In recent years, the Securities and Exchange Commission (SEC) has taken a focused approach to crypto-assets trading, especially in the secondary market. While this is not a new initiative, the SEC has not undertaken a comprehensive rulebook overhaul to accommodate digital assets that are securities under US federal securities law. However, SEC has stepped up enforcement actions to address the risks of crypto-assets. As a result, the market is still confused about whether most digital assets are securities, and many would-be entrants are on the sidelines until such time as the classification of a digital asset becomes clear.

Earlier this year, SEC Chairman Gene Sperling urged crypto-lending platforms to register with the SEC under the supervision of the Commission. This invitation sounds like a spider beckoning a fly, but it is only a step in a larger effort to ensure that digital assets are regulated in a manner that reflects the realities of the marketplace.

There are several other steps the secondary digital asset exchange can take to increase regulatory certainty for the secondary crypto-assets trading market. For example, the Commission has proposed a non-exclusive list of 50-60 characteristics that it suggests market participants consider when transacting in a digital asset. These characteristics are intended to foster reproducible results and enhance price accuracy. However, they are not exhaustive, and a number of factors may be involved in determining which characteristics are most significant in determining a security.

In addition, the SEC has also proposed a framework to examine the application of Howey in the context of digital assets. The Commission has interpreted the test in ways that include capital appreciation and other aspects of a transaction. It has brought more than 100 enforcement actions related to digital assets.

While the SEC has focused on addressing the risks of crypto-assets in the secondary market, other regulatory authorities such as the Commodity Futures Trading Commission (CFTC) have also begun to review applications for crypto-ETFs. With the first bitcoin futures ETF approved by the CFTC in October of 2021, a formal regulatory framework may soon be on the horizon.

Before a formal regulatory framework can be put in place, the SEC needs to determine when digital assets are securities under US federal securities law. As a result, Congress has introduced numerous bills aimed at regulating digital assets. Some of these bills are focused on strengthening the role of the CFTC, while others seek to establish consumer protection standards for cryptocurrencies. Ultimately, congressional lawmakers must specify when a digital asset is subject to regulation by the SEC or another agency.

Nevertheless, the legislative branch is writing laws for digital assets, and there is cross-aisle support for such laws. For example, senators Debbie Stabenow and John Boozman recently announced the Digital Commodities Consumer Protection Act of 2022. Meanwhile, Senators Cynthia Lummis and Kirsten Gillibrand have teamed up to introduce the Lummis-Gillibrand Responsible Financial Innovation Act. This bill is designed to clarify the definition of a digital asset, and it excludes crypto tokens that give holders a profit share.