Expanding Crypto Assets And SEC Cyber ​​Unit Point To More Active Enforcement | Eversheds Sutherland (USA) LLP – Tech Tribune France

On May 3, 2022, the United States Securities and Exchange Commission (SEC) announced the expansion of its new Crypto Assets and Cyber ​​Unit (Unit) (formerly known as the Cyber ​​Unit), hosted within its Division of Enforcement.1 The unit, which is responsible for protecting investors in digital assets and monitoring cyber threats in the market, will add 20 positions, nearly doubling in size from 30 to 50 dedicated staff members. According to the announcement, the Unit has filed more than 80 enforcement actions involving fraudulent and unregistered crypto asset offerings and platforms, resulting in more than $2 billion in monetary relief.

The announcement also noted that the Unit, which has previously filed lawsuits against SEC registrants and public companies for failing to maintain adequate cybersecurity controls and appropriately disclose risks and incidents related to cybersecurity, will continue to protect investors against cybersecurity threats. The Unit’s commitment to “address pervasive cybersecurity threats in national markets” echoes the warning of the Cyber ​​Unit’s predecessor in November 2021 regarding increased cybersecurity enforcement” to ensure clear disclosure of cyber risks and strong internal controls”.2

The unit will specifically target violations of securities laws involving crypto asset offerings, crypto asset exchanges and decentralized finance (DeFi) platforms, crypto asset lending and staking products , non-fungible tokens (NFTs), and stablecoins.

Crypto Asset Offerings: The Unit’s stated focus on crypto asset offerings is unsurprising given public statements by commissioners and the SEC’s continued enforcement in this space. In his April 2022 remarks to the Penn Law Capital Markets Association Annual Conference, SEC Chairman Gary Gensler was blunt: “Without prejudging any token, most crypto tokens are contracts of investment according to the Howey test.”3 He also recently reported that there is “a crypto market where many tokens can be unregistered securities, with no required disclosures or market surveillance.”4 The Law Enforcement Division also brought a number of recent cases related to crypto asset offerings.5 The SEC is seeking to further strengthen its ability to regulate crypto assets in the highly anticipated case, SEC v. Ripple, in which the SEC alleges that Ripple Labs and two executives sold $1.3 billion worth of cryptocurrency tokens in in connection with an unregistered offering of securities. The outcome of this case could have far-reaching implications for the SEC’s future enforcement of potential securities violations involving crypto assets.

Crypto Asset Lending and Staking ProductsNote: The SEC has also already taken notable enforcement action regarding crypto asset lending and staking products. In February 2022, the SEC filed a lawsuit and, along with state securities regulators, imposed $100 million in civil penalties against BlockFi Lending, a major cryptocurrency exchange, finding that its product crypto lending, which was offered and sold to US investors, was a security requiring registration.6 Last year, Coinbase suspended a similar crypto lending product after the SEC reportedly told Coinbase it would take legal action if it continued.7 The unit’s focus on crypto asset lending and staking products is to be expected given these recent developments.

Cryptocurrency exchanges and DeFi: Although there has been more limited SEC enforcement activity against cryptocurrency exchanges and DeFi platforms to date8, many expected an increase in this area. The SEC recently proposed a rule that could expand what constitutes an “exchange” as defined in Rule 3b-16(a) and make it easier for cryptocurrency exchanges and DeFi platforms to come under market regulation. DRY.9 Additionally, SEC Commissioner Caroline Crenshaw noted potential compliance issues with unregistered centralized bitcoin exchanges.ten In April 2022, Chairman Gensler opined that “crypto trading and lending platforms, whether they call themselves centralized or decentralized (DeFi)” are likely commercial securities: “many tokens traded on these platforms forms may well meet the definition of “titles”. While the legal status of each token depends on its own facts and circumstances, given the Commission’s experience with various tokens that are securities, and with so many tokens traded, the likelihood is quite low that a platform data has no title.11 Chairman Gensler further stated that he had instructed SEC staff to work to “get the platforms themselves registered and regulated much like exchanges.”12 Finally, it was reported that the SEC had already opened an investigation into one of the biggest DeFi platforms.13

NFT: While the SEC has already brought cases regarding the categories listed above, it has yet to wade into NFTs through guidance or enforcement. Recently, it was reported that the SEC was investigating how companies use NFTs, and in particular fractional NFTs.14 The listing of NFTs in the center of the expanded unit indicates that the SEC is studying the applicability of securities laws to NFTs and likely anticipates enforcement of securities violations involving NFTs.

Stable Coins: Stablecoins are a type of cryptocurrency that allegedly offers more stability than other cryptocurrencies because they are backed by fiat currencies. For this reason, they have generally been considered outside the jurisdiction of the SEC. But Chairman Gensler has previously noted that the SEC would regulate any stablecoin considered a security, particularly because there could be investor protection concerns and possible illicit activity associated with stablecoins.15 Given these recently expressed concerns, it’s no surprise that the Unit is focusing on securities violations involving stablecoins.

