2025 has already seen swift legal developments related to whether and how various crypto assets will be subject to regulation under the federal securities laws. In particular:
- President Trump Issues Digital Asset Executive Order and Creates Crypto Working Group. On January 23, 2025, President Trump signed an Executive Order related to digital assets (the “Crypto EO”), as part of his stated plans to make the United Stats the “world capital of artificial intelligence and crypto.” The Crypto EO also established the President’s Working Group on Digital Asset Markets within the National Economic Council (the “Crypto Working Group”).
- Securities and Exchange Commission (“SEC”) Creates Cryptocurrency Task Force and Repeals Staff Accounting Bulletin No. 121 (“SAB 121”). On January 21, 2025, Acting SEC Chairman Mark Uyeda established a cryptocurrency task force at the SEC dedicated to developing a comprehensive and clear regulatory framework for digital assets, to be led by SEC Commissioner Hester Peirce (the “Cryptocurrency Task Force”). A few days later, the SEC repealed SAB 121, which had since March 2022 expressed the SEC Staff’s divisive expectations for financial accounting for crypto assets held by platforms on behalf of users.
- SEC Required to Provide Explanation for Decision Not to Adopt Crypto Rules in Coinbase, Inc. v. SEC. On January 13, 2025, the Third Circuit Court of Appeals in Coinbase, Inc. v. SEC[1](the “Coinbase Rulemaking Case”) required that the SEC provide additional investigation or explanation to support its decision denying the petition of Coinbase, Inc. (“Coinbase”) to request that the SEC engage in cryptocurrency rulemaking.
- Appeal Made to Second Circuit in SEC v. Coinbase, Inc. to Resolve Whether Crypto Assets are “Securities”. On January 7, 2025, Judge Katherine Polk Failla of the Southern District of New York stayed the enforcement action proceedings in SEC v. Coinbase, Inc.[2] (the “Coinbase Enforcement Action”) pending resolution of an interlocutory appeal to the Second Circuit to determine whether various crypto transactions can be considered to involve “investment contracts” under existing Supreme Court decisions and therefore regulated by the SEC under the federal securities laws.[3]
Trump Administration Expected to Propose Sweeping Changes to U.S. Crypto Landscape
At the end of his first week as the 47th President of the United States, President Trump signed an Executive Order to promote U.S. leadership in digital assets and financial technology, including the establishment of the Crypto Working Group. The members of the Crypto Working Group will include, among others, the newly appointed special advisor for AI and crypto, the Secretaries of the Treasury, Commerce and Homeland Security, the Attorney General and the Chairmen of the SEC and Commodity Futures Trading Commission (“CFTC”). As part of the Crypto EO, President Trump revoked several crypto-related orders issued during President Biden’s administration and prohibited the establishment, issue or promotion of Central Bank Digital Currencies.
In addition, within 180 days following the issuance of the Crypto EO, the Crypto Working Group has been directed to recommend regulatory and legislative proposals that advance the policies established in the Crypto EO, including:
- Proposing a federal regulatory framework to govern the issuance and operation of digital assets, including provisions relating to market structure, oversight, consumer protection and risk management.
- Considering, and proposing criteria for, a national digital asset stockpile.
In connection with the adoption of the Crypto EO, the White House signaled its intent to “make the United States the center of digital financial technology innovation by halting aggressive enforcement actions and regulatory overreach that have stifled crypto innovation under previous administrations.” The White House also expressed its view that the “growth of digital financial technology in America must remain unhindered by restrictive regulations or unnecessary government interference.”
SEC Cryptocurrency Task Force Expected to Accelerate Adoption of Crypto Rules and Market Access, Starting with Repeal of Controversial SAB 121
On the day of his inauguration, President Trump appointed SEC Commissioner Mark Uyeda to serve as acting Chairman of the SEC, pending the confirmation of Commissioner Paul Atkins to serve on the Commission and fill the Chairman position vacated by Commissioner Gary Gensler. In light of the differences in approach to cryptocurrency assets espoused by SEC Commissioners Uyeda and Peirce (friendly to crypto expansion), compared to the approach of former Commissioner Gary Gensler (focused on crypto restraint), it was not surprising that one of Commissioner Uyeda’s first actions upon appointment as acting SEC Chairman was to establish the Cryptocurrency Task Force.
The Cryptocurrency Task Force will:
- Collaborate with SEC Commission staff and the public to set the SEC on a sensible regulatory path that respects the bounds of the law.
- Provide clarity regarding regulatory lines and realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously.
- Operate within the statutory framework provided by Congress and coordinate the provision of technical assistance to Congress as it makes changes to the regulatory framework.
- Coordinate with federal departments and agencies, including the CFTC, and state and international counterparts.
Those involved in the cryptocurrency industry are hopeful that the SEC under the Trump administration will provide a more tailored and workable framework with respect to the issuance and trading of crypto assets, compared to the SEC’s recent positions and perceived regulation by enforcement under Chairman Gensler’s tenure. However, given the complexity of the issues involved, and the differences in the characteristics and uses of crypto assets, and their trading and markets, compared to more traditional securities instruments, the SEC has acknowledged that “[t]his undertaking will take time, patience, and much hard work. It will succeed only if the Task Force has input from a wide range of investors, industry participants, academics, and other interested parties.” Under the Crypto EO, within 30 days of its issuance, the SEC (and other agencies including the Treasury and Justice Departments and the CFTC) must identify all regulations, guidance, orders and other items that affect the digital asset sector, and within 60 days, they must submit to the Chair of the Crypto Working Group recommendations with respect to the identified regulations, guidance, orders and other items.
