Blockchain technology and associated tokens, commonly referred to as digital assets, are recognized by the existing U.S. laws, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to be securities, commodities, or both, depending on the facts and circumstances. Technology places no constraints on what the data that is recorded on a blockchain represents. Therefore, the characterization of a particular digital asset and the resulting legal and regulatory implications is not a function of the underlying blockchain technology, but is instead based on the economic realities of the proposed transaction.
In 2017 and 2018, the sale of digital assets raised over $20 billion. The market growth of digital assets as a new investment asset class gives rise to distinct regulatory considerations for broker-dealers and registered investment advisers offering, trading, and/or assuming custody of such assets. The use of blockchain technology in effecting digital asset transactions may be, in some instances, quite different than the technology used for transactions in other asset classes. Certain differences in market infrastructure and trade flow are being evaluated by regulators. In some instances, the existing securities laws and regulations applicable to broker-dealers and registered investment advisers may require interpretation, regulatory guidance, or SEC no-action relief in order to support a market for digital asset securities.
This chapter provides an overview of blockchain and digital assets, followed by the existing regulations applicable to broker-dealers and investment advisers engaged in digital asset activities. Various regulators may assert overlapping jurisdiction for market participants transacting in digital assets. As such, this chapter also includes a discussion of other applicable regulatory regimes, including money transmission laws and state virtual currency regulation. Regulatory considerations are driven primarily by existing regulation as applied to the nuances of blockchain technology. The discussion includes digital asset regulatory guidance being disseminated through investor warnings, public speeches, reports, and enforcement actions. The law is not yet settled as it relates to digital assets, but market participants are developing industry best practices taking into consideration the existing regulations.
This material has been published as chapter 64 of Investment Adviser Regulation: A Step-by-Step Guide to Compliance and the Law (Third Edition) edited by Clifford E. Kirsch (© 2019 by Practising Law Institute), available for purchase at www.pli.edu. Reprinted with permission. Not for resale or redistribution.