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On August 3, 2021, in a speech before the Aspen Security Forum, SEC Chairman Gary Gensler put the digital asset industry on notice that the SEC intends to increase policing the digital asset space. Chairman Gensler said that, in his view, to date, crypto assets primarily have been little more than “digital, scarce vehicles for speculative investment.” He further added that there was not enough investor protection in the industry, compared the sector to the “Wild West,” and stated that the asset class was “rife with fraud, scams, and abuse.” Finally, the Chairman promised that, to protect investor and the capital markets, the SEC “will continue to take our authorities as far as they go.”

Chairman Gensler indicated that he considered certain crypto activity such as ICOs to be securities transactions within the purview of the SEC. That is in line with the views of the former Chairman and not a surprise. More interesting was that he included stablecoins — that is, digital currency and transactions involving tokens pegged or linked to the value of fiat currencies. In discussing stablecoins, Gensler referenced both Facebook’s project, Diem, and the wider, existing stablecoin market. Gensler stated that he intends to apply “the full investor protections of the Investment Company Act and the other federal securities laws to these products.” That provided an interesting juxtaposition to the actions taken by the OCC under its former chair, Brian Brooks — while the OCC guidance is not in direct conflict with the position stated by Chairman Gensler, it certainly indicated a more welcoming view of the concept.

Gensler also addressed crypto trading platforms, lending platforms, and other decentralized finance (“DeFi”) platforms. He expressed his belief that many tokens found on DeFi platforms are securities, that many such platforms claim to block U.S. investors while making minimal efforts to do so, and that transactions on DeFi platforms may implicate the securities laws even where the underlying tokens involved in such transactions themselves may not be securities. He stated that these platforms can also implicate the commodities laws and the banking laws. Gensler called on Congress to “close regulatory gaps” that would expand the SEC’s powers with respect to these platforms and stated that regulation was necessary for financial stability and national security.

LEGAL TOKENS

Chairman Gensler’s speech is only a declaration of intent, though speeches by SEC commissioners or staff can have significant impact on the industry. (For an example, consider the speech by William Hinman, then Director of the Division of Corporation Finance of the SEC, titled “Digital Asset Transactions: When Howey Met Gary (Plastic).” The Chairman’s speech indicates that we are likely to see continued enforcement activity from the SEC. Given the lengthy and difficult process involved with passing rules, the SEC’s enforcement activities will outpace the enactment of any actual rules for the immediate and mid-term future. The full speech is available here.

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Author's Assets

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Anthony Tu-Sekine | Partner

As the head of Seward & Kissel’s Blockchain and Cryptocurrency Group and a frequent commentator on all things crypto, Anthony advises clients on a wide range of evolving topics, including how to structure and issue security and utility tokens, registered and unregistered offerings of security tokenstoken custody, transfer and liquidity issues, non-security opinions, and investments in crypto assets by funds and other investors. A recognized leader on physical precious metals funds, Anthony represented APMEX Inc. and alternative asset manager Sprott Inc. in connection with the launch of OneGold.com, which allows investors to own gold documented on blockchain.

You can work with regulators or you can really try to piss them off… If you really want to do the latter, then you should expect that they will bring every tool they have against you.

Anthony’s thoughts on BitMEX indictment, as published in Law360 article “BitMEX Case Seen as Blessing in Disguise for Crypto Sector” 

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Philip Moustakis | Counsel

A former senior counsel in the SEC’s Division of Enforcement, Philip advises companies and individuals at Seward & Kissel on cryptocurrencies and blockchain technology, SEC enforcement matters, other regulatory investigations, and internal investigations. As a founding member of the SEC’s Cyber Unit, Philip advised the Commission on cryptocurrencies and investigated matters involving initial coin offerings (ICOs), unlawful touting of ICOs, and other violations of the federal securities laws related to cryptocurrencies. Publicly filed enforcement matters Philip spearheaded included the SEC’s first ever Bitcoin-related enforcement action against the operator of Bitcoin Savings & Trust, a Bitcoin-denominated Ponzi scheme, settled proceedings against an operator of a Bitcoin-related social media marketing venture and a popular Bitcoin betting site for the offer and sale of unregistered securities, and settled proceedings against an operator of unregistered cryptocurrency-denominated securities exchanges and broker-dealers.

“The SEC is a principles based regulator, and it will assert its jurisdiction over any securities offering or transaction, as it has done since the onset of the ICO craze, regardless of the technology used to facilitate such an offering.”

- Philip’s thoughts on the recent SEC enforcement action against Kik Interactive, Inc. as published in the Crowdfund Insider article “Former SEC Senior Counsel Comments on Kik Ruling: Kik Could Have Benefited From Traditional Capital Markets Lawyer"

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Tamara Rozina | Associate

Tamara Rozina is an associate in the Litigation group at Seward & Kissel. She specializes in the representation of clients within the financial industry, including hedge funds, broker dealers and banks, and also has experience in the cryptocurrency and blockchain technology space. Tamara has successfully represented clients in state and federal courts across the country, as well as in arbitrations before self-regulatory organizations including FINRA. Tamara has been instrumental in securing dismissal of claims prior to trial, with recent victories in favor of a broker dealer where claims for fraud and breach of fiduciary duty were brought by investors of a hedge fund, and in favor of a foreign charity in connection with contract and tortious interference claims. Tamara has also advised clients in connection with governmental investigations, regulatory probes and in proceedings brought by regulatory authorities including the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). Tamara has experience preparing for trials, briefing dispositive and pre-trial motions, taking and defending depositions, and preparing for witness examinations and conducting oral arguments.

Tamara received a B.A., magna cum laude, from the Boston University and a J.D., cum laude, from Boston University School of Law. In law school, Tamara was a finalist in the Albers Moot Court Competition. She began her career at Seward & Kissel as a summer associate and joined the firm upon graduation from law school.