nicole
Vanatko.
60 SEC Commissioner Hester Peirce,
How We Howey, May 9, 2019, at https://www.sec.gov/news/speech/peirce-how-
we-howey-050919.
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Digital Assets and SEC Regulation
securities exchanges. For example, these platforms bring together buyers and sel ers, execute
trades, and display prices.
The general consensus among domestic and international securities regulators regarding digital
assets is that regulatory oversight should be balanced with the need to foster financial innovation.
However, if digital asset trading platforms are buying and sel ing securities and fal w ithin the
SEC’s regulatory regime, then securities regulation’s basic objectives should arguably continue to
apply.61 In addition, some international authorities believe that, although digital asset trading
platforms may face issues similar to traditional exchanges, regulatory approaches may stil need
to be adjusted to account for particular operating models that may amplify risks differently.62 In
general, policymakers contending with major financial innovations have historical y focused on
addressing risk concerns while tailoring their regulatory framework flexibly to accommodate
evolving technology.63
The differences between digital asset “exchanges” and the SEC regulated national securities
exchanges could include transparency, fairness, and efficiency.64 These are principles guiding the
national securities exchange regulation, yet they are perceived as lacking for digital asset
“exchanges.”
Nontransparent and Fraudulent Activities
Many digital asset “exchanges” that general y al ow trading of digital assets that are not
securities, and thus not regulated by the SEC, are reportedly exaggerating their volumes on a
routine basis to attract more participation.65 Investors are perceived to have no idea whether the
trading volume and prices reflect real activities or market manipulation. To take the more
frequently studied digital asset Bitcoin for example,66 one study shows that 95% of Bitcoin’s
trading volume displayed on digital asset price and volume aggregator CoinMarketCap.com is
either fake or non-economic in nature.67 Another widely cited academic study il ustrates the scale
61 SEC,
Statement on Digital Asset Securities Issuance and Trading, November 16, 2018, at https://www.sec.gov/news/
public-statement/digital-asset-securites-issuuance-and-trading, and Board of the International Organization of
Securities Commissions,
Issues, Risks and Regulatory Considerations Relating to Crypto -Asset Trading Platform s,
May 2019, at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD627.pdf.
62 G7 Working Group on Stablecoins,
Investigating The Impact of Global Stablecoin, October 2019, at
https://www.bis.org/cpmi/publ/d187.pdf.
63 17 C.F.R. §§202, 240, 242, and 249. SEC, “ Regulation of Exchanges and Alternative T rading Systems,” 70844-
70951, December 22, 1998, at https://www.federalregister.gov/documents/1998/12/22/98-33299/regulation-of-
exchanges-and-alternative-trading-systems.
64 For a more detailed list of principles relating to trading, see International Organization of Securities Commissions,
Methodology for Assessing Im plem entation of the IOSCO Objectives and Principles of Securities Regulation, May
2017, at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD562.pdf.
65 Olga Kharif, “On Crypto Exchanges, T he T rades Don’t Always Add Up,”
Bloomberg, July 25, 2019, at
https://www.bloomberg.com/news/articles/2019-07-25/on-crypto-exchanges-the-trades-don-t-always-add-up.
66 Bitcoin is a commodity rather than a security and is under the CFT C’s general anti-fraud and manipulation oversight
and enforcement authority. CFT C,
Custom er Advisory: Understand the Risks of Virtual Currency Trading , at
https://www.cftc.gov/sites/default/files/idc/groups/public/@customerprotection/documents/file/
customeradvisory_urvct121517.pdf. T he SEC generally regulates securities transactions and their related
intermediaries. T he SEC does not have direct oversight of transactions in non-security currencies or commodities. SEC
Chairman Jay Clayton,
Chairm an’s Testim ony on Virtual Currencies: The Roles of the SEC and CFTC, February 6,
2018, at https://www.sec.gov/news/testimony/testimony-virtual-currencies-oversight-role-us-securities-and-exchange-
commission.
67 Bitwise Asset Management,
Presentation to The U.S. Securities and Exchange Commission , March 19, 2019, at
https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf.
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Digital Assets and SEC Regulation
of potential damage that digital asset market manipulations could create, underlining the investor-
protection concerns in the digital asset space. The study argues that a single market manipulator
likely fueled half of Bitcoin’s 2017 price surge that pushed its price close to $20,000.68 The
activities were reportedly carried out through the largest digital asset “exchange” at that time,
Bitfinex, and used stablecoin Tether to boost the demand for Bitcoin.69
Network Congestion and Market Inefficiencies
Unlike national securities exchanges for stocks, digital asset “exchanges” frequently face network
congestions or trading halts, cal ing into question their readiness to serve a growing marketplace.
For example, during a rapid digital asset sel off and recovery in May 2021, multiple major digital
asset “exchanges” reported technical issues, further intensifying market stress during a volatile
time of increased trading.70 These market disruptions could generate investor-protection concerns
due to investors’ inability to get in and out of their investment positions in a timely manner or
investors’ inability to seek the best execution for their trades—often common features of a fair
and efficient trading system.
Given the scale of such issues, some have questioned whether digital asset trading warrants more
regulatory safeguards that protect investors and promote more efficient market operations.71 It is
difficult to predict the extent to which an SEC-regulated digital asset national exchange would
have mitigated the market manipulations, or if the SEC’s regulatory framework is the best fit for
addressing al the digital-asset-trading-related policy concerns.
