On November 19, the Options Clearing Corporation (OCC) and Nasdaq launched Bitcoin ETF options—starting with BlackRock’s iShares Bitcoin Trust (IBIT)―signaling a new era of cryptocurrency financial instruments. The launch of Bitcoin ETF options in the United States marks a new moment for cryptocurrency markets. Options promise to transform how institutional and retail investors engage with Bitcoin.
Impact of the Presidential Election on the Future of Digital Assets in the United States
During his first term in office, President Trump expressed skepticism about cryptocurrencies, saying that he was “not a fan” and that they were based on “thin air.” However, statements made during the campaign leading to his election on November 5, as well as his family’s involvement in the crypto space, indicate that the new Trump administration now holds a favorable stance toward the industry. The post-election rally in cryptocurrency markets certainly indicates that the industry believes that the incoming Trump administration will be pro-crypto.
In this post, we will explore what the future of cryptocurrency might look like under a Trump-led government, how regulatory changes could unfold, and the potential timeline for meaningful reform.
1. A Pro-Crypto Administration
Based on his campaign rhetoric and the Trump family’s increasing involvement in crypto, it appears that President Trump will be a more crypto-friendly president than his predecessor. For example, his policy proposals have included the following:
- Aggressively encouraging Bitcoin mining by having – in his words — “all the remaining Bitcoin to be MADE IN THE USA;”
- Creating a strategic Bitcoin reserve to eliminate the $35-plus trillion U.S. debt;
- Preventing the creation of a central bank digital currency; and
- Eliminating oppressive regulation in the crypto space by, in part, firing U.S. Securities and Exchange Commission Chair Gary Gensler “on day one.”
While not all campaign promises become reality, it is likely that the new Trump administration will take an aggressively supportive stance toward cryptocurrency.
2. The SEC Under Fire
On the campaign trail, President-elect Trump pledged to the industry that he will fire SEC Chair Gary Gensler “on day one.” We would expect that Trump will attempt to carry out this promise immediately.
Under Gensler, the SEC has classified many digital assets as securities and, as a result, brought and litigated multiple cases against major crypto exchanges, projects and developers for allegedly selling unregistered securities and other alleged violations. This has led to tension with the crypto industry, with complaints that the SEC is regulating the industry through enforcement, that the regulatory environment is not clear, and that these efforts have impeded innovation and development of the crypto economy.
Whether President Trump can actually or effectively fire Gensler immediately remains to be seen. Gensler’s term currently runs through June 5, 2026, and, having been appointed and confirmed by the Senate, he can only be fired for cause. But as p.resident in his first term, Trump demonstrated that he did not want to be bound by the niceties of the federal appointment process and would creatively work to achieve his ends.
3. Congressional Movement Towards Crypto-Friendly Legislation
The U.S. crypto industry has been pushing hard for regulatory clarity. While the executive branch can take significant steps to shape policy, legislative action will be crucial for ensuring the long-term stability and growth of the crypto industry.
During his presidential campaign, President Trump declared that he will be a pro-crypto president. But it is important to recognize that the crypto industry’s political efforts were not limited to the presidential race and, as a result, over 250 (self-proclaimed) “pro-crypto” candidates were elected to Congress.
Under a Trump-led government, we would expect to see a concerted effort from both the administration and Congress to pass legislation that recognizes cryptocurrency as a legitimate asset class and establishes clear rules for its use and taxation, building upon prior efforts such as the passage of the Financial Innovation and Technology for the 21st Century Act in May 2024 by the House. By highlighting the economic potential of crypto and the need for the U.S. to remain competitive in the global digital economy, the Trump administration could leverage the first truly pro-crypto Congress to pass crypto-friendly legislation that clarifies the legal framework for digital assets.
4. A 12-18 Month Timeline for Crypto Legitimization
Regardless of what happens with the SEC chair, if the Trump administration successfully drives legislative action, we could see significant changes within the next 12 to 18 months.
New legislation that brings regulatory clarity could create new opportunities in the following ways:
- Open the door for traditional financial institutions, including banks and large investment firms, to participate more actively in the crypto space. These institutions have largely been sidelined due to regulatory uncertainty and the risk of non-compliance with existing laws. Once a clear legal framework is established, these institutions would have more incentive to offer crypto-related products and services, such as custody, trading, and even crypto-based financial products;
- Retail investors could benefit from greater legitimacy and protections within the crypto market;
- It could lead to a surge in retail adoption, further driving the price and mainstream acceptance of digital assets; and
- Losses in crypto and blockchain development to Asian markets could be reversed and the U.S. could again become a haven for innovation in the crypto space.
