Key points to remember
- The SEC does not want to define “digital assets” in relation to hedge funds and private equity funds.
- This isn’t the first time the SEC has been undecided on the definition of notable cryptographic terms, referring to Ether as security speculation.
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Although it proposed a definition of digital assets less than a year ago, the SEC needs more time to deliberate.
The US Securities and Exchange Commission (SEC) is not ready to define “digital assets” for hedge funds and private equity funds, a phrase commonly used as an umbrella term for assets such as crypto -currency, NFTs, etc. Nine months ago, the SEC detailed a proposal to define digital assets with respect to hedge funds and private equity funds, despite backtracking on its decision today.
In August 2022, the SEC propose: “We are adding question 66 to section 4 to collect information on the investment strategies of private equity funds.” This proposal would define digital assets and add the word to the official definition of funds above.
Instead, the SEC took a different route, in writing in its May 3 proposal, “We propose to define the term ‘digital asset’ as an asset that is issued and/or transferred using distributed ledger technology or blockchain technology (“technology Distributed Ledger”), including, but not limited to, so-called “virtual currencies”, “coins”, and “tokens”, with the commission considering these terms to be interchangeable.
This would have been the first time the SEC has used and defined digital assets, but “the commission and staff continue to review this term and do not adopt ‘digital assets’ under this rule at this time.”
Other proposals are constantly being negotiated, such as the new proposal from last month definition who added “DeFi” and cryptocurrency “exchanges” to a proposal that defined market platforms. SEC Chairman Gary Gensler said in response:
“Make no mistake: many crypto trading platforms already fall under the current definition of an exchange and therefore have an existing obligation to comply with securities laws.
The woes of the SEC
The SEC has been slow to define common terms used in crypto and has even been accused of working against the industry by failing to establish a clear regulatory framework. A clear example is the lawsuit against the SEC in November 2022, where Hodl Law for follow-up the commission after the SEC “failed to clarify its jurisdictional authority over digital assets and whether it considers digital assets to be securities.” A lawyer who provides insight into legal issues in the crypto space and metaverse, took to Twitter to comment on the lawsuit:
2/ The SEC has decided to dismiss the case.
In its motion, the SEC makes this startling statement:
“Hodl Law’s own allegations make it clear that the SEC has not made a final decision regarding the Ethereum or Ether network.” (SEC note, p. 11)
— MetaLawMan (@MetaLawMan) February 27, 2023
MetaLawMan further tweeted“But somehow the SEC took 8 years to analyze if Ether is a security – and it’s still officially undecided.” It’s true: The SEC still hasn’t been able to define Ether as a security, with Chairman Gary Gensler refusing to discuss it even a year later.
According As part of the Howey Test for Digital Assets, defining Ether as a security will define holding ETH as an investment and subject it to federal laws that will make it difficult for Ethereum users. This will require disclosure agreements and registration of those listing Ether, which will cause problems for exchanges that list ETH and for DApps on the Ethereum network.
Six months after questioning ETH’s security status, the SEC has labeled nine cryptocurrencies as securities, a move criticized by many industry players as “regulation by enforcement”.