68 John Griffin and Amin Shams,
Is Bitcoin Really Un-Tethered?, SSRN, October 28, 2019, at https://ssrn.com/
abstract=3195066.
69 Phillip Rosenstein, “$1.4T Bitcoin Manipulation Case Preposterous, T ether Says,”
Law360, November 15, 2019, at
https://www.law360.com/articles/1220333; New York Attorney General, “ Attorney General James Announces Court
Order Against ‘Crypto’ Currency Company Under Investigation For Fraud,” press release April 25, 2019, at
https://ag.ny.gov/press-release/2019/attorney-general-james-announces-court-order-against-crypto-currency-company;
and Bitfinex, “ Bitfinex Anticipates Meritless and Mercenary Lawsuit Based on Bogus Study,” October 5, 2019, at
https://www.bitfinex.com/posts/423. T he Department of Justice (DOJ), Commodity Futures T rading Commission
(CFT C), and New York Attorney General’s office are reportedly investigating whether T ether was used to prop up
Bitcoin’s price. Shiraz Jagati, “How Severe Is Roche Freedman’s Lawsuit Against T ether and Bitfinex?”
Cointelegraph, October 11, 2019,
at https://cointelegraph.com/news/how-severe-is-roche-freedmans-lawsuit-against -
tether-and-bitfinex; and Matt Robinson and T om Schoenberg, “ Bitcoin -Rigging Criminal Probe Focused on T ie to
T ether,” Bloomberg, November 20, 2018, at https://www.bloomberg.com/news/articles/2018-11-20/bitcoin-rigging-
criminal-probe-is-said-to-focus-on-tie-to-tether. For more on the SEC’s discussions of the alleged manipulation, see
SEC,
Release No. 34-87267 File No. SR-NYSEArca-2019-01, October 9, 2019, at https://www.sec.gov/rules/sro/
nysearca/2019/34-87267.pdf.
70 Daniel Palmer, “ T op Crypto Exchanges See T echnical Issues Amid Market Crash,”
Coindesk, May 19, 2021, at
https://www.coindesk.com/top-crypto-exchanges-see-technical-issues-amid-market -crash; and Robert Hart, “ Leading
Crypto Exchanges Down As Bitcoin and Ether Plummet,” Forbes, May 19, 2021, at https://www.forbes.com/sites/
roberthart/2021/05/19/leading-crypto-exchanges-down-as-bitcoin-and-ether-plummet .
71 For example, SEC Chairman Jay Clayton reportedly commented that “if [investors] think there’s the same rigor
around that price discovery as there is on the Nasdaq or New York Stock Exchan ge ... they are sorely mistaken ... we
have to get to a place where we can be confident that trading is better regulated.” Jeff Cox, “SEC Chairman Says He
Doesn’t See Bitcoin T rading on a Major Exchange Until It Is ‘Better Regulated,’”
CNBC, September 20, 2019, at
https://www.cnbc.com/2019/09/19/jay-clayton-delivering-alpha.html. For more discussions on regulatory concerns, see
Office of the New York State Attorney General,
A.G. Schneiderm an Launches Inquiry Into Cryptocurrency
“
Exchanges,” April 17, 2018, at https://ag.ny.gov/press-release/2018/ag-schneiderman-launches-inquiry-
cryptocurrency-exchanges.
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Regulatory Frameworks and SEC Actions
The SEC took its first enforcement action against an unregistered digital asset “exchange” in
2018. The SEC stated that the platform “had both the user interface and underlying functionality
of an online national securities exchange and was required to register with the SEC or qualify for
an exemption,” but was perceived to have failed to do so.72
Some of the largest digital asset “exchanges” have developed a system to rate digital assets based
on the probability that they could be defined as securities.73 These “exchanges” reportedly hope
that by so doing they could exclude securities-based digital assets from their unregistered trading
platforms, thus avoiding being subject to SEC regulation. This action is part of the digital asset
industry’s self-regulation discussion that is gaining momentum. For example, an international law
firm’s survey showed that the vast majority of the respondents thought the industry should
formalize self-regulation and subject that self-regulation to regulatory oversight.74
Many digital asset trading platforms also reportedly sought to obtain exemptions from the SEC to
operate as alternative trading systems (ATS).75 ATSs are “dark pools” that do not publicly display
the size and price of their orders.76 ATSs face fewer regulatory requirements than national
exchanges, but they must register as broker-dealers and meet certain SEC and Financial Industry
Regulatory Authority (FINRA, a self-regulatory organization) compliance and filing
requirements, such as custody, books and records, and regulatory examinations.77 However, any
ATS that transacts more than 5% of the trading volume of any security, which also trade on the
national securities exchange system, could face stricter “order display” and “first access” rules
that effectively integrate that ATS in part into the national market system.78
A number of the largest digital asset “exchanges” (e.g., Coinbase, Gemini, Bitstamp, and ItBit)
have obtained state-level regulatory licenses, such as the BitLicense, from New York State’s
Department of Financial Services.79 The license requirements include certain investor protection,
market fraud and manipulation prevention, and il icit activity prevention measures.80
72 SEC, “SEC Charges EtherDelta Founder With Operating an Unregistered Exchange,” press release, November 8,
2018 at https://www.sec.gov/news/press-release/2018-258.