Conclusion: Crypto’s Bright Future in a Trump Administration
In summary, a second term for Donald Trump could be a game-changer for the cryptocurrency industry in the U.S. With a pro-crypto stance, potential changes at the SEC, and the push for favorable legislation, the next 12 to 18 months could see crypto move from a fringe asset class to a mainstream financial tool. The Trump administration’s focus on deregulation and fostering innovation, combined with pressure from industry stakeholders and the broader financial sector, could help pave the way for a more robust and legitimate cryptocurrency market in the U.S.
Crypto.com Acquires Broker-Dealer While Suing the SEC
By Terry Weiss and Alek Smolij
Crypto.com, one of the world’s largest cryptocurrency trading platforms which claims to have over 100 million users, announced this week an acquisition of Watchdog Capital, LLC, an SEC-registered broker dealer with the capability to trade traditional securities. The move is significant because while there has been a deliberate expansion into crypto by some traditional securities firms (whether it be allowing the trading of crypto ETFs or direct ownership in more limited cases), this move is interesting for another reason: on one hand Crypto.com will expect to need the regulatory support from the SEC as it undertakes this expansion, but at the same time it is suing the SEC, contending that the regulator has overstepped its authority in the crypto space.
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A new California law, AB 2426, signed by Governor Gavin Newsome on September 24, 2024, requires any company offering online-only digital goods to California consumers using “buy,” “purchase” or similar terms to clarify whether or not the goods are a transfer of ownership or are instead a license to the purchaser.
In essence, the law bans digital storefronts from using terms like “buy” or “purchase” if there is no transfer of ownership unless they also inform customers that they are not getting unrestricted access to the digital items they are paying for. Online sites using “buy,” purchase” or similar terms when offering digital goods will have to prominently state that customers are getting a license that can be revoked and provide the terms of the license. Companies that do not could be fined for false advertising or potentially sued by consumers.
Read the full story on the Duane Morris LLP website.
Swift Pilots Live Digital Asset Transactions Beginning in 2025
By Joe Silvia
On October 3, 2024, the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”), the global bank messaging network, announced plans to allow global financial institutions the ability to use its platform to conduct pilot transactions for the settlement of digital assets and currencies starting in 2025. This announcement is just the latest advancement for the digital assets ecosystem as it moves the settlement of digital assets and currencies from Swift experimentation to live transactions.
Swift indicated that “these trials will demonstrate how financial institutions can transact interchangeably across both existing and emerging asset and currency types using their current Swift connection” and the “trials aim to address a key challenge in the continuously evolving digital asset market: the rise of disconnected digital platforms, or ‘digital islands’, that could hinder more widespread adoption and ease of use for new forms of value.” Swift notes that its ultimate vision in this space is to give financial institutions a single point of access to multiple digital asset classes and currencies, and this move to pilot transactions “marks an important milestone” toward that ultimate vision.
While the announcement reflects the continued interest and demand for further integration of digital assets in the global financial system, we anticipate continued sluggish progress to that end given the broad range of stakeholder perspectives.
Hong Kong Continues to Promote a Pro-Crypto Stance with a New Enhanced Regulatory Framework
By Mauro Wolfe and Carolina Goncalves
In the game of which jurisdiction will become the crypto global king, Hong Kong is the latest aspiring fintech hub to announce enhancements to its digital asset regulation framework. No doubt this change is designed to give Hong Kong an edge in the global crypto markets.
In July 2024, the Hong Kong Monetary Authority (HKMA) announced its plans to enhance its digital asset regulatory framework by introducing legislation related to stablecoins, a type of cryptocurrency tied to stable assets like fiat currencies, within the following 18 months. The HKMA is carrying out sandbox testing and plans to introduce stablecoins by the end of 2024.
HKMA launched the sandbox in March 2024 as “part of the HKMA’s efforts in facilitating the sustainable and responsible development of stablecoin ecosystem in Hong Kong.” The sandbox participants are required to “propose concrete use cases for the stablecoin to help address pain points in economic activities and create value and new opportunities for [Hong Kong’s] economy and financial services.” The use cases will involve supply chain management, applications in capital markets and digital asset trading, including cross-border trade payments. The sandbox participants will then provide their use case feedback to regulators who will use the data to formulate a “fit-for-purpose and risk-based regulatory regime.” Where the use case involves cross-border payments, the sandbox participants must ensure that both they and their overseas partners strictly comply with the legal and regulatory requirements of the applicable jurisdictions, in addition to ensuring that their stablecoin issuance process complies with the sandbox requirements and Hong Kong laws. The participants will be prohibited from soliciting or handling funds from the public for sandbox activities.
