Senators Warn SEC Crypto Exemptions Strip Away Investor Protections
Commentary by Steven Lofchie
Senators Elizabeth Warren and Chris Van Hollen warned that a recent SEC interpretive release, which exempts from securities laws certain crypto transactions, strips away longstanding investor protections while delivering a windfall to the crypto industry and the Trump family.
In their letter to SEC Chair Paul Atkins, the Senators said the release sorts crypto assets into five categories and concludes that three (digital commodities, digital collectibles, and digital tools) fall outside the federal securities laws, placing mining, staking, and airdrop activities largely beyond SEC jurisdiction. The Senators argued that the SEC interpretation conflicts with the Supreme Court's Howey test, which requires case-by-case economic analysis rather than categorical exemptions. They also said the release gives issuers a roadmap to exit securities regulation simply by abandoning their promises to investors.
The Senators criticized the SEC for issuing the release without notice-and-comment rulemaking - despite Chair Atkins's prior pledge to restore "regular order". They also expressed alarm over indications that the SEC was considering a host of other exemptions on crypto assets, including a “startup exemption” and a “fundraising exemption” that "would allow some crypto companies to raise tens of millions of dollars from investors over several years without having to register with the SEC."
Further, the Senators argued the release creates a direct financial benefit for the Trump family, whose crypto holdings grew by approximately $1.4 billion over the past year and whose ventures span the newly exempted categories. They asked whether the agency has any written policies to prevent the President's crypto interests from influencing SEC decisions.
Commentary
The fundamental problem with the Senators' criticism of the SEC's actions is that it is not based on the definition of the term "security" in the securities laws. This is the same fundamental problem that the former administration refused to address: i.e. the mere fact that an activity or a product has the potential to make or lose money does not make the activity or the product a "security" as such term is used in the securities laws.
Unless the Senators can make a persuasive argument that the SEC has reached an improper legal conclusion on the specifics of the application of the law, the SEC's proper response is that it is limiting its authority to the activities and products over which it has been granted authority by Congress. If the Senators believe that non-security crypto assets should be regulated, then they must work with Congress to pass the appropriate legislation.
As for the argument that decisions must be made on a "case-by-case" basis, it is likewise not meaningful in this context. Of course, decisions are made on an individual basis, but unless those decisions fit into a coherent framework then they are just arbitrary. The Howey case provides one such framework for investment contracts and the Reves case provides another useful framework for debt instruments. New frameworks should not be invented for each set of facts.