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Crypto Assets Plus Securities Laws Equal Big Trouble
Attorney Lewis Cohen, co-founder of DLx Law, takes a look at the problems presented by applying securities regulations to crypto assets. Now usually this critique is focused on the regulatory or technological challenges, or the differences between Wall Street TradFi and fundraising in the tech sector. Cohen, however, gives us a deep dive on the issue from a legal perspective, and that alone would be worth the read. But the bonus is: can anyone pass up an article that uses expressions like “Ineluctable Modality?” We don’t think so.
We frequently hear from regulators that they view most crypto assets as securities and, as such, those crypto assets need to be registered with the U.S. Securities and Exchange Commission if they are to be offered to the general public or held by more than 500 “retail” investors. This latter test, in particular, would likely ensnare most large-cap crypto assets available today on Coinbase and other leading marketplaces, even if the assets were not originally offered to the public.
So what are we to make of this? Is the fact that almost no crypto assets are registered simply the result of intransigence and a desire to evade the law? Or is there more to the story?
We recently wrote a lengthy paper on this topic entitled “The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are Not Securities” for which we reviewed the entire body of appellate case law on the subject of “investment contracts” (a unique type of security defined not by Congress but in a famous Supreme Court case known as SEC v. W.J. Howey and Co.). When crypto assets are categorized as “securities” it is to this definition that regulators and courts generally look.
As we explain in "Ineluctable Modality," the SEC and state regulators have won almost all cases they have brought involving fundraising transactions in which crypto assets are sold to raise money for the development of a blockchain project. However, there have been no significant court cases yet in which the status of a crypto asset independent of a fundraising transaction has been presented to a court.
Most crypto assets do not create a legal relationship between an identifiable “issuer” and the owner of the asset. We would argue crypto assets are not themselves “securities” under current law. (We also argue that characterizing crypto assets as “temporary” securities until extrinsic factors like “sufficient decentralization” cause them to “morph” into non-securities is not supported by current law and would be bad policy if adopted by courts.)