On July 18, 2024, the HKMA announced the first participants in its stablecoin issuer sandbox. They include a company linked to significant Chinese e-commerce retailer Jingdong Coinlink Technology; RD InnoTech Limited, a local fintech firm; and a coalition of Standard Chartered Bank, venture capital firm Animoca Brands and Hong Kong Telecommunications. The sandbox participants will undergo an assessment process as they test their respective stablecoin operational plans within a limited scope and in a risk-controlled environment specified by the HKMA. The HKMA will announce on its website any future participants as it continues to process sandbox applications.
These developments follow a two-month public consultation period that received 108 stakeholder submissions, including from market participants, industry associations and professional organizations. The consensus was that a regulatory regime is necessary for stablecoin issuers to both manage potential monetary and financial stability risks and also ensure transparent and effective oversight.
Hong Kong’s enhanced regulatory framework is aligned with developments in international standards and practices, such as the expectations of the G20’s Financial Stability Board, in the virtual asset ecosystem, including the issuance of stablecoin. The new framework is intended to (1) complement existing regulatory measures for virtual asset trading platforms, (2) make digital asset transactions more secure through regulatory oversight and enforcement, (3) encourage more innovative financial products in Hong Kong, (4) foster innovation and (5) attract global fintech talent.
A central feature of cryptocurrency is the development of borderless commerce. Regardless of which jurisdiction becomes the global crypto king, the cross-border nature of crypto business development is here to stay. Duane Morris will continue to monitor the global legislative landscape as the digital asset continues to mature.
District Judge Imposes $125 million fine on Ripple Labs, Demanding No Future Securities Law Infringements after 3-plus year battle with SEC
By Mauro Wolfe
In the ongoing legal saga between Ripple Labs Inc. and the SEC, U.S. District Judge Analisa Torres of the Southern District of New York imposed a $125 million fine on Ripple Labs, a provider of digital asset infrastructure for financial services, and restrained the company from violating U.S. securities laws in the future.
The SEC v. Ripple Labs case is a significant precedent in the cryptocurrency and commercial finance legal communities. The dispute centered around whether Ripple’s sale of XRP – a cryptocurrency developed, issued and partially managed by Ripple – constituted an unregistered securities offering. The SEC contended that XRP should be classified as a security, and therefore Ripple should have registered its transactions with the SEC. However, Ripple argued that XRP is a digital currency and not a security, asserting that the SEC’s application of securities laws to XRP was inappropriate and harmful to innovation in the cryptocurrency space.
On December 22, 2020, the SEC filed an action against Ripple and two of its executives for allegedly using an unregistered digital asset security to raise funds. The SEC charged the defendants with violating the registration provisions of the Securities Act of 1933, seeking injunctive relief, disgorgement with prejudgment interest and civil penalties.
The SEC’s lawsuit stated that Ripple and the two executives started raising funds in 2013 by selling XRP digital assets to investors in the United States and other countries in an unregistered, ongoing digital asset securities offering. The term “unregistered” is key to the SEC’s allegations because the agency’s argument centered around the nature of XRP as digital asset securities and not as a simple cryptocurrency. Additionally, Ripple allegedly gave out billions of XRP in exchange for activities like market-making and labor, contrary to a monetary compensation. In consequence, the complaint alleged that the defendants violated the federal securities laws’ registration requirements by not registering or not meeting any of the exemptions to register these kind of transactions.
Ripple disagreed, arguing that it was not adequately notified of its purported violations of registration regulations. Reluctant to categorize XRP as a security, Ripple defiantly challenged the SEC in federal court. Ultimately, the court was not persuaded with this argument entirely.
In Judge Torres’ decision on July 13, 2023, the court held that XRP “is not in and of itself ‘a contract, transaction, or scheme’ that embodies the Howey requirements of an investment contract.” Ultimately, the court found that Ripple violated the securities laws in its transactions aimed to offer XRP to institutional buyers such as hedge funds. As we have written in other blog posts, the court held that the secondary market transactions were not securities. Other courts have not followed Judge Torres’ analysis as to secondary markets. The disagreement between trial level courts in various cases leaves ultimate resolution on the application of the Howey test to cryptocurrencies to the federal appellate courts and most likely the U.S. Supreme Court, unless congressional legislation arrives first.
Following the summary judgment order from a year ago, the District Court issued the final judgment on August 7, 2024, after nearly four years of litigation. The court’s summary judgment found that some of Ripple’s transactions involving the exchange or sale of XRP were not considered in violation of the securities laws. However, the court held that XRP tokens sold to institutional investors were in violation of Howey, and awarded the SEC with $125 million civil monetary penalty and issued an injunction barring the company from future violations of Section 5 of the Securities Act.
