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The Regulation of Cryptocurrencies in the United States of America
by
Prof. Dr. Frank Emmert, LL.M., FCIArb*
Indiana University Robert H. McKinney School of Law
I. INTRODUCTION
II. U.S. FEDERAL LAWS IN FORCE
1. Introduction
2. Sarbanes-Oxley
3. Jumpstart Our Business Startups (JOBS)
4. Dodd-Frank
5. Other Consumer Protection Laws at the Federal Level
III. REGULATIONS, RULES, AND OPINIONS OF FEDERAL REGULATORY AGENCIES
1. Overview
2. The Financial Crimes Enforcement Network (FinCEN)
3. The Environmental Protection Agency (EPA)
4. The Commodities Futures Trading Commission (CFTC)
5. The Securities and Exchange Commission (SEC)
6. The Treasury Department with the Office of Foreign Assets Control (OFAC) and
the Internal Revenue Service (IRS)
7. The Federal Trade Commission (FTC) and the Commerce Department
8. The Consumer Financial Protection Bureau (CFPB)
9. The Federal Reserve and the Office of the Comptroller of the Currency (OCC)
10. The Department of Justice (DoJ)
III. PROPOSED U.S. FEDERAL LEGISLATION SPECIFICALLY ADDRESSING CRYPTOCURRENCIES
1. The 2021 Securities Clarity Act
2. The 2022 Stablecoin TRUST Act
3. The Digital Commodity Exchange Act of 2022
4. The McHenry-Thompson Bill and its Progeny
5. The 2022 Virtual Currency Tax Fairness Act
6. The Digital Consumer Protection Act of 2022 (DCCPA)
7. The Digital Trading Clarity Act of 2022
8. The Digital Asset Anti-Money Laundering Act of 2022
9. The 2022 Responsible Financial Innovation Act (RFIA)
10. Outlook
* I have been advising companies in the Blockchain space since 2017 and I am teaching, among other
subjects, Blockchain and Digital Currency Law at Indiana University. I would like to thank my assistants
Can Okandan, Adam Kashin, and Rick Tapia for background research going into this report. I am indebted
to Professor Frank Sullivan, member of the ULC Joint Study Committee on the Uniform Commercial Code
and Emerging Technologies, and Andrew Bull, founding partner of Bull Blockchain Law in Philadelphia,
for commenting on earlier drafts. Any remaining errors or omissions are mine alone. For comments or
questions please e-mail femmert@iu.edu.
United States Cryptocurrency Law Page 2 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
V. CRYPTOCURRENCY LEGISLATION AND REGULATION BY THE SEVERAL STATES
1. Overview
2. Uniform Laws
3. Non-Uniform State Laws and Regulations
4. New York Law
5. Wyoming Law
VI. CONCLUSIONS ON THE CURRENT LEGAL REGIME PROVIDED FOR CRYPTOCURRENCIES IN
THE U.S. AND OPPORTUNITIES FOR FUTURE IMPROVEMENT
I. INTRODUCTION
Many experiments with any new technology will fail,
but failures can help point the way to future successes,
so broad room for experimentation – with appropriate protective
measures to reduce and mitigate harm – is paramount.
Experimentation can teach both regulators
and market participants important lessons.
Hester Peirce, Commissioner of the Securities and Exchange Commission (SEC)1
Whenever a new technology emerges and provides new opportunities for business and
potentially new and different solutions for real-world problems, developers of the technology,
developers of its business applications, and investors supporting the developers, are looking for
guidance from regulators. Ideally, the guidance will be more than a snapshot of what is currently
allowed, and include also reliable information on what will be allowed, and on what conditions,
in the foreseeable future. This is all the more important if development of marketable
applications using the new technology is time-consuming and expensive, and if the technology is
not just providing incremental improvements to existing solutions and business models but
seems to be promising revolutionary changes that may well upend entire industries and make at
least some of the existing solutions and business models – and therefore some of the existing
businesses – obsolete.
Examples where such regulatory guidance is needed include the conflict between privacy and
data protection on the one side and the highly personalized marketing of goods and services
based on mining of huge data pools accumulated by companies like Meta (Facebook) or
Alphabet (Google) on the other. The paradigm shift from gasoline and diesel powered cars and
trucks to electric vehicles, with the need for a dense and world-wide system of fast charging
stations and the potential of obliterating the entire network of gas stations as we know them, is
another example. So is the idea of self-driving vehicles.
Blockchain or distributed ledger technology (DLT) is another example since it promises an
upgrade to anything and everything we have been doing on the internet that may well be more
1 SEC Commissioner Hester Peirce, Paper, Plastic, Peer-to-Peer, Remarks at the British Blockchain
Association’s Conference “Success Through Synergy: Next Generation Leadership for Extraordinary
Times”, 15 March 2021, https://www.sec.gov/news/speech/peirce-paper-plastic-peer-to-peer-031521.
United States Cryptocurrency Law Page 3 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
profound than the introduction of smart phones that put the internet – and hundreds of thousands
of apps – at everyone’s fingertips, everywhere and all the time. While we have been able to do a
number of financial transactions on our smart phones, such as checking our bank balances,
making payments via Paypal or Venmo, and ordering stuff on Amazon and Doordash, those were
evolutionary or incremental improvements to existing technologies and business models. As
evidence for the limited impact of those innovations, we may take the fact that they largely did
not require new and special regulation. The risks presented by those innovations – occasional
fraud on the side of mis-representing “vendors” and occasional fraud or abuse by misrepresen-
ting “buyers” – was largely absorbed within the existing systems of customer protection in the
credit card market, i.e. by banks and other centralized institutions acting as trusted interme-
diaries.