73 Dave Michaels, “Cryptocurrency Exchanges Including Coinbase to Rate Digital Assets,”
Wall Street Journal,
September 30, 2019, at https://www.wsj.com/articles/cryptocurrency-exchanges-including-coinbase-to-rate-digital-
assets-11569835801.
74 T he surveys are conducted in March and April of 2018, 62 professionals completed the survey. Most respondents
(61%) held executive titles or identified as investors or traders. Respondents were primarily based in the United States
and ranged in age from their 20s to 50 and older. Foley & Lardner LLP,
2018 Cryptocurrency Survey, at
https://www.foley.com/files/uploads/Foley-Cryptocurrency-Survey.pdf.
75 JD Alois, “Here Is T he List of SEC Approved Alternative T rading Systems,”
Crowdfund Insider, April 23, 2019, at
https://www.crowdfundinsider.com/2019/04/146721-here-is-the-list-of-sec-approved-alternative-trading-systems/.
76 SEC,
Alternative Trading Systems (ATSS), at https://www.investor.gov/additional-resources/general-resources/
glossary/alternative-trading-systems-atss.
77 SEC,
Alternative Trading System (“ATS”) List, at https://www.sec.gov/foia/docs/atslist.htm.
78 17 C.F.R. §§202, 240, 242, and 249.
79 Robert Gutmann, Jonathan Knehr, Phillip Rapoport, and Ross Stevens,
Buying Bitcoin, February 1, 2019, at
https://ssrn.com/abstract=3346668.
80 New York State Department of Financial Services,
Virtual Currency Business Activity (BitLicense), at
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses.
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SEC Chair’s Call for a Regulatory Framework Governing Digital Asset
“Exchanges”
SEC Chair Gary Gensler has asked Congress for clear authority over digital asset exchanges. At a
congressional hearing in May 2021, Gensler voiced concerns regarding the lack of a regulatory
framework for digital asset exchanges.81 He stated that the lack of oversight represents a “gap in
our system” that denies traders basic investor protection.82 Gensler emphasized the importance of
bringing the same protections found in traditional securities markets to digital asset “exchanges.”
He added that “none of the exchanges trading crypto tokens has registered yet as an exchange
with the SEC. Altogether, this has led to substantial y less investor protection than in our
traditional securities markets, and to correspondingly greater opportunities for fraud and
manipulation.”83 Digital asset investor-protection issues have become one of the SEC’s priorities.
Coinbase’s Public Listing
Coinbase, the largest U.S. digital asset “exchange,” went public on April 14, 2021. The public
listing offered Coinbase investors indirect exposure to the crypto industry. For example, the vast
majority of the company’s revenue is derived from transaction fees—the more cryptocurrency
trading that could take place on the Coinbase platform, the higher its earnings and stock valuation
could be. By going public, Coinbase subjects itself to more stringent SEC disclosure requirements
for public securities offerings.84 However, such SEC compliance requirements for public
securities issuers is different than regulatory requirements for national securities exchanges.
Coinbase as a publicly traded company is now providing more disclosure, but this does not mean
that the SEC has been overseeing Coinbase’s digital asset trading operations in a way similar to
its oversight of national securities exchanges.
Digital Asset Custody
Custodians provide safekeeping of financial assets. They are financial institutions that do not
have legal ownership of assets but are tasked with holding and securing assets, among other
administrative functions.85 The SEC’s custody rules impose requirements designed to protect
client assets from the possibility of being lost or misappropriated. Custodians are important
building blocks for the financial services industry. The custody industry for traditional assets is
large and concentrated. In the past 90 years, financial custody has evolved from a system of self-
custody to one in which major custodians provide asset custody for client accounts. Four banks
81 Gensler stated that “right now the exchanges, trading these crypto assets do not have a regulatory framework.…
[R]ight now there is not a market regulator around these crypto exchanges, and thus there ’s really not protection against
fraud or manipulation.” Bloomberg transcript for House Financial Services Committee hearing
Gam e Stopped? Who
Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part III , May 6, 2021, at
https://www.bgov.com/core/news/#!/articles/QSQU5G8JMDC0.
82 Steven Dennis and Jesse Hamilton, “ Crypto’s Wild Ride Leaves Washington Grasping at What to Do,”
Bloomberg,
May 19, 2021, at https://www.bloomberg.com/news/articles/2021-05-19/crypto-s-wild-ride-leaves-washington-
grasping-at-how-to-respond.
83 SEC Chair Gary Gensler,
Testimony Before the Subcommittee on Financial Services and General Government, U.S.
House Appropriations Com m ittee, May 26, 2021, at https://www.sec.gov/news/testimony/gensler-2021-05-26.
84 For more on SEC disclosure requirements, see CRS In Focus IF11256,
SEC Securities Disclosure: Background and
Policy Issues, by Eva Su.
85 §17(f) of the Investment Company Act and 17 C.F.R. §§270.17f-1-270.17f-7; 17 CFR §275.206(4)-2 and the SEC
Customer Protection Rule or Rule 15c3-3 under the Securities Exchange Act of 1934 (P.L. 73 -291).