This decision highlights the ongoing challenges that crypto markets face with regard to U.S. law and regulation. In effect, law and regulation lag behind the pace of industry.
The murky U.S. legal and regulatory landscape makes for challenges for the crypto markets and its participants. While other foreign countries are developing new laws and regulations, the sector waits for the creation of the U.S. crypto framework.
Once that happens, the United States may yet have a chance to be the leading crypto market in the world.
Special thanks to law clerk Laila Salame Khouri for her assistance with this blog post.
U.K. Law Commission Adds Another Powerful Voice in Support of Crypto
By Mauro Wolfe and Kourosh Jahansouz
Since the publication of Satoshi Nakamoto’s bitcoin white paper in October 2008, the digital asset space has seen exponential adoption and growth. From crypto tokens to NFTs, citizens around the world are continuing to show a deep interest in possessing digital assets.
In 2021, the Law Commission of the United Kingdom began considering how principals of personal property law interact with the ever-growing digital asset space. Traditionally, the law of England and Wales recognizes two distinct categories of personal property rights:
- Rights relating to things in possession (tangible things); and
- Rights related to things in action (legal rights or claims enforceable by action)
In February 2024, the Law Commission put forth a draft legislative proposal and bill that aimed at statutorily recognizing a third category of property rights. The Law Commission explained that over the last 10 years, common law has moved toward the recognition of a third category of personal property rights that does not easily fall within either of the two traditional categories. Notably, digital assets do not sit easily in either of the traditionally recognized categories of things in possession or things in action. For this reason, the Law Commission recommended legislation to confirm the existence of a third category of personal property rights, capable of accommodating certain digital assets, including crypto tokens.
Then, on July 29, 2024, the Law Commission published a supplemental report in which it put forth amendments to the draft legislation and provided further explanations behind its proposals. Under this report, a new Property Act (Digital Assets etc.) would be implemented to “make provision about the types of things that are capable of being objects of personal property rights.”
The Property Act provides that “a thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither a thing in possession, nor a thing in action”―leaving it to the courts of England and Wales to further define what “things” would qualify for this third new category of property over time.
The draft bill is not intended to confirm that any particular type of thing is the object of third category of personal property rights or set out the implications of any such property rights. Rather, it merely clarifies that things other than things in possession or things in action are capable of being the object of property rights. Broadly speaking, however, a thing will fall within the third category if it:
- Is functionally analogous to those things that attract property rights and is itself capable of attracting property rights; and
- Is not comfortably either a thing in possession or thing in action.
Further, the supplemental report acknowledges that some things will not fall within this criteria. For example:
- Pure information, being the intangible, abstract thing that is information, distinct from the means by or on which that information is recorded;
- Certain digital assets, such as digital files and records, email accounts and certain in-game assets and domain names.
The legislation landscape for the digital asset space continues to evolve rapidly every year. In 2024, the European Union passed a landmark set of rules, Markets in Crypto-Assets (MiCA), which created an expansive and rigorous regulatory framework for virtual value, including financial crime compliance duties, for crypto assets, service providers and currency exchanges. The U.K. Law Commission’s policy support for crypto shows key global support for crypto.
Meanwhile, in the United States, the House of Representatives passed a bill in May 2024 seeking to create a legal framework for digital assets, the Financial Innovation and Technology for the 21st Century Act (H.R. 4763). There has been no movement on this since May.
As such, it is anticipated that perhaps in 2025 we may see legislation in the U.S., which will signify the maturation and legitimacy of the crypto markets.
Duane Morris will continue to monitor the legislative landscape for the digital asset space as it continues to develop.
Coinbase Effort to Dismiss SEC Suit Falls Short
A New York federal court has held that the SEC sufficiently pleaded that Coinbase—a well-known cryptocurrency exchange, broker, and clearing agency—operated as an unregistered intermediary of securities and engaged in the unregistered offer and sale of securities through its crypto staking program. In a partial win for Coinbase (and possibly others offering wallet services), the court dismissed the SEC’s claim that Coinbase acted as an unregistered broker by offering a crypto wallet application to its customers. The case is Sec. and Exch. Comm’n v. Coinbase, Inc., 23 Civ. 4738 (S.D.N.Y. Mar. 27, 2024).
This decision has important ramifications for all players in the crypto market, as it clears the way for the SEC to continue to act as the primary regulator of crypto in the absence of further regulatory direction from Congress and allows the SEC to continue aggressive enforcement in the crypto space.
