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At last week’s Yahoo! All Markets Summit in Palo Alto, SEC Division of Corporation Finance Director William Hinman delivered a speech sure to send shockwaves through the crypto world. Applying the Howey test (which sets forth the elements necessary for determining whether a transaction involves the offer or sale of…

On May 29, the SEC announced that it had secured injunctive relief halting an allegedly “ongoing fraud” involving an unregistered, non-exempt ICO that raised as much as $21 million in cryptoassets.

The SEC’s complaint charges Titanium Blockchain Infrastructure Services, Inc., EHI Internetwork and Systems Management, Inc. and Michael Stollery, (collectively, the “Titanium defendants”) with fraud in connection with the purchase, offer or sale of securities under Sections 10 and 17 of the Securities Exchange Act and the unregistered offer and sale of securities under Section 5 of the Securities Act. 

Last week, former CFTC Chairman Gary Gensler explained in remarks at M.I.T. that he believes the second and third most widely used virtual currencies—Ether and Ripple—may have been issued and traded in violation of securities regulations.  This comes on the heels of a crackdown on cryptocurrency-related securities by the SEC, which is particularly focused on initial coin offerings (ICOs).  For fund managers, we believe the increased regulatory pressure will be felt in some expected, and some not-so-expected, ways.

ICO enforcement is trending: The SEC’s Cyber Unit has ramped up enforcement pressure, issuing dozens of subpoenas and information requests to technology companies and advisers involved in the ICO market.  The requests have sought information about the structure for sales and pre-sales of ICOs.  This uptick in enforcement pressure isn’t surprising, especially given Chairman Clayton’s repeated warnings that participants in the ICO space are not complying with the required securities laws (for example, notably stating that he has yet to see an ICO that “doesn’t have a sufficient number of hallmarks of a security.”)  There are no signs the SEC will slow down its scrutiny of crypto-related assets.  The SEC has already indicated that it will devote significant resources to policing the ICO market. 

Virtual worlds similar to the OASIS in Steven Spielberg’s upcoming film Ready Player One may be closer than we think – and provably scarce, blockchain-based digital assets could provide the leap forward that gets us there. Already, developers are testing early implementations.

Since CryptoKitties launched at the end of 2017, promptly causing a traffic jam on the Ethereum network and proving that crypto-collectible “games” leveraging blockchains can be a hot commodity, a number of copycats have sprung up.

While interesting, this first generation of blockchain games has been a relatively simple series of experiments. Meanwhile, developers have taken note of the potential synergies between blockchain-based digital assets and the mass-market video game and virtual/augmented reality space. As they explore potential ways of using blockchain technology to make virtual worlds and interactions more immersive and to build better bridges between in-game and real-world commerce, there are a number of legal issues to consider.

Last month, SEC chairman Jay Clayton and CFTC chairman Christopher Giancarlo testified before the Senate Banking Committee on their agencies’ regulatory efforts with respect to cryptoassets and ICOs. The written testimonies of chairmen Clayton and Giancarlo, as well as their verbal statements at the hearing itself, shed light on various issues including:  how tokens might be categorized; the desirability of targeted legislative action to address jurisdictional gaps in the cryptoasset marketplace; coordination among regulators; forthcoming enforcement actions; and the general long-term prospects of cryptoassets and blockchain technology.

Below, we highlight some essential takeaways and remaining open questions.

It was reported this month that ING Groep NV and a major international bank recently completed the first live securities lending transaction settled using distributed ledger technology (“DLT”). The transaction involved the banks swapping baskets of government securities through a collateral lending application from financial technology company HQLAx built using…