SEC Expands and Renames Cyber ​​Unit to “Crypto Assets and Cyber ​​Unit” | Winstead PC

[co-author: Gavin Fearey]

On May 3, the SEC announced that the Division of Enforcement’s Cyber ​​Unit is being renamed the “Crypto Assets and Cyber ​​Unit” and will be expanded from 20 positions to approximately 50 positions.[1] Regulating digital assets has been a key initiative of SEC Chairman Gary Gensler, who previously chaired the CFTC.

The press release highlights the explosion of crypto markets in recent years and states that the Crypto Assets and Cyber ​​Unit will be vital in protecting investors and effectively regulating financial markets. The expanded unit will focus on investigating securities violations related to:

  • Crypto Asset Offerings;
  • Crypto asset exchanges;
  • Crypto asset lending and staking products;
  • Decentralized financial platforms, commonly known as “DeFi” platforms;
  • Non-fungible tokens, commonly referred to as “NFTs”; and
  • Stable Coins

Although the unit has filed more than 80 lawsuits over fraudulent and unregistered digital asset deals, many of them were Ponzi schemes and other fraudulent deals. This does not mean that the newly reconstituted unit will not be aggressive; it surely will be.

There is considerable uncertainty and litigation as to whether some of these assets constitute “investment contracts” and are therefore securities under federal securities laws. The Cyber ​​Unit’s expansion and renaming to focus on the enforcement of cryptocurrencies and other digital assets could be criticized as “regulation by enforcement”. Indeed, in response to the SEC announcement, SEC Commissioner Peirce tweeted: “The SEC is a regulatory agency with an enforcement division, not an enforcement agency. Why are we leading with the application of crypto? »

SEC announcement comes as Congress plans to expand CFTC authority over crypto assets

In addition to federal securities laws, participants in the digital asset market must comply with commodity law, as well as federal and state laws. It is widely recognized that many digital assets fall under the very broad definition of “commodity” under the Commodity Exchanges Act. Under the CEA, as it currently stands, the CFTC’s authority over “cash” markets is largely limited to cases of fraud and manipulation, as opposed to futures and other “interest” markets. on Commodities” over which the CFTC has the power to impose registration requirements and actively regulate.

The timing of the SEC’s announcement of its expanded unit of application is remarkable. It comes shortly after House lawmakers reintroduced bipartisan legislation, the Digital Commodity Exchange Act of 2022, to allow and in some cases require “digital commodity exchanges” to be registered and regulated by the CFTC. .

In this bill, digital assets are defined as “fungible intangible personal property” that can be held and transferred in peer-to-peer transactions without an intermediary. The definition excludes crypto assets that represent ownership of a company, as well as certain other types of interests traditionally regulated by the SEC.

The bill would also bring many “stablecoins” — digital assets whose price is usually pegged to another currency, usually the US dollar — under the CFTC’s regulatory regime.

It will be interesting to see how the regulatory overlap in monitoring digital assets develops and is eventually resolved. In the meantime, the SEC is strengthening its practical ability to take enforcement action against platforms and other companies involved in digital assets, regardless of allegations of fraud or investor losses.

[1] https://www.sec.gov/news/press-release/2022-78 (SEC nearly doubles the size of the app’s crypto assets and cyber unit).