Coinbase operates as one of the world’s largest crypto trading platforms that offers additional services that complement its crypto trading operations. Coinbase “Prime” is a service that institutional customers can use to execute large volumes of crypto trades through both Coinbase and third-party trading platforms. Coinbase “Wallet” is a self-custodial wallet that allows customers to store crypto assets on their own computers or mobile devices with the ability to connect to decentralized exchanges to trade these assets. Coinbase’s staking program allows customers to earn financial rewards (usually in the form of cryptocurrency) for transferring custody of assets to Coinbase, who in turn takes a commission from the staking profits and returns the balance to the customer.
On June 6, 2023, the SEC brought a lawsuit against Coinbase under the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC alleged that Coinbase violated the law by acting as an unregistered securities broker, an unregistered securities exchange, and an unregistered securities clearing agency. The SEC named a dozen popular crypto assets (including Solana and Chiliz) and argued that these assets met the legal definition of a “security” (in SEC parlance, an “investment contract”). Thus, the SEC alleged that Coinbase violated the law by working with these assets and not registering with the SEC. Coinbase moved to dismiss the SEC’s complaint, contending primarily that none of the crypto assets named by the SEC met the definition of an investment contract and Coinbase therefore was not subject to federal securities laws.
The decision, authored by Judge Katherine Polk Failla in the Southern District of New York, first held that the SEC was not violating regulatory and administrative law by instituting its enforcement action against Coinbase. The court then applied the well-known Howey test for investment contracts and held that the SEC plausibly alleged that at least some of the crypto asset transactions on Coinbase’s platform (including those on its Prime service) constituted investment contracts. After finding that the SEC plausibly alleged that Coinbase facilitated transactions in securities, the Court declined to dismiss the majority of the SEC’s claims alleging that Coinbase violated the federal securities laws. Additionally, the Court held that the SEC adequately alleged that Coinbase’s crypto staking program was an investment contract subject to federal securities law.
Notably, the court rejected Coinbase’s argument that secondary market transactions–those that involve an asset purchaser buying crypto assets from someone other than the original issuer–were excluded from the definition of investment contracts. Coinbase relied, among other cases, on the July 2023 decision in SEC v. Ripple by another judge in the Southern District of New York, which held that Ripple’s sales of XRP (a crypto token) on secondary platforms did not constitute securities transactions (SEC v. Ripple also held that sales of XRP to institutional investors did constitute securities transactions).
Without directly contradicting the Ripple decision, Judge Failla ruled that crypto transactions on the secondary market cannot be categorically excluded from constituting investment contracts. The Howey test makes no such distinction and Judge Failla found little logic to the attempt to draw a distinction between investors who buy directly from the issuer and those who purchase on the secondary market in reliance on “promises and offers made by issuers to the investing public.” In her opinion, Judge Failla cited favorably to the December 2023 decision SEC v. Terraform Labs, from yet another judge of the Southern District of New York, which rejected many of the same arguments Coinbase raised regarding transactions on the secondary market.
The court did, however, dismiss the SEC’s claim that Coinbase conducted unregistered securities brokerage activity through its “Wallet” application. The court noted that the Wallet application did not undertake routing activities traditionally carried out by securities brokers, including directing how and when to execute trades. Indeed, the SEC’s allegations conceded that Coinbase had no control over a user’s crypto assets via the “Wallet” application. This was ultimately fatal to the SEC’s claim because the SEC failed to adequately allege that Coinbase was acting as a broker.
The Coinbase decision provides the SEC with a win in two areas. First, the court held that the SEC’s aggressive crypto enforcement actions did not violate federal or regulatory law, paving the way for the SEC to continue acting as the primary U.S. crypto regulator. Second, the decision held as a matter of law that the SEC adequately alleged that Coinbase’s crypto services dealt in investment contracts. Finally, the balance of cases within the Southern District of New York has now tipped decidedly in favor of the conclusion that, when the elements of the Howey test are met, there is little distinction to be drawn between investors who buy directly from the issuer and those who purchase on the secondary market. While the SEC may not necessarily prevail at trial, this opens the door for further crypto enforcement actions and provides a strong basis for such actions to proceed past the pleading stage into the expensive and time-consuming process of discovery and motion practice.
Webinar: U.S. Law Enforcement Targets Growing Global Crypto Market
Duane Morris and Khaitan & Co will present a Zoom webinar, U.S. Law Enforcement Targets Growing Global Crypto Markets: The Tiger in the Grass ‒ What Every Crypto Actor Must Know Now, on Thursday, January 18, 2024, from 4:30 p.m. to 5:30 p.m. IST. (Note: For those attendees located in the U.S., the time for this webinar is Thursday, January 18, 2024, from 6:00 a.m. to 7:00 a.m. Eastern.)
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