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Digital Assets and SEC Regulation
(BNY Mel on, J.P. Morgan, State Street, and Citigroup) service around $114 tril ion of global
assets under custody.86
Digital-asset custody has recently attracted regulatory attention because the SEC custody rules
could pose unique chal enges for custodians of digital assets. The custody rules were developed
for traditional assets, which are easier than digital assets to secure and produce tangible tracks of
physical existence or records. Digital assets general y lack physical existence or records produced
by intermediaries, as seen in traditional assets such as gold or bank accounts. Common practice in
the digital asset industry so far focuses on safeguarding private keys, unique numbers assigned
mathematical y to digital asset transactions to confirm asset ownership.87 This practice raises the
question of how possession or control of a digital asset should be defined for regulatory purposes.
The chal enges include but are not limited to, for example, that a digital asset could have multiple
private keys or that a single private key does not exist. As such, some believe the digital asset
custody definition should go beyond the verification of the keys to incorporate holistic custody
views.88
Regulators are evaluating whether custody requirements should be adjusted to account for digital
assets’ unique operational characteristics. The SEC released a letter to the industry in March 2019
to solicit public input regarding digital asset custody.89 The SEC summarized a number of policy
issues, including the use of distributed ledger technology (DLT) to record ownership, the use of
public and private cryptographic key pairings to transfer digital assets, the ability to restore or
recover digital assets once lost, the general y anonymous nature of DLT transactions, and the
chal enges posed to auditors in examining DLT and digital assets.90
On July 8, 2019, the SEC and FINRA issued a joint statement to outline considerations for digital
asset securities custody.91 They acknowledged the chal enges of applying custody requirements to
digital assets and stated that there are initiatives underway to solicit input from market
participants that could help develop new ways to establish “possession or control” for digital asset
securities.92
86 Fidelity Digital Assets,
Custody in the Age of Digital Assets, October 2018, at https://www.fidelitydigitalassets.com/
bin-public/060_www_fidelity_com/documents/FDAS/custody-in-the-age-of-digital-assets.pdf.
87 Some financial institutions offer digital asset custody services. T hese service providers also consider the con trol of
the private keys as the control of the digital assets. European Financial Reporting Advisory Group,
EFRAG Research
Project on Crypto-Assets Analysis of Scope – Initial Coin Offerings and Custodial Services, May 22, 2019, at
https://www.efrag.org/Assets/Download?assetUrl=
%2Fsites%2Fwebpublishing%2FMeeting%20Documents%2F1904050854507613%2F06 -01%20-
%20T EG%20Issues%20paper%20on%20scope%20of%20crypto -assets.pdf. For more on the general background of
private keys and custody requirements, see Debevoise & Plimpton LLP,
Custody of Digital Assets: Centralized
Safekeeping of Decentralized Assets under the Investm ent Advisers Act, December 17, 2018, at
https://www.debevoise.com/~/media/files/insights/publications/2018/12/20181217_custody_of_digital_assets.pdf; and
Fidelity Digital Assets,
Custody in the Age of Digital Assets, October 2018, at https://www.fidelitydigitalassets.com/
bin-public/060_www_fidelity_com/documents/FDAS/custody-in-the-age-of-digital-assets.pdf.
88 Swen Werner, Managing Director, Global Product Manager at St ate Street, “What Is Custody of Digital Assets?”,
Global Custodian, at https://www.globalcustodian.com/blog/custody-digital-assets/.
89 SEC, “Engaging on Non-DVP Custodial Practices and Digital Assets,” March 12, 2019, at https://www.sec.gov/
investment/non-dvp-and-custody-digital-assets-031219-206.
90 SEC, “Engaging on Non-DVP Custodial Practices and Digital Assets.”
91 SEC Division of T rading and Markets and FINRA Office of General Counsel,
Joint Staff Statement on Broker-
Dealer Custody of Digital Asset Securities, July 8, 2019, at https://www.sec.gov/news/public-statement/joint -staff-
statement -broker-dealer-custody-digital-asset-securities.
92 SEC Division of T rading and Markets and FINRA Office of General Coun sel,
Joint Staff Statement on Broker-
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Digital Assets and SEC Regulation
On December 23, 2020, the SEC issued a statement and request for comment regarding digital
asset securities custody.93 In the request, the SEC asked about digital asset custody best practices,
processes, risk disclosure, and risk implications, among other things. Amendments to the custody
rules have been included in the SEC’s 2021 rulemaking agenda.94
Digital Asset Exchange-Traded Funds
ETFs are pooled investment vehicles that gather and invest money from a variety of investors.95
ETFs combine features of both mutual funds and stocks and can trade on national exchanges.
Some industry practitioners hope that the ETF structure could incorporate digital assets.96
Individual investors typical y buy digital assets, for example, Bitcoins, from other owners or
through digital asset trading platforms and other intermediaries.97 Individual investors currently
cannot directly purchase digital assets (e.g., Bitcoins) from the SEC-regulated national securities
exchanges.98 Some have proposed al owing retail investors to buy or sel digital assets on
regulated exchanges through the ETF structure—where, instead of directly trading digital assets,
the investors would buy or sel publicly traded ETF shares with values linked to underlying
digital assets. This section discusses potential Bitcoin ETFs’ policy implications for the digital
asset industry.
