SEC’s crypto rulemaking authority disputes
Background: SEC and Crypto Rulemaking Authority
The SEC’s authority to regulate cryptocurrencies primarily hinges on whether certain crypto-assets qualify as "securities" under the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC has asserted jurisdiction over many crypto assets as securities, especially when they involve investment contracts or initial coin offerings (ICOs).
The main legal test used is the Howey Test, derived from the Supreme Court’s decision in SEC v. W.J. Howey Co. (1946). Under the Howey Test, an instrument is a security if there is:
An investment of money,
In a common enterprise,
With an expectation of profits,
Derived primarily from the efforts of others.
Case 1: SEC v. W.J. Howey Co. (1946)
Significance: This foundational Supreme Court case established the Howey Test.
Details: The Court held that a land sale contract that included an opportunity to develop the land with the company’s efforts constituted an investment contract, thus a security.
Relevance: The Howey Test is the primary tool to determine whether cryptocurrencies or ICOs are securities subject to SEC regulation.
Case 2: SEC v. Telegram Group Inc. (2020)
Summary: The SEC sued Telegram for its TON (Telegram Open Network) token offering, arguing the tokens were unregistered securities.
Court Holding: The U.S. District Court for the Southern District of New York agreed with the SEC, issuing a preliminary injunction preventing Telegram from distributing tokens.
Key Points:
The court applied the Howey Test and concluded that investors had an expectation of profit based on Telegram’s efforts.
The ruling emphasized that tokens sold before the network was functional could be securities.
Implication: Strengthened SEC’s authority to regulate ICOs as securities offerings.
Case 3: SEC v. Kik Interactive Inc. (2020)
Summary: Kik was charged with conducting an unregistered securities offering through its ICO of the Kin token.
Court Holding: The U.S. District Court for the Southern District of New York ruled that Kin tokens were securities at the time of the ICO.
Reasoning:
Investors bought tokens expecting profits based on Kik’s efforts to develop and promote the platform.
Even though Kin tokens might have later gained utility, at the time of the sale, they were investment contracts.
Impact: Reinforced that timing and facts at the moment of token sale are critical for securities status.
Case 4: In re Munchee Inc. (2017)
Summary: The SEC issued a cease and desist order against Munchee, a company that planned to issue tokens to fund a restaurant review app.
SEC’s Position: The ICO tokens were securities because they were marketed as investments with profit potential.
Result: Munchee canceled the ICO.
Importance: This was one of the first public SEC actions clarifying that utility tokens can be securities if sold as investments.
Case 5: SEC v. Ripple Labs Inc. (Ongoing since 2020)
Facts: SEC alleges Ripple’s XRP tokens were sold as unregistered securities.
Dispute: Ripple argues XRP is a currency and not a security.
Developments:
The case is pivotal in determining how cryptocurrencies that function as payment tokens should be regulated.
Courts are examining whether XRP satisfies the Howey Test.
Significance: The outcome will greatly influence the SEC’s regulatory scope over crypto assets that resemble payment tokens rather than traditional securities.
Additional Considerations: Administrative Authority and Rulemaking
The SEC has attempted to clarify its authority through guidance and enforcement actions, but has not yet issued comprehensive crypto-specific rules.
Some cases have involved challenges to the SEC’s rulemaking process or claims that crypto assets fall outside the agency’s mandate.
Courts generally give deference to SEC’s interpretation of the securities laws (Chevron deference) unless the interpretation is unreasonable.
Summary of SEC’s Crypto Rulemaking Authority Disputes
| Case | Court | Key Holding | Impact on SEC Authority |
|---|---|---|---|
| SEC v. W.J. Howey Co. | Supreme Court (1946) | Established Howey Test | Foundation for crypto as securities |
| SEC v. Telegram | SDNY (2020) | Tokens are securities | Affirmed SEC’s ICO jurisdiction |
| SEC v. Kik | SDNY (2020) | ICO tokens are securities | Reinforced timing relevance |
| In re Munchee | SEC Order (2017) | Utility tokens can be securities | Early SEC enforcement clarity |
| SEC v. Ripple Labs | Ongoing | XRP’s status pending | May redefine crypto regulation scope |
Conclusion
The SEC’s authority to regulate cryptocurrencies remains anchored in traditional securities laws, interpreted through the Howey Test. While several courts have upheld the SEC’s authority to classify many tokens as securities, ongoing litigation, such as Ripple, continues to challenge the boundaries of this power. These disputes shape the evolving regulatory landscape for crypto assets in the U.S.
RELATED Blog
0 comments