Expansion of SEC’s Crypto Assets and Cyber Unit portends more active enforcement | Eversheds Sutherland (US) LLP


On May 3, 2022, the U.S. Securities and Exchange Commission (SEC) announced the expansion of its new Crypto Asset and Cybernetics Unit (formerly known as the Cybernetic Unit), housed in its Application Division.1 The Unit, which is responsible for protecting investors in digital assets and controlling cyber threats in the marketplace, will add 20 posts, almost doubling its size from 30 to 50 dedicated staff members. According to the announcement, the Unit has filed more than 80 enforcement actions that include fraudulent and unregistered cryptocurrency offerings and platforms, resulting in more than $ 2 billion in monetary relief.

The announcement also states that the Unit, which has already filed lawsuits against SEC and public companies for failing to maintain proper cybersecurity controls and failing to properly disclose cyber-related risks and incidents, will continue to protect investors from cyber threats. . The Unit’s commitment to “address ubiquitous cyber threats to the country’s markets” echoes its predecessor’s November 2021 Cyber ​​Security warning on greater application of cybersecurity “to ensure clear disclosures of cyber risk and sound internal controls.”2

The Unit will specifically address securities law violations involving cryptocurrency offerings, cryptocurrency asset exchanges and decentralized financing (DeFi) platforms, loan asset and cryptocurrency participation products, non-fungible tokens (NFTs) and stable currencies.

Offers of cryptographic assets: The Unit’s stated focus on cryptocurrency offerings is not surprising given the Commissioners ’public statements and the SEC’s continued application in this space. In his April 2022 statement to the Penn Law Capital Markets Association Annual Conference, SEC President Gary Gensler was direct: “Without prejudging any token, most cryptocurrencies are investment contracts under the Howey test.”3 He also recently stated that there is now “a crypto market where many tokens can be unregistered securities, without the required disclosures or market supervision.”4 The Enforcement Division has also filed a number of recent cases related to cryptocurrency offerings.5 The SEC seeks to further consolidate its ability to regulate cryptocurrencies in the long-awaited case, SEC vs. Ripple, in which the SEC alleges that Ripple Labs and two executives sold $ 1.3 billion in cryptocurrency tokens in an unregistered securities offering. The outcome of that case could have far-reaching implications for the SEC’s future application of possible securities breaches involving cryptographic assets.

Loan products and participation in cryptographic assets: The SEC has also already taken notable enforcement measures related to loan products and cryptographic asset share. In February 2022, the SEC filed a lawsuit and, along with state securities regulators, imposed $ 100 million in civil penalties against BlockFi Lending, a major cryptocurrency exchange, finding that its cryptocurrency loan product, which was offered and sold to American investors, it was a guarantee that requires registration.6 Last year, Coinbase suspended a similar cryptocurrency product after the SEC allegedly informed Coinbase that it would file enforcement action if it continued.7 The Unit’s focus on cryptocurrency lending and shareholding products is predictable given these recent developments.

Cryptocurrency and DeFi exchanges: Although to date there has been more limited SEC enforcement activity against cryptocurrency exchanges and DeFi platforms8, many expected an increase in this area. The SEC recently proposed a rule that could extend what constitutes an “exchange” as defined in Rule 3b-16 (a) and facilitate the subjecting of cryptocurrency exchanges and DeFi platforms to SEC regulation.9 In addition, SEC Commissioner Caroline Crenshaw noted potential compliance issues related to unregistered centralized bitcoin exchanges.10 In April 2022, President Gensler opined that “cryptocurrency trading and lending platforms, whether called centralized or decentralized (DeFi)” are likely to be negotiating securities: “many of the tokens traded on these platforms may meet the definition of Although the legal status of each listing depends on its own facts and circumstances, given the Commission’s experience with multiple tokens that are securities and with so many token exchanges, the probability is quite remote that any platform has zero titles. .11 President Gensler further stated that he had asked SEC staff to work to “register and regulate platforms in a manner similar to exchanges.”12 Finally, it was reported that the SEC has already opened an investigation into one of the largest DeFi platforms.13

NFTs: Although the SEC has already filed cases related to the categories listed above, it has not yet entered NFT through guidance or application. Recently, it was reported that the SEC was investigating how NFT companies are using, and in particular, fractional NFTs.14 The inclusion of NFTs as the focus of the expanded Unit indicates that the SEC is exploring the applicability of securities laws to NFTs and predictably the application of securities infringements involving NFTs.

Stablecoins: Stable currencies are a type of cryptocurrency that are supposed to offer more stability than other cryptocurrencies because they are backed by fiat currencies. For that reason, they were generally considered outside the jurisdiction of the SEC. But President Gensler previously commented that the SEC will regulate any stablecoin that is considered a security, especially because there may be investor protection issues and possible illicit activities associated with stablecoins.15 Given these recently expressed concerns, it is not surprising that the Unit focuses on violations of values ​​involving stable currencies.