Bitcoin ETF Proposals
As mentioned previously, some digital assets are securities subject to securities laws and
regulations. But digital assets could also be structured as securities products, even if the
underlying assets are not securities. The proposed Bitcoin ETFs are the most prominent example.
Although Bitcoin is not a security,99 Bitcoin ETFs would be securities products with value linked
to the underlying Bitcoins and are subject to securities regulation, including the Investment
Company Act of 1940 and Investment Advisers Act of 1940. Reportedly, around 10
cryptocurrency ETF applications were awaiting SEC approval as of May 2021.100 But the SEC
has not yet approved any cryptocurrency ETFs because of market manipulation and fraud
Dealer Custody of Digital Asset Securities, July 8, 2019.
93 SEC, “SEC Issues Statement and Requests Comment Regarding the Custody of Digital Asset Securities by Special
Purpose Broker-Dealers,” press release, December 23, 2020, at https://www.sec.gov/news/press-release/2020-340.
94 Office of Management and Budget,
Agency Rule List—Spring 2021, at https://www.reginfo.gov/public/do/
eAgendaMain.
95 For more on ET Fs, see CRS Report R45318,
Exchange-Traded Funds (ETFs): Issues for Congress, by Eva Su.
96 David Weisberger, “T he Case for a Bitcoin ET F,”
Coindesk, November 23, 2019, at https://www.coindesk.com/the-
case-for-a-bitcoin-etf.
97 Kevin Voigt, “How to Invest in Bitcoin,” June 14, 2019, at https://www.nerdwallet.com/blog/investing/how-to-
invest -in-bitcoin/.
98 However, two commodities trading platforms—Chicago Board Options Exchange (Cboe) and CME Group—offer
Bitcoin futures trading.
99 SEC Division of Corporate Finance Director William Hinman, “Digital Asset T ransactions: When Howey Met Gary
(Plastic),” speech delivered at Yahoo Finance All Markets Summit: Crypto, San Francisco, CA, June 14, 2018 , at
https://www.sec.gov/news/speech/speech-hinman-061418.
100 Katherine Greifeld and Claire Ballentine, “Bitcoin ET F Approval Odds Grow Longer After Gensler Critique,”
Bloom berg, May 10, 2021, at https://www.bloomberg.com/news/articles/2021-05-10/bitcoin-etf-approval-odds-grow-
longer-after-gensler-critique.
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concerns. While U.S. regulators have been more cautious, in Canada, multiple Ethereum and
Bitcoin ETFs have received regulatory approval and popular market reception.101
The SEC repeatedly stated in its rejections that Bitcoin ETF proposals did not meet standards
governing national securities exchanges.102 Specifical y, the SEC stated that the proposals have
not met the requirements in Section 6(b)(5) of the Exchange Act that order national exchanges to
be “designed to prevent fraudulent and manipulative acts and practices.”103
The agency articulated its rationale in a 2018 staff letter that listed chal enges related to a Bitcoin
ETF. In addition to market manipulation concerns, major Bitcoin ETF chal enges included
valuation and pricing, custody, and liquidity.104 For example, al ETFs must frequently value their
portfolio assets. The valuation process determines what investors should pay for the ETF shares
and how the ETFs perform. Some worry that the Bitcoin ETFs would not be able to obtain the
information necessary to adequately value the digital assets given the high volatility and
fragmentation of the markets.
Bitcoin ETFs also have supporters. One institutional investor argues that ETFs provide a familiar
and convenient way for investors to invest in digital assets, enabling them to participate in digital
asset trading and partake in the potential financial gains brought by technological advancements,
despite the potential trade-offs with respect to investor protection.105 In a public statement about a
dissenting vote on a disapproved Bitcoin ETF proposal, SEC Commissioner Hester Peirce stated
that certain Bitcoin ETF proposals do satisfy the Section 6(b)(5) statutory requirements and that
the disapproval may dampen innovation and inhibit institutionalization.106
Stablecoins in Securities Markets
Stablecoins are a type of digital asset designed to maintain a stable value by linking its value to
another asset or a basket of assets, typical y collateralized by fiat currencies or facilitated by
algorithms.107 The best-known example of stablecoins are Tether and Diem (see discussion
below). These stablecoins have generated many policy concerns, inspired new considerations for
comparable use cases from the private and public sectors, and fueled discussions of other global
stablecoins.
101 Nate DiCamillo, “Canada Approves T hree Ethereum ET Fs in One Day,”
Coindesk, April 16, 2021, at
https://www.coindesk.com/purpose-investments-gets-approval-to-launch-first-ether-etf-in-canada.
102 For example, see SEC,
Release No. 34-87267,
Self-Regulatory Organizations; NYSE Arca, Inc.; Order
Disapproving a Proposed Rule Change, as Modified by Am endm ent No. 1, Relating to the Listing and Trading of
Shares of the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 8.201 -E, October 9, 2019, at https://www.sec.gov/
rules/sro/nysearca/2019/34-87267.pdf.
103 15 U.S.C. §78f(b)(5).
104 SEC staff letter,
Engaging on Fund Innovation and Crypto-currency Related Holdings, January 18, 2018, at
https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm. For more information on
custody, see
“ Digital Asset Custody” section of the report. Liquidity refers to the ease of buying and selling securities
without affecting the price.
105 Jordan Clifford, “T he Road to a Bitcoin ET F,”
Medium, August 14, 2018, at https://medium.com/scalar-capital/the-
road-to-a-bitcoin-etf-4364b07a7e15.