In advance of more comprehensive crypto-related decision making by the SEC through its Crypto Task Force and involvement and participation in the Crypto Working Group, on January 21, 2025, the SEC proactively repealed SAB 121. When issued in March 2022, SAB 121 had received criticism from members of the crypto industry and certain regulators, including Commissioner Peirce, for requiring that crypto platforms that “safeguard” customers’ crypto assets record a liability at fair value for those safeguarded assets (as well as recognizing a corresponding asset), due to the increased regulatory risks associated with the uncertain regulatory environment, technological risks and lack of legal precedent related to those crypto assets. When adopted, SAB 121 reflected a significant change in practice, which had previously based the accounting treatment of such assets on an assessment of control over the assets and a detailed facts and circumstances analysis. Given the significant criticism of SAB 121, it is not surprising that it is one of the first pieces of guidance to be rescinded by the SEC. Based on the expressed intentions of President Trump’s administration with respect to crypto regulation, this will likely be one of many changes in the SEC’s approach to the crypto legal framework.
Third Circuit Forces SEC to Support Its Decision Not to Engage in Crypto Rulemaking
Given the challenges of applying traditional securities laws to crypto assets and the failure of the SEC during Chairman Gensler’s tenure to set forth detailed and workable guidance on how to apply existing securities laws to crypto assets, in July 2022, Coinbase, the largest platform for trading digital assets in the United States, petitioned the SEC under the Administrative Procedures Act to propose new rules to address how and when crypto assets qualify as securities under the existing securities law framework. Coinbase raised a number of issues in its petition, including the different uses of crypto assets compared to traditional securities, the decentralized nature of the management of crypto assets, the lack of applicability and relevance of categories of existing disclosure requirements to crypto assets, the impracticality of broker-dealer custody requirements as applied to crypto assets and the unworkable nature of the “net capital rules” as applied to crypto assets. While the SEC is given significant deference in determining the timing and priorities of its regulatory agenda, the Third Circuit Court of Appeals found that the SEC’s order denying Coinbase’s petition for rulemaking was arbitrary and capricious, because it was conclusory and insufficiently reasoned. Therefore, in a decision rendered on January 13, 2025, the Third Circuit remanded the matter to the SEC to provide additional investigation or explanation to support its decision not to engage in crypto asset rulemaking.
Given the establishment of the Cryptocurrency Task Force and the Crypto Working Group, it will be interesting to follow the SEC’s response to the Third Circuit’s requirement that the SEC substantiate its previous decision under Chairman Gensler’s tenure not to pursue rulemaking in connection with the Coinbase Rulemaking Case. It remains to be seen how the SEC will reconcile these additional information requirements with its review and study of how best to provide clarity with respect to the regulatory framework governing the crypto industry.
Howey Test for Crypto Assets Appealed to Second Circuit
In June 2023, the SEC brought an enforcement action against Coinbase, claiming among other things that Coinbase, through its trading platform activities, operates as an unregistered broker and unregistered clearing agency and that its platform is an unregistered securities exchange, because various crypto assets traded on its platform are “investment contracts” and therefore “securities” under the federal securities laws. The district court judge who heard the arguments in the case denied Coinbase’s motion for judgment on the pleadings and on January 7, 2025, certified an interlocutory appeal to the Second Circuit Court of Appeals to determine whether the crypto assets in question are “investment contracts” under the federal securities laws. The district court judge’s decision to certify the interlocutory appeal was due in part to the existence of conflicting authority from various district courts about how traditional tests for determining “investment contracts” should be applied to crypto assets that are traded in secondary markets.
Under existing federal securities laws, the test for assessing whether an instrument is an “investment contract” is outlined in SEC v. W.J. Howey Co.[4] Under Howey, instruments are considered “investment contracts” subject to regulation under the federal securities laws if they consist of:
- Investments of money by a person,
- In a common enterprise,
- With an expectation of profits to come solely from the efforts of others.
The Howey court recognized that this definition of an investment contract “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profit.”[5] The test was broadly constructed to protect investors from those who would devise unique instruments whose economic substance, based on the totality of circumstances and intent and expectations of the parties, comes within the scope of the tests laid out by the Howey court.
Given the different approaches, and outcomes, used by district courts in the last several years to determine whether crypto assets may be “investment contracts” under the test outlined in Howey, Coinbase has encouraged the Second Circuit to review its case, especially since another crypto case where the Howey test is also at the core of the legal analysis (SEC v. Ripple Labs, Inc.[6]) is concurrently being considered by the Second Circuit on appeal, and the facts involved in the Coinbase matter are more expansive in terms of the number and characteristics of the different crypto assets involved. A decision by the Second Circuit in either of these cases would be the first time a federal appellate court has weighed in on these issues and could give participants in the crypto industry clearer guidelines on how crypto assets should be treated under the existing federal securities laws, until such time as crypto-specific rules are adopted by the SEC as part of its Cryptocurrency Task Force efforts, through other administrative action as a result of the efforts of the Crypto Working Group or through Congressional action.
Moving Forward
We are closely monitoring advances in the regulation of crypto assets in what will no doubt be a cycle of reform. From developments in pending SEC enforcement actions and other pending crypto litigation, to the SEC’s establishment of its Cryptocurrency Task Force and Trump’s recent Crypto EO and the formation of the Crypto Working Group, 2025 should see significant evolution in the federal regulatory environment for crypto assets likely in favor of greater access and utilization of crypto assets in the public markets.
[1] No. 23-3202 (3d Cir. Jan. 13, 2025).
[2] No. 23-cv-04738 (S.D.N.Y. Mar. 27, 2024).
[3] SEC v. Coinbase, Inc., No. 23-cv-04738 (S.D.N.Y. Jan. 7, 2025).
[4] 328 U.S. 293 (1946).
[5] Howey, 328 U.S. at 299.
[6] No. 20-cv-10832 (S.D.N.Y. July 13, 2023).