Immediately following the announcement of the expansion of the Unit, SEC Commissioner Hester Peirce, often known as Crypto Mom due to her generally pro-cryptocurrency stance, reiterated her concern that the SEC is participating in regulation by implementing: “The SEC is a regulatory agency with an enforcement division, not an enforcement agency. Why do we lead the application of cryptography?16 It’s not the first time he’s expressed this frustration. In January 2021, he commented: “Implementing actions can indeed provide clarity, but it’s not the right way to do it from my perspective … We want to provide people with clear guidelines ahead of time and then find out how they can do something so that it is legal ”.17

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Since taking over the SEC last year, President Gensler has repeatedly expressed his view that the SEC has jurisdiction over almost every aspect of the cryptocurrency market. Prior to this announcement, this has been verified in various enforcement actions and regulatory proposals. But this dramatic increase in resources for the Enforcement Division shows that the SEC is on the move when it comes to asserting its authority over cryptography. The Enlarged Unit will enhance its ability to conduct more in-depth and extensive research in the cryptographic space, for example, possibly by examining whether a token traded on a DeFi platform is a security. Cryptographic industry players should be prepared to increase research and enforcement activities.

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1SEC nearly doubles the size of Enforcement’s cryptographic assets and cyber unit, SEC publication No. 2022-78 (May 3, 2022).

2Arsen Ablaev, Senior SEC Attorney, 2021 Securities Enforcement Forum (November 4, 2021).

3President Gary Gensler, Comment before the Penn Law Capital Markets Association Annual Conference (April 4, 2022) https://www.sec.gov/news/speech/gensler-remarks-crypto-markets-040422.

4President Gary Gensler, Commentary to the Aspen Security Forum (August 3, 2021) https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03.

5See, pThe SEC charges the brothers with a $ 124 million cryptocurrency fraud operation that included misleading roadshows, YouTube videos and release no. SEC 2022-37 (March 8, 2022) (SEC has filed enforcement measures related to unregistered fraudulent offers of securities including a digital token called “Ormeus Coin” and misrepresentations about the success of currency mining operations); See alsoSEC accuses developer of investing in cryptocurrency investments, SEC Publication No. 2021-237 (November 18, 2021) (where the defendant allegedly raised approximately $ 3.6 million in Bitcoin, and then converted it to his own benefit).

6BlockFi Lending LLC, AP file number 3-20758 (February 14, 2022). Ver The SEC’s latest shot at the crypto industry: BlockFi has sanctioned its unregistered crypto loan product for more information.

7Paul Grewal, Coinbase’s legal director, “The SEC has told us it wants to sue Lend. We don’t know why.” Coinbase Blog (September 7, 2021) https://blog.coinbase.com/the-sec-has-told-us-it-wants-to-sue-us-over-lend-we-have-no – idea-por-que-a3a1b6507009? gi = 78d62ad199b5.

8The SEC charges the lender with decentralized financing and top executives for raising $ 30 million through fraudulent bidding, SEC publication no. 2021-145 (August 6, 2021) (Charge lenders for fraud by misleading investors about the operations and profitability of their DeFi Money Market business).

9 Amendments to Rule 3b-16 of the Foreign Exchange Act on the definition of “foreign exchange”; ATS Regulation for ATS trading with U.S. government securities, NMS shares, and other securities; SCI Regulations for ATS Trading with U.S. Treasury Securities and Agency Securities, 17 CFR Parts 232, 240, 242, 249, Release No. 34-94062; File at S7-02-22, https://us.eversheds-sutherland.com/portalresource/34-94062.pdf. Ver The SEC is issuing a proposed rule that could reach cryptocurrency exchanges for more information.

10Commissioner Caroline A. Crenshaw, Digital Asset Securities: Common Goals and a Bridge to Better Outcomes, Comments on SEC Speaks, (October 12, 2021) https://www.sec.gov/news/speech/crenshaw-sec-speaks -20211012.

11President Gary Gensler, Comment before the Penn Law Capital Markets Association Annual Conference (April 4, 2022) https://www.sec.gov/news/speech/gensler-remarks-crypto-markets-040422.

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13Dave Michaels, Paul Kiernan. Crypto’s “DeFi” projects are not immune to regulation, says SEC Gensler. Wall Street Journal (August 19, 2021).

14Matt Robinson, “SEC Scrutinizes NFT Market Over Illegal Crypto Token Offerings,” Bloomberg (March 2, 2022).

15President Gary Gensler, Comment before the Penn Law Capital Markets Association Annual Conference (April 4, 2022) https://www.sec.gov/news/speech/gensler-remarks-crypto-markets-040422; President Gary Gensler, Commentary to the Aspen Security Forum (August 3, 2021) https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03.

16Hester Peirce, @HesterPeirce, tweet (May 3, 2022).

17Interview with Commissioner Hester Peirce on Forkast (January 2021) https://forkast.news/video-audio/crypto-mom-hester-peirce-sec-ripple-xrp-defi/.

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