eToro Reaches Settlement with the SEC; New UK Crypto Bill; BRIDGE Digital Assets Act; HFSC Hearing
eToro Reaches Settlement with the SEC
What happened?
On September 12th, eToro agreed to pay the Securities and Exchange Commission (SEC) $1.5 million to settle the charges for operating as an unregistered broker and as an unregistered clearing agency. These charges are in connection with eToro allegedly facilitating the selling and buying of cryptocurrencies as securities. In its settlement with the SEC, eToro has agreed to sell only bitcoin, bitcoin cash, and ether on its platform.
In the wake of the settlement, Yoni Assia, eToro’s Co-founder and CEO, stated that the settlement “allows us to move forward and focus on providing innovative and relevant products across our diversified US business. US users can continue to trade and invest in stocks, ETFs, options and the three of the largest cryptoassets.” Assia assured their customers that the settlement will have a minimal impact on the company and that the platform will continue to offer over 100 crypto assets to customers that are outside the US.
What does this mean?
The SEC’s rampant regulation by enforcement strategy continues to leave market participants in a tough bind. eToro’s decision to settle is just another example of a trading platform opting to settle the lawsuit and focusing its attention on non-US markets. Moving the industry offshores has been a noticeable trend in the US given the regulatory uncertainty, and should the SEC continue, the trend will accelerate.
New UK Crypto Bill Introduced in Parliament
What happened?
On September 11th, the UK government proposed the Property (Digital Assets etc) Bill into the House of Lords, which would classify certain digital assets as personal property. Most prominent among these assets includes cryptocurrency, non-fungible tokens (NFTs), and carbon credits. This bill places the UK among the few jurisdictions that have classified digital assets as legal property.
Under current UK regulations, a thing can only legally be considered personal property if it is (a) a thing in possession, or (b) a thing in action. The Bill disrupts these classifications, specifically mentioning that, when classifying personal property, a “thing” can include “a thing that is digital or electronic in nature.” In a response to the proposal of the Bill, the UK government also accepted the recommendation to establish a group of legal and technical experts to navigate the complexities of digital assets, ensuring the courts are properly informed.
In a written statement supporting the Bill, the Ministry of Justice stated that, “[p]roviding certainty over legal issues around digital assets will encourage the use of English and Welsh law in internationally mobile transactions.”
What does this mean?
The introduction of the Bill marks an inflection point in the regulation of digital assets in the UK. According to a set of explanatory notes released alongside the Bill, if the Bill goes into effect, it will have implications for bankruptcy and insolvency proceedings, situations in which “property rights are interfered with or unlawfully taken,” “the legal rules concerning succession on death,” “custody relationships, collateral arrangements and structures involving trusts,” and more.
DEF commends the approach that the UK government is taking towards new proposals for classifying digital assets, and the sweeping legal clarity that such regulations would provide.
Rep. John Rose Proposes BRIDGE Digital Assets Act
What happened?
Last week, Representative John Rose (R-TN), a member of the House Financial Services Committee (HFSC), proposed the Bridging Regulation and Innovation for Digital Global and Electronic Digital Assets Act or “BRIDGE” Act. The bill would establish a Joint Advisory Committee (“JAC”) on digital assets between the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC). The JAC would consist of “at least 20 nongovernmental stakeholders who represent a broad spectrum of interests” in the digital assets space and would be selected by both commissions.
Specifically, the JAC would provide the SEC and CFTC with “advice on rules, regulations, and policies of the Commission related to digital assets; further the regulatory harmonization of digital asset policy between the Commissions; and examine and disseminate methods for describing, measuring, and quantifying digital asset decentralization, functionality, information asymmetries, and transaction and network security.”
Finally, the JAC would “examine the potential for digital assets, blockchain systems, and distributed ledger technology to improve efficiency in the operation of financial market infrastructure and better protect financial market participants, including services and systems which provide (i) improved customer protections; (ii) public availability of information; (iii) greater transparency regarding customer funds; (iv) reduced transaction cost; and (v) increased access to financial market services.” Subsequently, each of the Commissions must review the findings and recommendations of the JAC, issue a public statement, and to disclose the action or decision not to take action in response to a finding or recommendation.
What does this mean?
The bill establishes an environment for both Commissions to better understand the digital asset landscape and pivot away from their current unproductive approach.
HFSC Holds Hearing on SEC’s Approach to Digital Assets
What happened?
Last week, the House Financial Services Subcommittee on Digital Assets, Financial Technology, and Inclusion held a hearing entitled “Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets.” Witnesses included Quinn Emanuel LLP Co-Chair of the SEC Enforcement Defense Practice and Co-Chair of the Blockchain and Digital Asset Practice Michael Luftik, Robinhood Markets Chief Legal Officer and former SEC Commissioner Daniel M. Gallagher, Bitwise Asset Management President Teddy Fusaro, Cato Institute Director of Financial Regulation Studies Jennifer Schulp, and Duke University Lecturing Fellow Lee Reiners. The hearing covered the SEC’s rulemaking by enforcement strategy based on costly litigation and inconsistent application of existing securities laws.
Subcommittee Chairman French Hill (R-AR) opened the hearing by stating that the SEC “has a statutory mandate to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation” but instead “has pursued enforcement cases against companies for activities that were not clearly defined as securities violations, leaving investors and businesses in a heightened state of uncertainty” and “proposed rulemakings and guidance have often been overly broad and difficult and frequently impossible to implement.”
Discussion in the hearing primarily related to SEC’s plethora of crypto-related enforcement actions, primarily for the unregistered offering, sale, and exchange of securities. There was discussion on adoption and product market fit for crypto, especially pertaining to the use of exchange-traded products (ETPs) and the risks associated with crypto markets increasingly being connected to TradFi. Representatives Bill Foster (D-IL), Sean Casten (D-IL), and Brad Sherman (D-CA) also pressed witnesses on issues related to illicit finance and securities fraud, applauding the SEC for their enforcement actions. Committee Republicans questioned witnesses on the SEC’s dishonest Enforcement Division litigation strategy and employee turnover. Witnesses pushed for rulemaking and regulatory clarity, noting that many industry participants do not understand their obligations under the law. There was an emphasis on custodial crypto companies in regard to SEC’s Staff Accounting Bulletin 121, the FTX failure, Special Purpose Broker licensing, and the provision of ETPs.
In exchanges with Representatives Ritchie Torres (D-NY) and Bryan Steil (R-WI), witnesses discussed the particular ambiguities in determining whether a blockchain-based digital asset is a security, underscoring a central issue to SEC crypto enforcement actions. Witnesses noted that the SEC has no statutory, regulatory, or precedential backing to the term “digital asset security.” Representative Torres followed up by emphasizing the distinct nature of genuinely decentralized assets “In the Howey case, the Supreme Court emphasizes that the SEC must zero in on the ‘economic reality of a transaction.’ Since there is no entity that centrally controls Ether in the same manner that Apple controls an Apple stock, would it be fair to say that the economic reality of purchasing a decentralized digital asset like Ether is qualitatively different from the economic reality of purchasing a security like an Apple stock?”
What does this mean?
This hearing underscored the SEC’s contemptuous and deceitful approach to digital assets. Witnesses had the opportunity to explain their litigious interactions with the SEC, including Robinhood, who was recently served a Wells Notice from the SEC after attempting to register in good faith. The Committee has noticed a hearing to be held tomorrow, conducting oversight over all five SEC Commissioners for the first time since 2019. The coming oversight hearing will be a great opportunity for Members to ask the Commissioners questions about SEC’s approach to crypto.
