Crypto Executives Meet with House Finance Committee to Discuss Regulation and Future of Digital Asset Market | Lowenstein Sandler LLP

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The United States House of Representatives Committee on Financial Services (the Committee) met last Wednesday[1] to discuss the rapid growth of trading in the cryptocurrency market and the regulatory landscape that currently governs it.

Executives from six major crypto asset companies, including Coinbase and Circle, testified at the hearing, calling for clearer standards and guidance from regulators. Among other things, witnesses raised concerns about the current regulatory framework used to determine whether digital assets should be regulated as securities under federal securities laws. They also discussed the need for oversight by a centralized body capable of taking a flexible approach to regulating the crypto asset industry in light of its complex and dynamic nature. Specifically, Coinbase CEO Alesia Haas expressed the need for regulation by “an agile group that is constantly reviewing changes in crypto.”[2]

The Committee’s hearing memorandum reflects its concern that investments in digital assets are thus “vulnerable to fraud, manipulation and abuse”.[3] Accordingly, and “[g]With the growth and evolution of the digital asset industry, several questions have arisen as to how regulators can ensure investor protection, ensure consumer protection and maintain market integrity.[4] Some, but not all, digital market exchanges and issuers have obtained national charters and / or licenses to transfer funds and sell checks from various states.[5]

The United States Securities and Exchange Commission (SEC) has sought to protect investors by requiring the registration and disclosure of any digital asset offering that falls within the definition of securities as set out in the Securities Act of 1933,[6] which encompasses a variety of terms listed, including “investment contracts”. Securities are defined broadly under the law, and courts interpret this definition liberally.

To determine whether an offer, including an offer involving cryptocurrency, constitutes an “investment contract” under federal securities law, courts apply the “Howey test” of the US Supreme Court- United.[7] Under the Howey test, courts analyze whether the offer is (a) an investment of money (b) in a joint venture, and (c) with an expectation of profits to be derived solely from the efforts of others.[8] As the SEC explained, the Howey test not only requires a factual analysis of “the form and terms of the instrument itself,” but also focuses “on the circumstances surrounding the digital asset. [or other instrument or offering] and how it is offered, sold or resold.[9]

Howey, decided in 1946, focused on whether an offer of citrus groves, as well as management services, constituted an “investment contract” under the law.[10]

The SEC has offered advice on the application of Howey in the context of digital assets, but acknowledged that the outcome of the test depends on the specific facts and circumstances of each case.[11] At Wednesday’s hearing, former US banking regulator and current CEO of bitcoin mining firm Bitfury Brian Brooks said the uncertain classification of digital assets was “the most important short-term issue for the industry.” .[12] Brooks pointed out that the Howey test is a “balancing test” rather than a clear rule.[13]

Witnesses also answered questions from the Committee on a variety of topics, such as the demographic differences between cryptocurrency investors and investors in traditional instruments, and the extent to which the growth of digital assets and decentralized finance can drive the growth of digital assets and decentralized finance. financial inclusion and benefit underserved communities.[14] These questions reflect the Committee’s awareness of the potential benefits that the evolving digital asset industry can deliver, not only in the United States, but globally as well.

[1] Hearings, United States House Committee on Financial Services, https://financialservices.house.gov/events/eventsingle.aspx?EventID=408705 (last visited December 10, 2021) (hereafter, “Hearings” ).[2] Identifier.[3] Memorandum: December 8, 2021, Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States, 3 (December 3, 2021), https://financialservices.house.gov/ uploadedfiles / hhrg -117-ba00-20211208-sd002.pdf.[4] Identifier. to 1.[5] Identifier. to 3.[6] 15 USC § 77a et seq.[7] SEC c. WJ Howey Co., 328 US 293 (1946).[8] Identifier.[9] Framework for the Analysis of “Investment Contracts” of Digital Assets, SEC, https://www.sec.gov/files/dlt-framework.pdf (last modified April 3, 2019) (hereinafter, “the framework “).[10] 328 United States 293.[11] See Framework.[12] Hearings.[13] Identifier.[14] Identifier.

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