{"id":2746,"date":"2019-10-16T20:36:31","date_gmt":"2019-10-16T20:36:31","guid":{"rendered":"https:\/\/live-journal-of-law-and-public-policy.pantheonsite.io\/?p=2746"},"modified":"2019-10-16T20:36:31","modified_gmt":"2019-10-16T20:36:31","slug":"the-sec-cryptocurrencies-and-facebooks-libra-the-secs-approach-to-cryptocurrency-markets-and-how-the-tech-giants-involvement-could-change-the-secs-regulatory-ove","status":"publish","type":"post","link":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/2019\/10\/16\/the-sec-cryptocurrencies-and-facebooks-libra-the-secs-approach-to-cryptocurrency-markets-and-how-the-tech-giants-involvement-could-change-the-secs-regulatory-ove\/","title":{"rendered":"The SEC, Cryptocurrencies, and Facebook\u2019s Libra: The SEC\u2019s Approach to Cryptocurrency Markets and How the Tech Giant\u2019s Involvement Could Change the SEC\u2019s Regulatory Oversight of Cryptocurrencies"},"content":{"rendered":"(Source)<\/em><\/a>\n\nThe SEC\u2019s position on whether cryptocurrencies should be \u2014 or can be \u2014 classified as securities is far from clear, making it difficult for the public to understand how the cryptocurrency and token industry will be regulated by the federal government. In March 2019, Coincenter<\/em><\/a> \u2014 a blockchain legislative advocacy group \u2014 published correspondence<\/em><\/a> explaining that the SEC\u2019s staff analysis confirmed that Ethereum and similar cryptocurrencies (including Bitcoin) are not subject to securities laws. Previously, in June 2018, SEC Chairman Jay Clayton stated in a CNBC interview<\/em><\/a> that Bitcoin was not a security. These statements have created a precedent and have led to confusion as the SEC now tries to re-adjust the parameters regarding classifying cryptocurrencies given the surge<\/em><\/a> of initial coin offerings<\/em><\/a> (ICOs) and token launches over the past few years.\n\nThe Securities Act of 1933 and the Securities Exchange Act of 1934 state that transactions qualifying as \u201cinvestment contracts\u201d<\/em><\/a> are deemed securities and thus are subjected to SEC oversight regarding disclosure and registration requirements. Traditionally, the SEC has relied on the Howey<\/em> test<\/a> for determining the classification of a security. The Howey<\/em> test, which arose following the 1946 Supreme Court case SEC v. W.J. Howey Co.<\/em><\/a>, offers guidance on how to determine if a transaction qualifies as an investment contract. According to the Supreme Court\u2019s decision, a transaction constitutes an investment contract if \u201ca person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.\u201d Even though these Acts and the Howey<\/em> test pre-date substantial technological innovations (including blockchain and the creation of cryptocurrencies), they are still the basis of the SEC\u2019s approach to determining the qualification of transactions.\n\nWith the rapid growth of the cryptocurrency and tokens markets, however, the SEC has been forced to develop more substantial guidance regarding the SEC\u2019s regulatory role in the industry. Earlier in 2019, the SEC released new regulatory guidance<\/em><\/a> to help token issuers better determine whether their respective cryptocurrencies would be classified as security offerings. The new framework lists factors \u2014 such as an expectation of profit and whether a group is creating or supporting a market for a digital asset \u2014 that token and cryptocurrency issuers need to consider in determining whether their offerings qualify as securities. The framework also provides guidance regarding cryptocurrencies and tokens previously sold, discussing whether they should have been registered as securities and if \u201ca digital asset previously sold as a security should be reevaluated.\u201d<\/em><\/a> Furthermore, the guidance provides criteria for reevaluation. While this new framework provides some much-needed clarity for the cryptocurrency and token industry, the SEC is still far from a clear-cut regulatory framework for the industry, particularly since the framework functions as a guideline and is not a legally binding document. Thus, the Securities Act of 1933, the Securities Exchange Act of 1934, and the Howey<\/em> test are still the legally backed rules when it comes to determining the classification of transactions as investment contracts and securities.\n\nFacebook\u2019s proposed digital currency, Libra \u2014 announced in June 2019 \u2014 reinvigorated debate about and highlighted substantial concern regarding regulatory oversight of the cryptocurrency<\/em><\/a> and token industry. With the European Union\u2019s plans to craft regulations to combat concerns that (1) Libra would undermine the euro and (2) would be used as a tool by money-launderers, potential regulatory \u201croadblocks\u201d<\/em><\/a> are already beginning to appear.\n\nUnlike its European counterpart, the United States has not been as quick in establishing its level of regulatory oversight. Currently, the SEC is trying to determine how to classify Libra \u2014 a decision that will determine if (or how much) Libra is subject to SEC oversight. Some have compared Libra to an exchange traded fund<\/em><\/a> (ETF), which requires SEC approval before trading is permitted. Even if Libra is not classified as an ETF, however, Facebook still faces obstacles to Libra\u2019s official launch, stemming from congressional concerns about the digital asset\u2019s impact on the United States as well as from the SEC\u2019s changing guidelines regarding its regulatory reach over the cryptocurrency industry.