The landscape of cryptocurrency regulation is evolving rapidly following a recent failed cloture vote in the Senate on the proposed CLARITY act. In its aftermath, both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have taken steps to establish new rules governing digital asset markets.
Two days subsequent to the Senate vote, the SEC announced a five-year exemption that facilitates the issuance and trading of stock tokens. This initiative has led to OXK partnering with the Intercontinental Exchange (ICE) to commence trading in 63 stocks listed on the NYSE, while Securitize has initiated trading in 12 stocks, including well-known companies such as Apple, Nvidia, and Microsoft.
In conjunction, the SEC has clarified that a cryptocurrency token does not automatically qualify as a security simply because a project is repurchasing its tokens. Notably, the SEC has also classified liquid staking tokens as non-securities and has proposed new regulations regarding the custody of crypto assets.
On the CFTC side, the agency has proposed an exemption for certain crypto software providers from existing registration requirements. This aligns with their plans to introduce a new registration category designated specifically for “crypto asset markets” and to authorize registered exchanges to offer leveraged trading options.
Despite these developments, concerns within the industry persist regarding the stability and longevity of these new rules. TD Cowen has pointed out that agency regulations can be easily rescinded, as evidenced by the previous administration’s rollback of regulations established during the tenure of SEC Chair Gary Gensler.
Furthermore, a Supreme Court decision in 2024 intensified worries about the durability of agency rules, making them more susceptible to judicial overturns. This judicial vulnerability was highlighted by a lawsuit from a community bank group against the Office of the Comptroller of the Currency regarding its actions that allowed crypto firms to procure national trust bank charters under questionable authority.
To delve into the complexities of these legal dynamics, we spoke with Yuriy Brisov from D&A Partners. The following is an edited excerpt from our conversation.
Magazine: Following the failure of the CLARITY vote, SEC Chair Paul Atkins indicated that the agency would be rolling out rules due to Congressional inaction. Should agencies like the SEC be in the position of creating new regulations, or are they meant to simply interpret existing laws?
Brisov: Agencies like the SEC are indeed empowered to create regulations. This authority is granted under the Exchange Act of 1934, established in response to the significant market disruptions of the late 1920s. The SEC’s role includes not only interpreting laws but also crafting rules to ensure that new technologies, such as blockchain tokens, can be appropriately regulated. Historically, the Commission has adapted to technological advancements, remaining within the framework of its powers.
Magazine: Can a new SEC interpret regulations in a manner that contradicts the approach taken by its predecessors?
Brisov: That is possible, but any such interpretation must be grounded in a rational basis. The challenges faced under Gary Gensler’s leadership began with applying existing regulations to token-based assets, leading to confusion that prompted many firms to exit the U.S. market. This presents an opportunity for a new Commission to reassess these rules and propose alternatives if the previous approach proves ineffective. Regulatory changes must still adhere to economic principles and allow for challenges in court if deemed overly burdensome.
Magazine: Can you explain the significance of the Chevron decision by the Supreme Court and its overturning this year? How does this affect agency rule-making by organizations like the SEC and CFTC?
Brisov: The Chevron case, established in 1984, typically granted agencies leeway in interpreting vague laws. However, with the Loper Bright decision in June 2024, that practice has shifted, emphasizing that courts should exercise their independent judgment rather than defer to agency interpretations. While the SEC has established expertise in securities law, this new precedent means courts may reach different conclusions regarding agency regulations.
Magazine: Hence, the likelihood of SEC rules being overturned in court has increased?
Brisov: Yes, courts now have greater capacity to challenge SEC rulings. Nevertheless, parties disputing a regulation must prove that a lack of adequate research or burdensomeness justifies a challenge. Historically, businesses have successfully contested regulations deemed excessive or poorly founded.
Looking ahead, SEC Chair Paul Atkins and the current Commission appear to undertake thorough consultations with various stakeholders, including crypto firms and venture capitalists, prior to implementing new regulations.
Magazine: Imagining a scenario where the SEC and CFTC’s rules remain stable for the next couple of years, allowing businesses to invest significantly in new infrastructures surrounding tokenized stocks, would a future SEC be able to cancel these rules unilaterally?
Brisov: A future Commission would need to consider the established businesses before enacting any significant change. Regulations that foster economic growth and market stability would likely not be overturned without sound reasoning. Any proposed change must be substantiated with comprehensive analysis and an understanding of its economic implications.
Magazine: The SEC has seemingly been preparing for an innovation exemption for an extended period. Recently, they published an FAQ clarifying that repurchasing its own tokens does not automatically reclassify a cryptocurrency token as a security. Should companies feel confident proceeding with a token buyback based on this FAQ?
Brisov: While the FAQ provides helpful guidance and comes from knowledgeable sources, it should be noted that it does not hold the weight of formal regulation. An FAQ serves more as an instructive aid rather than a binding legal standard.
Magazine: So the FAQ does not imply a change in the rules but rather clarifies existing regulations?
Brisov: Precisely. It functions as a supplementary explanation, similar to a university casebook. Such documents can be frequently revised to adapt to ongoing developments within the industry.
Magazine: It was noted that the SEC revised the FAQ a week later due to feedback indicating a significant loophole pointed out by legal advisors from a16z.
Brisov: Exactly, and this process reflects the fluid nature of these guidelines. While they provide insight, they are not static regulations and may be subject to rapid alteration.
