Bilzin Sumberg Baena Price & Axelrod LLP
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A steep decline in value isn’t the only recent source of significant concern for cryptocurrency companies. In remarks made at the annual meeting of the Financial Industry Regulatory Authority (FINRA) earlier this month, the Chairman of the United States Securities and Exchange Commission (SEC) confirmed that the SEC, in conjunction with d other federal agencies, intended to tighten its regulation of the crypto industry. SEC Chairman Gary Gensler said “much remains to be done” in the categories of cryptocurrency oversight and regulation.
Gensler revealed that securities regulators are in talks with the US Commodity Futures Trading Commission (CFTC) which are focused on distinguishing between crypto tokens that look like commodities and those that should be classified as securities. movables. The goal, he added, is to fill a void, given that crypto platforms currently lack many guarantees from registered exchanges. From the SEC Chairman’s point of view, “the investing public is not so well protected. We will continue to be a cop on the spot. We will continue to use our limited resources as best we can to protect investors public.”
He also expressed concern that investors are likely unaware that they are transferring ownership of their tokens to a given platform when making trades. “If the platform goes down, guess what? You just have a quid pro quo relationship with the platform. Queue in bankruptcy court.”
Gensler’s fears appear to be confirmed by some claims made by both sides in an ongoing lawsuit alleging that a crypto platform sells unregistered securities. A proposed class action lawsuit filed in March against Coinbase Inc., its CEO, and one of its affiliates filed claims that nearly 80 digital assets available on Coinbase platforms are securities, and therefore subject to laws and regulations on securities. The plaintiffs, who are users of the platforms, want to be reimbursed for their token purchases, transaction fees and trading losses. In a motion this month to dismiss those claims, Coinbase argued that it does not sell unregistered securities because it does not sell tokens to its users. Coinbase claims that it does not solicit purchases of cryptocurrency, but simply functions as an intermediary through which users can transact with each other. The motion to dismiss is currently pending in federal court in New York.
As issuers/platforms and investors await anticipated actions from the SEC, CFTC, and possibly other agencies, and follow the results of several ongoing lawsuits against crypto companies, they can take prudent action . Issuers should consult with securities attorneys before issuing tokens to comply with applicable securities laws. “Intermediary” companies should consult with attorneys to ensure compliance with any potentially applicable securities laws. Finally, investors in tokens and holders of tokens, which may or may not ultimately qualify as securities, should evaluate (and consult with their attorneys about) the risks and rewards of investing in or owning these tokens.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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