The SEC’s Shift in Digital Asset Regulation

Until the new presidential administration took office, the digital asset industry was embroiled in an existential showdown with the U.S. Securities and Exchange Commission (SEC). For years, the SEC waged a scorched-earth regulation-by-enforcement campaign against the digital asset industry and its most-used platforms, citing confusing — or non-existent — rules about what constitutes a security and who must register to buy and sell them. Now, under new leadership, the SEC has confirmed the end of its regulation-by-enforcement era.

While this shift has dramatically reduced (though not eliminated) the industry’s exposure to regulatory suits by the agency, firms must prepare for private plaintiffs to exploit the enforcement void. This could lead to continued ambiguities in the application of federal securities laws due to lawsuits in U.S. courts alleging that specific digital assets are securities.

The SEC’s Enforcement U-Turn

Under new leadership, the SEC confirmed the end of the regulation-by-enforcement era and has taken significant steps to progress its policy goals. Notable regulatory shifts include:

• Crypto Task Force: One day into his tenure, SEC Acting Chair Commissioner Uyeda announced the formation of a “Crypto Task Force.” Its mission is to provide clarity on defining which digital assets are securities and develop a regulatory framework for the digital asset space through a series of industry roundtables.
• Enforcement Action Dismissals: The SEC has dismissed nearly all non-fraud cases concerning allegations of failing to register as an exchange or broker-dealer.
• Cyber and Emerging Technologies Unit: The SEC replaced the Crypto Assets and Cyber Unit with the Cyber and Emerging Technologies Unit (CETU), focusing on protecting retail investors from fraud, including within blockchain technology and crypto assets.

These changes indicate that SEC enforcement will likely decline, as its enforcement arm will no longer serve as the primary means to create regulatory policy. However, the SEC has reaffirmed its commitment to prosecuting fraud-based claims.

Unsettled Law is an Opportunity for Litigation

In light of the SEC’s retreat, individuals and firms should prepare for private litigation to fill the enforcement void. Historically, decreased regulatory enforcement spurs private plaintiffs to pursue litigation, including claims of federal antitrust laws or securities law violations. Such suits can be costly for businesses, even for those who eventually prevail.

Private plaintiffs may utilize federal securities laws to bring various allegations, including:

• Selling unregistered securities.
• Securities fraud involving misleading statements in prospectuses (white papers).
• Misconduct by individuals in decision-making roles, including founders.
• Alleged violations of state securities laws and common law.

The SEC’s new interpretation aligns more closely with industry views, but it does not bind courts analyzing digital asset securities. For example, in a case involving the TRON Foundation, a U.S. District Court rejected a motion to dismiss based on the SEC’s prior framework, which was deemed a nonbinding interpretation. Moreover, the SEC dismissed a suit involving Coinbase pending appellate review regarding crypto transactions’ qualifications as securities.

As a result, companies should prepare for a potential increase in private litigation. Specifically, meme coins may come under scrutiny, as plaintiffs may argue their circumstances classify them as securities under federal law.

Overall, the digital asset industry has seen positive progress this year, distancing itself from oppressive regulatory oversight. However, businesses should reevaluate their legal risks and consult with legal teams on strategies to navigate increased private litigation exposure.