\n\nIn July 2019, Congress asked Facebook to halt its development of Libra<\/em><\/a> until the government could create a proper legal framework for the new digital asset. Facebook\u2019s response indicated that Libra would not launch until regulators were comfortable with the currency\u2019s structure and framework. The company\u2019s response, however, came up short of a commitment to halt the currency\u2019s development. Two months after Congress\u2019 request, the House Financial Services Committee (HFSC) shared its concern of Facebook\u2019s plans for Libra and Calibra (its digital wallet) in a hearing with SEC officials. During the hearing, Chairwoman Maxine Waters<\/em><\/a> expressed her fears about Libra, stating that it \u201cappears that Facebook is working to create a global financial system that is intended to rival the U.S. dollar\u2026 I hope to hear what steps the SEC has taken is doing to ensure that Libra is appropriately and rigorously regulated.\u201d\n\nThe HFSC hearing provided an opportunity for committee members to ask the SEC for greater clarity regarding regulatory oversight of cryptocurrencies and other digital assets. Additionally, members leveraged the Committee Memorandum<\/em><\/a> to voice their opinions that Libra could be deemed a security based off of the platform\u2019s proposed structure. In response to the committee members\u2019 inquiries and concerns, SEC Chairman Jay Clayton welcomed the members\u2019 insight and opinions and attempted to assuage some concerns by noting that the SEC currently has a group focused on weighing the benefits and risks to digital assets. Throughout the hearing, Chairman Clayton emphasized the importance of providing proper regulatory guidance for this new industry and asset class, noting that if \u201ccrypto assets would be used to evade \u2026 regulations, I have a real problem with it.\u201d\n\nIf the SEC begins regulating cryptocurrencies more aggressively, Libra could be subject to the same \u2014 or at the very least, similar \u2014 regulatory practices as existing securities. Because of the time, cost, and risk implications associated with the classification of \u201csecurity,\u201d Facebook (and other cryptocurrency companies) want to avoid SEC oversight. With cryptocurrencies and ICOs becoming more prevalent<\/em><\/a> in the past couple of years, however, Chairman Clayton has been altering the SEC\u2019s approach<\/em><\/a> to and oversight of the cryptocurrency industry.\n\nClayton\u2019s statement<\/em><\/a> that securities laws should apply to ICOs and tokens, combined with the new framework<\/em><\/a> released in April 2019 and the Trump administration\u2019s pro-regulatory stance on the issue, suggest oversight of the industry may not be far off. Facebook\u2019s Libra announcement acted as a catalyst in this debate, bringing the issue of the regulation of cryptocurrencies as securities back to the forefront of the SEC\u2019s agenda. Facebook\u2019s role in the resurgence of the debate is likely due in part to the company\u2019s recent clashes with the federal government, namely its dispute with the FTC over the adequacy of Facebook\u2019s privacy practices. With the ongoing tension between Facebook and the federal government, coupled with the company\u2019s influence in the United States and throughout the rest of the world, it is possible that the SEC will determine it has oversight over Libra (and perhaps other cryptocurrencies) as a way of restricting Facebook\u2019s reach. A decision to increase oversight of cryptocurrencies and tokens would broaden the SEC\u2019s regulatory authority over the cryptocurrency industry as the sector continues to grow and cryptocurrencies become more widespread.\n\n \n\n\"eliseElise Kletz is a second-year law student at Cornell Law School. Elise earned a B.S.B.A. from the Olin Business School at Washington University in St. Louis, where she completed a double major in Leadership & Strategic Management and in Marketing. Currently, Elise serves as an associate for The Issue Spotter and serves as Co-President for the Business Law Society and the Jewish Law Student Association.\n\n \n\n \n\nSuggested Citation: Elise Kletz, The SEC, Cryptocurrencies, and Facebook\u2019s Libra: The SEC\u2019s Approach to Cryptocurrency Markets and How the Tech Giant\u2019s Involvement Could Change the SEC\u2019s Regulatory Oversight of Cryptocurrencies<\/em>, Cornell J.L. & Pub. Pol\u2019y, The Issue Spotter, (October, 20, 2019),https:\/\/live-journal-of-law-and-public-policy.pantheonsite.io\/the-sec-cryptocurrencies-and-facebooks-libra-the-secs-approach-to-cryptocurrency-markets-and-how-the-tech-giants-involvement-could-change-the-secs-regulatory-ove\/<\/a>. <\/a>","protected":false},"excerpt":{"rendered":"

(Source) The SEC\u2019s position on whether cryptocurrencies should be \u2014 or can be \u2014 classified as securities is far from clear, making it difficult for the public to understand how the cryptocurrency and token industry will be regulated by the federal government. In March 2019, Coincenter \u2014 a blockchain legislative advocacy group \u2014 published correspondence…<\/p>\n","protected":false},"author":1,"featured_media":2748,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[14,15,18],"tags":[],"class_list":["post-2746","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-archives","category-authors","category-feature"],"acf":[],"_links":{"self":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts\/2746","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/comments?post=2746"}],"version-history":[{"count":0,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/posts\/2746\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/media\/2748"}],"wp:attachment":[{"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/media?parent=2746"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/categories?post=2746"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/publications.lawschool.cornell.edu\/jlpp\/wp-json\/wp\/v2\/tags?post=2746"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}