On January 10, 2024, the Securities and Exchange Commission (“SEC”) issued an order approving the applications of 11 different spot Bitcoin exchange‑traded products (the “Approved ETPs”) to each list and trade their shares on a national securities exchange. As a result, each Approved ETP is expected to commence trading on

On July 12, 2023,  U.S. Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-N.Y.) proposed a revised version of their previously introduced crypto regulation bill to create better safeguards for the crypto industry generally while adding new, stronger consumer protection provisions and AML provisions.  The Lummis-Gillibrand bill, also known as the Responsible Financial Innovation Act (“RFIA”), identifies the need for enhanced regulation of digital assets.  The proposal addresses this need, in part, by creating clearly defined regulatory roles for the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”), which are two of the leading regulatory bodies currently engaged in regulating the U.S. crypto market, as well as creating a new Customer Protection and Market Integrity Authority self-regulatory organization.  The need for greater clarity in the roles of the CFTC and the SEC and with respect to cryptocurrency regulations generally is certainly timely, given the recent CFTC actions against Blockratize, bZeroX (and its successor Ooki DAO), and others and recent high-profile SEC actions against major crypto exchanges.

The SEC suffered a significant loss last week in its ongoing legal battle with Ripple over the XRP digital token. While the District Court held that Ripple’s initial sales of XRP to institutional investors constituted the sale of unregistered securities, it was a Pyrrhic victory as the court held

Crypto firm bankruptcies and resulting disruption in the crypto ecosystem will continue to exacerbate liquidity and regulatory concerns in this space.  Since all participants supporting the crypto ecosystem are at risk, managing that risk is critical.

Fund managers should be prepared on multiple fronts.

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A recent guilty plea in U.S. v. Wahi in the U.S. District Court for the Southern District of New York, a crypto insider trading case, sets up an interesting situation where the defendants — who have already pled guilty to wire fraud — are challenging the SEC’s parallel civil charges

When it rains, it pours.  On January 23, 2023, the New York Department of Financial Services announced that it had issued certain Guidance on Custodial Structures for Customer Protection in the Event of Insolvency in which it emphasized the importance of sound custody and disclosure practices to protect customers in the event of an insolvency or similar proceeding.  This month, the Securities and Exchange Commission (“SEC”) followed suit.

On February 15, 2023, the SEC proposed amendments to the Custody Rule under the Investment Advisers Act of 1940, which, among other changes, expands the current custody rule’s application to a broader array of client assets under the rule managed by registered investment advisers and clarifies certain aspects of the existing rule (see more digestible SEC Fact Sheet here).

The SEC’s proposed amendments are aimed at reducing the risk of loss of client assets by expanding the types of assets covered by the rule beyond “funds and securities” that will be subject to custodial safeguards and helping ensure assets are properly segregated. The proposed amendment would also impose certain reporting and compliance requirements on investment advisers, including requiring them to provide information about their practices in safeguarding client assets. Notably, if the amended rule is adopted after the 60-day comment period, which is not certain, then crypto assets will undoubtedly be affected. In a statement discussing the proposed amendments, SEC Chair Gary Gensler noted that the rule “covers a significant amount of crypto assets” and that “most crypto assets are likely to be funds or crypto asset securities covered by the current rule.”

Custody is a safekeeping activity by a financial institution involving storing, protecting, and securing assets separately from those of other customers or the investment firm itself. TradFi investment advisers are typically required to maintain customer funds and securities with a qualified financial firm (i.e., a custodian).  Most assets are intangible assets held “on account” with a broker-dealer (i.e., stocks and bonds, which are rarely held in certificate form), though some assets may consist of physical certificates, cash, or other tangible assets.  On the other hand, crypto custody consists primarily of bookkeeping because there is no physical asset and no centralized ownership record for a digital asset: the blockchain records wallet activity and balances.  While there is the option for self-custody of crypto assets, a crypto investor may allow a custodian or crypto exchange to hold their private keys for them, enabling the custodian to use the wallet to transact. This arrangement potentially opens up a range of risks, including the risk of hacking, insolvency risk, or malfeasance involving the commingling of investors’ cryptoassets with those of other investors or institutional assets.

The organizers of an initial coin offering (ICO) recently won dismissal of an investor’s fraud claims by establishing that their public risk disclosures negated the investor’s claims of reliance on alleged misstatements.  The project, a video service provider’s ICO, was governed by a purchase agreement called a “Simple Agreement for Future Tokens” (“SAFT”).   The plaintiff investor later lost his entire investment as the token collapsed, allegedly due to the provider’s decision to scrap its initial plans for a decentralized platform and move to a permissioned blockchain (and also the provider’s choice to seek additional capital via a “Regulation A” public offering).  The New York court found that even if certain representations made by the issuer regarding the prospect of a decentralized network were actionable, the Plaintiff had not plausibly alleged  “reasonable reliance” on such representations in signing the SAFT. (Rostami v. Open Props, Inc., No. 22-03326 (S.D.N.Y. Jan. 9, 2023)).