SEC and CFTC Issue Landmark Crypto Interpretation

Two of the main US financial regulators have jointly issued a statement to clarify how they will categorise crypto assets and what will count as security. The announcement has major implications for the sector, where rules are still unclear and regulatory domains have been undefined.

The long-awaited interpretation builds on the joint SEC-CFTC Project Crypto initiative and it reflects close coordination between the agencies, as well as the stated commitment from the current administration to provide the “fulsome regulatory clarity that best keeps blockchain-based innovation within the United States.”

According to the SEC, most cryptoassets are exempt from securities rules, but some transactions and arrangements can still come under securities laws where they function as “investment contracts.” The rationale behind the new classification takes the characteristics, functions and uses of crypto assets and divides them into categories. Digital commodities, whose value is linked to a “functional” cryptoasset system with supply-demand dynamics, rather than to the expectation of profits from the efforts of others, are not classified as securities. These include Bitcoin, Ether, Solana and Ripple’s XRP as well as a number of other major and widely-traded cryptoassets as examples.

This means that firms that enable trading or custody of these products will fall under CFTC oversight rather than that of the SEC. NFT and utility tokens, meanwhile, fall under digital collectibles and digital tools, respectively, and they are also exempt from securities rules. Stablecoins are also classified as exempt from securities laws.

The SEC also said that technology is not a relevant factor in its decision making, meaning that securities in tokenised or other digital form remain classified as such.