Immediately after the announcement of the unit’s expansion, SEC Commissioner Hester Peirce, often referred to as Crypto Mom due to her generally supportive stance on cryptocurrency, again expressed concern. as to whether the SEC engages in regulation by enforcement: “The SEC is a regulatory agency with an enforcement division, not an enforcement agency. Why are we leading with the application of crypto? »16 This is not the first time that she has expressed this frustration. In January 2021, she remarked, “Enforcement can indeed bring clarity, but that is not the right way to do it from my perspective. . . .We want to provide people with clear guidelines in advance and then they can figure out how they can do something to make it legal.17

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Since taking over as head of the SEC last year, Chairman Gensler has repeatedly expressed his view that the SEC has jurisdiction over almost every aspect of the crypto market. Prior to this announcement, this was confirmed by various enforcement actions and rule proposals. But this dramatic increase in Division of Enforcement resources shows that the SEC is stepping up when it comes to asserting its authority over crypto. The expanded unit will strengthen its ability to conduct deeper and broader investigations in the crypto space, such as possibly examining whether a token traded on a DeFi platform is a security. Crypto industry players should be prepared for an increase in investigations and enforcement activities.

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1SEC Nearly Doubles Size of Crypto Assets and Cyber ​​Enforcement Unit, SEC Publication No. 2022-78 (May 3, 2022).

2Arsen Ablaev, Senior SEC Counsel, Securities Enforcement Forum 2021 (November 4, 2021).

3Chairman Gary Gensler, remarks prior to the Penn Law Capital Markets Association Annual Conference (April 4, 2022)

4Chair Gary Gensler, Remarks Before the Aspen Security Forum (August 3, 2021)

5See, for exampleSEC Charges Siblings in $124 Million Crypto Fraud Operation that includes Misleading Roadshows, YouTube Videos, SEC Release No. 2022-37 (Mar. 8, 2022) (SEC filed lawsuits regarding fraudulent unregistered securities offerings involving a token digital called “Ormeus Coin” and misrepresentations about the successful mining operations of the coin); see alsoSEC Charges Promoter with Conducting Cryptocurrency Investment Scams, SEC Release No. 2021-237 (November 18, 2021) (Where defendant allegedly collected approximately $3.6 million in Bitcoin and then converted it for his benefit).

6BlockFi Lending LLC, AP File No. 3-20758 (February 14, 2022). To see The SEC’s latest blow to the crypto industry: BlockFi sanctioned for its unregistered crypto lending product for more.

7Paul Grewal, Chief Legal Officer of Coinbase, “The SEC told us they wanted to sue us for Lend. We don’t know why. The Coinbase Blog (September 7, 2021) idea-why-a3a1b6507009?gi=78d62ad199b5.

8SEC Accuses Decentralized Finance Lender and Top Executives for Raising $30 Million Through Fraudulent Offerings, SEC Release No. 2021-145 (August 6, 2021) (Charging lenders with fraud for misleading investors regarding the operations and profitability of their DeFi Money Market business) .

9Amendments to Rule 3b-16 of the Exchanges Act regarding the definition of “exchange”; Regulatory ATS for ATSs that trade US government securities, NMS stocks and other securities; SCI Rules for ATSs Trading US Treasury and Agency Securities, 17 CFR Parts 232, 240, 242, 249, Release No. 34-94062; File No. S7-02-22, To see The SEC releases a proposed rule that could reach out to cryptocurrency exchanges for more information.

tenCommissioner Caroline A. Crenshaw, Digital Asset Securities – Common Goals and a Bridge to Better Outcomes, Remarks at SEC Speaks, (October 12, 2021) -20211012.

11Chairman Gary Gensler, remarks prior to the Penn Law Capital Markets Association Annual Conference (April 4, 2022)

12Identifier.

13Dave Michaels, Paul Kiernan. Crypto’s ‘DeFi’ projects are not immune to regulation, says SEC’s Gensler. Wall Street Journal (August 19, 2021).

14Matt Robinson, “SEC Scrutinizes NFT Market Over Illegal Crypto Token Offerings,” Bloomberg (March 2, 2022).

15Chairman Gary Gensler, Remarks Before the Penn Law Capital Markets Association Annual Conference (April 4, 2022) Chairman Gary Gensler, Remarks Before the Aspen Security Forum (August 3, 2021)

16Hester Peirce, @HesterPeirce, Tweet (May 3, 2022).

17Curator Hester Peirce’s interview with Forkast (January 2021)

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Expanding Crypto Assets And SEC Cyber ​​Unit Point To More Active Enforcement | Eversheds Sutherland (USA) LLP – Tech Tribune France


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