106 SEC Commissioner Hester Peirce, “ Dissent of Commissioner Hester M. Peirce to Release No. 34 -83723; File No.
SR-BatsBZX-2016-30,” July 26, 2019, at https://www.sec.gov/news/public-statement/peirce-dissent-34-83723.
107 Financial Stability Board,
Regulatory Issues of Stablecoins, October 18, 2019, at https://www.fsb.org/wp-content/
uploads/P181019.pdf.
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A stablecoin arrangement’s individual components are complex, leading to many crosscutting
policy discussions. The Financial Stability Board, an international financial authority,
characterizes a stablecoin’s components as the following:
Entities/structures involved in issuing stablecoins; entities/structures that manage assets
linked to the coins; infrastructure for transferring coins; market participants/structures
facing users (e.g., platforms/exchanges, wallet providers) and the governance structure for
the arrangement, including the role and responsibilities of a possible governance body and
the underlying stabilisation mechanism used for the stablecoin.108
Stablecoin-related policy concerns vary; they include, market integrity, investor protection,
financial stability, monetary policy, payments, and il icit activity prevention.109 Some of these
concerns are outside of the scope of this report, which focuses on securities regulation. In
addition to securities regulators, other regulatory authorities—central banks, payment system
regulators, and financial crime enforcement entities—have been involved in stablecoin
monitoring and oversight.
The Managed Stablecoins are Securities Act of 2019 (H.R. 5197 in the 116th Congress) proposed
subjecting stablecoins to securities regulation by amending the statutory definition of the term
security to include a new category of securities cal ed “managed stablecoins.” The bil would
have defined a managed stablecoin as a digital asset that has either (1) a market value that is
determined, in whole or significant part, by reference to the value of a pool or basket of assets
that are held, designated, or managed by one or more persons; or (2) holders that are entitled to
obtain payment which is determined, in whole or in significant part, on the basis of the value of a
pool or basket of assets held, designated, or managed by one or more persons. Because managed
stablecoin issuers are general y perceived as not acknowledging their stablecoins as securities,
this bil would have removed regulatory uncertainty by stating that a managed stablecoin is a
security and therefore subject to securities regulation.
This section uses a Facebook-backed stablecoin (Diem) and the world’s largest stablecoin
(Tether) as examples to il ustrate some policy concerns and potential regulatory frameworks for
stablecoin.
Facebook-Backed Diem (Formally Libra) and Its Perceived ETF Structure
The Facebook-backed stablecoin Libra, which was later renamed Diem,110 has attracted
congressional attention since its announcement on June 18, 2019. The Diem Association, the
nonprofit that oversees Diem’s development, reportedly planned to launch a U.S. dollar
stablecoin pilot in 2021.111 At related congressional hearings in 2019, Facebook received multiple
questions regarding whether Libra is an ETF and how it should be regulated.112 These questions
108 Financial Stability Board,
Regulatory Issues of Stablecoins, October 18, 2019, at https://www.fsb.org/wp-content/
uploads/P181019.pdf.
109 G7 Working Group on Stablecoins,
Investigating The Impact of Global Stablecoin, October 2019, at
https://www.bis.org/cpmi/publ/d187.pdf.
110 Andrew Ackerman, “ Facebook-Backed Digital Currency Project Revamps to Address U.S. Regulators’ Concerns,”
Wall Street Journal, May 12, 2021, at https://www.wsj.com/articles/facebook-backed-digital-currency-project -
revamps-to-address-u-s-regulators-concerns-11620854340.
111 Ryan Browne, “ Facebook-Backed Diem Aims to Launch Digital Currency Pilot Later T his Year,”
CNBC, April 20,
2021, at https://www.cnbc.com/2021/04/20/facebook-backed-diem-aims-to-launch-digital-currency-pilot-in-2021.html.
112 U.S. Congress, House Committee on Financial Services,
Examining Facebook’s Proposed Cryptocurrency and Its
Im pact on Consum ers,
Investors, and the Am erican Financial System , hearing, 116th Cong., 1st sess., July 17, 2019, at
https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=404001; and U.S. Congress, Senate Committee
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arose because to create the stablecoin, Libra would be backed by reserve assets, including bank
deposits and short-term government securities.113 New Libra tokens could be created or destroyed
only by authorized sel ers. Some industry practitioners argue that Libra’s proposed operational
structure is similar to the creation and redemption process used by ETFs.114 For details on ETF
structure and operations, see CRS Report R45318,
Exchange-Traded Funds (ETFs): Issues for
Congress, by Eva Su.
Facebook acknowledged at a House hearing that Libra uses operational mechanisms that are
similar to ETFs but stated its view that it is stil a payment tool and not an investment vehicle.115
Diem’s design was based on Libra but incorporated updates. Diem’s core structure for creating a
reserve asset portfolio and designating dealers continues to somewhat resemble the ETF structure
in previous arguments.116 If deemed an ETF, Diem must comply with the SEC’s regulatory
regime governing securities, investment advisors, and investment companies. SEC approval
would be required to launch the project. The SEC was reportedly evaluating whether such
structure makes it an ETF.117
Tether’s Reserve Asset Portfolio: Could Mandatory Disclosures Be Helpful?
