LegiStorm

Summary:

In recent years, financial innovation in capital markets has fostered a new asset class—digital assets—and introduced new forms of fundraising and trading. Digital assets, which include crypto-assets, cryptocurrencies, or digital tokens, among others, are digital representations of value made possible by cryptography and distributed ledger technology. Regardless of the terms used to describe these assets, depending on their characteristics, some digital assets are subject to securities laws and regulations. Securities regulation generally applies to all securities, whether they are digital or traditional. The Securities and Exchange Commission (SEC) is the primary regulator overseeing securities offerings, sales, and investment activities. The SEC's mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The existing securities regulatory regime generally aligns with this mission, and the SEC's digital asset regulation generally follows the same regime. The SEC has used existing authorities to evaluate new product approval, provide individual regulatory relief, and solicit public input for policy solutions more tailored to digital assets. Digital assets have a growing presence in the financial services industry. Their increasing use in capital markets raises policy questions regarding whether changes to existing laws and regulations are warranted and, if so, when such changes should happen, what form they should take, and which agencies should take the lead. The current innovative environment is not the regulatory regime's first encounter with changing technology since its inception in the 1930s. Some technological advancements led to regulatory changes, whereas others were dealt with through the existing regime. The general consensus is that regulatory oversight should be balanced with the need to foster financial innovation, but securities regulation's basic objectives should apply. In addition, some believe that certain digital asset activities that may appear similar to traditional activities nonetheless require adjusted regulatory approaches to account for particular operating models that may amplify risks differently. In general, policymakers contending with major financial innovations have historically focused on addressing risk concerns while tailoring a regulatory framework that was flexible enough to accommodate evolving technology. Current developments that raise policy issues include the following: Initial coin offerings (ICOs). ICOs as a digital asset fundraising method can be offered in many forms using existing public and private securities offerings channels. Although ICOs may be useful fundraising tools, they raise regulatory oversight and investor protection concerns. Digital asset "exchanges." Some industry observers perceive digital asset trading platforms as functional equivalents to the SEC-regulated securities exchanges in buying and selling digital assets. But these platforms are not subject to the same level of regulation, suggesting that they may be less transparent and more susceptible to manipulation and fraud. Digital asset custody. Custodians provide safekeeping of financial assets and are important building blocks for the financial services industry. Digital assets present custody-related compliance challenges because custodians face difficulties in recording ownership, recovering lost assets, and providing audits, among other considerations. The SEC is aware of the challenges and is engaging stakeholders to discuss potential issues and solutions. Digital asset exchange-traded funds (ETFs). ETFs are pooled investment vehicles that gather and invest money from a variety of investors. ETF shares can trade on securities exchanges like a stock. Currently, digital assets themselves are generally not sold on SEC-regulated national exchanges. However, if portfolios of digital assets were made available as ETFs, they may be sold on national exchanges. The SEC has not yet approved any digital asset ETFs because of market manipulation and fraud concerns. Stablecoins in securities markets. Stablecoins are a type of digital asset designed to maintain a stable value by linking its value to another asset or a basket of assets. Issues concerning stablecoins include market integrity, investor protection, payments, financial stability, and illicit activity prevention. Three legislative proposals relating to securities regulation were discussed at a House Committee on Financial Services hearing: the first proposal (H.R. 5197) would subject stablecoins to securities regulation; the second draft proposal would limit public company executives' access to stablecoins; and the third proposal (H.R. 4813) would prevent "Big Tech" firms from offering financial services or issuing digital assets.