The largest stablecoin, Tether, was created in 2014 with the intention to be fully backed by fiat
currency.118 Tether’s prospectus states that “each tether issued into circulation wil be backed in a
one-to-one ratio with the equivalent amount of corresponding fiat currency held in reserves by
Hong Kong based Tether Limited.”119 But it raised investor-protection concerns because
investigations revealed that it was not
fully backed at al times. The New York attorney general’s
office charged Tether and its affiliated trading platform Bitfinex $18.5 mil ion to settle a case in
2021, claiming that the stablecoin overstated its reserves and covered up losses.120 Tether and
Bitfinex denied any wrongdoing but paid the fine and agreed to provide quarterly disclosures of
reserve assets. At Tether’s first disclosure of its reserves breakdown,121 investors learned for the
on Banking, Housing, and Urban Affairs,
Exam ining Facebook’s Proposed Digital Currency and Data Privacy
Considerations, 116th Cong., 1st sess., July 16, 2019, S. Hrg.116-71 (Washington: GPO, 2019), at
https://www.banking.senate.gov/hearings/examining-facebooks-proposed-digital-currency-and-data-privacy-
considerations.
113 Libra Association, “Libra White Paper,” 2019, at https://libra.org/en-US/white-paper/.
114 Dave Nagid, “Most Interesting ET F Filing Ever: Libra,” ET F.com, June 25, 2019, at https://www.etf.com/sections/
blog/most-interesting-etf-filing-ever-libra; and Izabella Kaminska, “ T reating Stablecoins Like ET Fs,”
Financial Tim es,
December 9, 2019, at https://www.ft.com/content/2dd03db3-67c4-4ccc-8a9c-1439a1b24fae.
115 U.S. Congress, House Committee on Financial Services,
Examining Facebook’s Proposed Cryptocurrency and Its
Im pact on Consum ers,
Investors, and the Am erican Financial System , hearing, 116th Cong., 1st sess., at
https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=404001.
116 Diem,
White Paper 2.0, at https://www.diem.com/en-us/white-paper.
117 Dave Michaels and Lalita Clozel, “SEC Weighs Whether to Regulate Facebook’s Libra,”
Wall Street Journal, July
13, 2019, at https://www.wsj.com/articles/sec-weighs-whether-to-regulate-facebooks-libra-11563015601.
118 For size of T ether, see CoinMarketCap at https://coinmarketcap.com.
119 T ether,
Tether: Fiat Currencies on the Bitcoin Blockchain, at https://tether.to/wp-content/uploads/2016/06/
T etherWhitePaper.pdf.
120 New York Attorney General Letitia James,
Attorney General James Ends Virtual Currency Trading Platform
Bitfinex’s Illegal Activities in New York, February 23, 2021, at https://ag.ny.gov/press-release/2021/attorney-general-
james-ends-virtual-currency-trading-platform-bitfinexs-illegal; and Olga Kharif, “ Bitfinex Settles New York Probe into
T ether, Hiding Losses,”
Bloom berg, February 23, 2021, at https://www.bloomberg.com/news/articles/2021-02-23/
crypto-exchange-bitfinex-settles-with-new-york-to-end-probe.
121 T ether,
Reserve Breakdown at March 31, 2021, at https://tether.to/wp-content/uploads/2021/05/tether-march-31-
2021-reserves-breakdown.pdf.
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first time that a large portion of Tether’s reserves was in unspecified commercial paper, a type of
short-term debt instrument.122 With Tether’s market valuation achieving around $60 bil ion as of
June 2, 2021, some observers worry that potential deceptive activities may create widespread
harm to investors.123 The usefulness of Tether’s disclosure of reserve asset breakdowns, which
helped investors to identify potential deceptive activities, drew discussions about whether such
disclosure should be more broadly mandated at other stablecoins. But others worry that additional
disclosures may increase compliance costs and hinder innovation.
As of May 2021, the SEC has not publicly acknowledged enforcement actions against Tether. But
a President’s Working Group on Financial Markets statement clarified that, depending on design
and other factors, a stablecoin may constitute a security.124 Critics of Tether have speculated that
the SEC could seek enforcement actions.125
Non-Fungible Tokens (NFTs)
NFTs are digital assets linking to certificates of authenticity using blockchain technology. NFTs
are different from “fungible” tokens, such as Bitcoin and Ether, which have each unit being the
same as any other units. NFTs are “non-fungible,” meaning each token and the authenticated
object it represents is unique. Through the creation of digital assets that are authenticated and
have a proof of origin, NFTs could generate purchaser attraction or new uses for the uniquely
“stamped” digital assets.126 Most NFTs are held on the blockchain-based network Ethereum.127
NFTs date back to 2015.128 But they started to gain popularity in 2017 following the introduction
of a new type of NFT—CryptoKitties—that offer individual y designed (non-fungible) digital
cats.129 Public awareness of NFTs heightened in 2021, when auctions of NFT artworks reportedly
fetched mil ions of dollars.130
NFTs could reach to the realm of property rights that may generate profits. For example, NFTs
could represent digital assets in a virtual world where the assets are controlled by their owners.131
The use of such assets by other participants (e.g., digital tools, houses, and airplanes in the virtual
world) could involve payments to the owners. NFTs could also be attached to other forms of
122 Jemima Kelly, “T ether Says Its Reserves Are Backed by Cash to the T une of … 2.9%,”
Financial Times, May 14,
2021, at https://www.ft.com/content/529eb4e6-796a-4e81-8064-5967bbe3b4d9.
123 Jacob Silverman, “Is T ether Just a Scam to Enrich Bitcoin Investors?,”
New Republic, January 13, 2021, at
https://newrepublic.com/article/160905/tether-cryptocurrency-scam-enrich-bitcoin-investors.
124 President’s Working Group on Financial Markets,
Statement on Key Regulatory and Supervisory Issues Relevant to
Certain Stablecoins, December 23, 2021, at https://home.treasury.gov/system/files/136/PWG-Stablecoin-Statement -12-
23-2020-CLEAN.pdf.
125 Simon Chandler, “Will T ether Be Classified as a Security and Sued by the SEC?,”
CryptoVantage, January 12,
2021, at https://www.cryptovantage.com/news/will-tether-be-classified-as-a-security-and-sued-by-the-sec.
126 Josie T haddeus-John, “ What Are NFT s, Anyway? One Just Sold for $69 Million,”
New York Times, March 11,
2021, at https://www.nytimes.com/2021/03/11/arts/design/what -is-an-nft.html.
127 Nonfungible.com and L’Atelier BNP Paribas,
Non-Fungible Tokens Yearly Report 2020, at https://nonfungible.com/
subscribe/nft -report -2020.
128 Nonfungible.com and L’Atelier BNP Paribas,
Non-Fungible Tokens Yearly Report 2020.
129 See CryptoKitties at https://www.cryptokitties.co.
130 James T army and Olga Kharif, “T hese Crypto Bros Want to Be the Guggenheims of NFT s,”
Bloomberg, April 15,
2021, at https://www.bloomberg.com/news/features/2021-04-15/nft-collectors-this-is-who-s-buying-beeple-pak-mad-
dog-jones-micah-johnson.
131 For more examples, see Steven Kurutz, “ T he Curious World of NFT Real Estate and Design,”
New York Times,
May 25, 2021, at https://www.nytimes.com/2021/05/25/fashion/selling-virtual-real-estate.html.
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property rights in the real world. For example, NFTs could help enable the identification and
tracking of real world objects, making the individualized value-creation process transparent.
Some characterize these types of application as akin to “acting as a kind of ‘digital twin’ to
anything existing in the real world and enabling the ownership and exchange of physical
possessions within digital marketplaces.”132
Could NFTs Be Securities?
The regulation of the NFT market is not yet clearly defined. Just like paintings and music that are
general y not securities, the NFTs that resemble the characteristics of conventional artwork are
less likely to be securities and subject to securities regulation. But the line is not so clear for more
complicated NFT transactions. If the NFTs could draw income streams such as royalty payments
or dividends, they also have potential to be deemed securities. At this point, however, the SEC
has not publicly acknowledged any NFTs as securities and subject to SEC regulation.
Fractionalized NFTs
Fractionalization al ows investors to purchase a portion of an expensive NFT or a fraction of a
large NFT collection.133 But fractionalized NFTs could be securities and thus subject to securities
regulation. SEC Commissioner Hester Peirce warned fractionalized NFT issuers at a summit,
stating that “the whole concept of an NFT is supposed to be non-fungible [meaning that] in
general, it’s less likely to be a security,” but if issuers decide to “sel fractional interests” in NFTs,
“you better be careful that you’re not creating something that’s an investment product, that is a
security.”134
In April 2021, an industry participant filed a petition with the SEC regarding recommending that
the commission initiate an NFT-related rulemaking.135 The petition recommends that the SEC
publish a concept release (i.e., notice of advanced rulemaking) on the regulation of NFTs and
propose rules to clarify when NFTs are securities. As of May 2021, the SEC has not issued any
guidance on NFTs.
Author Information
Eva Su
Analyst in Financial Economics
132 In addition to Etherum network, NFT s could be held on other blockchains, such as Matic, Flow, and Wax.
133 Proskauer, “ NFT s Are Interesting but Fractionalized Non-Fungible T okens (F-NFT s) May Present Even More
Challenging Legal Issues,”
JD Supra, April 23, 2021, at https://www.jdsupra.com/legalnews/nfts-are-interesting-but-
fractionalized-9904209.
134 Samuel Haig, “SEC’s ‘Crypto Mom’ Warns Selling Fractionalized NFT s Co uld Break the Law,”
CoinTelegraph,
March 26, 2021, at https://cointelegraph.com/news/sec-s-crypto-mom-warns-selling-fractionalized-nfts-could-break-
the-law; and Martin Young, “ Going to Pieces: Fractionalized NFT Projects Gather Steam,”
CoinTelegraph, March 18,
2021, at https://cointelegraph.com/news/going-to-pieces-fractionalized-nft-projects-gather-steam.
135 Sustainable Holdings,
Rulemaking Regarding Non-fungible Tokens, April 12, 2021, at https://www.sec.gov/rules/
petitions/2021/petn4-771.pdf; and National Law Review,
Rulem aking Petition Seeks SEC Guidance on NFTs, May 6,
2021, at https://www.natlawreview.com/article/rulemaking-petition-seeks-sec-guidance-nfts.
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Disclaimer
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under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
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