Emerging applications of Blockchain and DLT will be very different, however.2 The technology
is creating a trustless environment, i.e. a financial system without the need for trusted inter-
mediaries.3 In the brave new world of cryptocurrencies, there is no need for commercial banks to
facilitate funds transfers, nor for central banks to issue currency and control interest- and
exchange rates. There were no authorities with clearly defined supervisory powers, no
guarantees by institutions or insurers, and not even rules of the road enacted by legislators or
courts, when this study was started in the fall of 2021. Yet, at the peak of the market in
November 2021, the equivalent of US$ 3 Trillion4 were held by millions of individuals in the
form of more than 10,000 new digital currencies in more than 200 million cryptocurrency
wallets, completely disconnected from traditional bank accounts and credit cards. Although the
market cap of all digital currencies has since declined to around US$ 1.6 Trillion,5 these sums
are astonishing, given the fact that every one of those “virtual currencies”6 was privately created
2 For a concise introduction to the technology from a legal perspective see Terry Wong, Blockchain, in
Emma Jones et al. (eds), Digital Lawyering – Technology and Legal Practice in the 21st Century, Routledge
2022, at pp. 303-335.
3 For in-depth analysis see Kevin Werbach, The Blockchain and the New Architecture of Trust, MIT 2018.
Anyone interested in the scientific background see, e.g., Minghi Xu et al., A Trustless Architecture of
Blockchain-Enabled Metaverse, High-Confidence Computing 2023, Vol. 3, No. 1,
https://doi.org/10.1016/j.hcc.2022.100088. For the limits of the trustless environment see Primavera De
Filippi, Blockchain Technology and Decentralized Governance: The Pitfalls of a Trustless Dream,
https://hal.science/hal-02445179.
4 For comparison, overall U.S. GDP in 2021 was around US$ 23.2 Trillion, “only” about 10 times the value
of the cryptomarket. On the other hand, once single company, Apple, was valued at US$ 3 Trillion in
January 2022.
5 For continuously updated information on more than 160 widely distributed digital currencies and the entire
market of coins and tokens see, for example, https://coinstats.app/coins/.
6 The Financial Action Task Force (FATF), an intergovernmental organization “combating money
laundering, terrorist financing and other related threats to the integrity of the international financial system”,
has defined “virtual assets” as “any digital representation of value that can be digitally traded, transferred or
used for payment. It does not include the digital representation of fiat currencies.” See http://www.fatf-ga-
fi.org/publications/virtualassets/documents/virtual-assets.html?hf=10&b=0&s=desc(fatf_releasedate).
“Virtual currencies” are defined as “a digital representation of value that can be digitally traded and
functions as: (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does
United States Cryptocurrency Law Page 4 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
and managed, and not a single one of those wallets was protected by the Federal Deposit
Insurance Corporation (FDIC) or any equivalent mechanisms in other countries. Furthermore,
besides holding value and transferring value from one wallet to another, there was really not all
that much that could be done with all the crypto money since there were not a lot of goods or
services that could be bought with crypto and, more importantly, there were hardly any smart
contract applications7 on the market that could reliably deliver innovative and sophisticated
business solutions.8 Last but not least, the entire market was characterized by extreme volatility
where a single coin – and to some extent the entire market cap – could jump up or down by 5-
10% or more in a single day.
It is safe to say that a significant percentage of the digital coins and tokens were held by specu-
lators lured in by rags-to-riches stories of investors who had bought Bitcoin at a fraction of a
penny and were now traveling the world in private jets.9 Yet, there are just as many tech savvy
investors who created and purchased coins or tokens to support start-ups with promising
business ideas, much like more traditional investors used to buy shares of Apple when most
people still thought of it as a fruit company. Indeed, the perspective of being part of something
not have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment) in any
jurisdiction. It is not issued or guaranteed by any jurisdiction, and fulfils the above functions only by
agreement within the community of users of the virtual currency. Virtual currency is distinguished from fiat
currency (a.k.a. “real currency,” “real money,” or “national currency”), which is the coin and paper money
of a country that is designated as its legal tender; circulates; and is customarily used and accepted as a
medium of exchange in the issuing country. It is distinct from e-money, which is a digital representation of
fiat currency used to electronically transfer value denominated in fiat currency.” See FATF Report, Virtual
Currencies, Key Definitions and Potential AML/CFT Risks, Financial Action Task Force (June 2014),
http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-poten-
tial-aml-cft-risks.pdf.
7 A smart contract is a piece of software running on a Blockchain that automatically executes a function like
a funds transfer if and when certain conditions are met. The fact that the smart contract is stored on a Block-
chain makes it immutable. As an example, a buyer and a seller could agree on a sale of goods where the
buyer locks the funds into a smart contract and the program automatically releases the purchase price to the
seller the moment a third party like a customs office or carrier confirms the shipment of the goods. If the
goods are not shipped by a certain date, the contract can be programmed to automatically return the funds to
the buyer.
8 Buying and selling goods and services alone would not be enough to justify the creation of digital money.
We can already do that with our existing structures, i.e. online banking, credit and debit cards, etc. Unless
DLT would offer very significant efficiencies, i.e. offer the same services much faster or much cheaper or
much safer, there is no reason for switching from fiat to crypto, at least if we disregard the speculative
elements of purchasing and holding cryptocurrencies. As we all know, at least for the time being,
Blockchain-based trading is struggling with scaling up and certainly not delivering solutions for simple
purchasing transactions that are faster, cheaper and/or safer than traditional methods. However, if we can
create a number of entirely new use cases with cryptocurrencies, real and useful (business) solutions that
are not achievable with fiat money and traditional financial services, the entire frame of reference changes.
9 Bitcoin, the most widely known digital currency, was launched in January 2009, and started trading in July
2010 at US$ 0.0008. In November 2021, it traded at more than US$ 68,000, at least for a while. An investor
who put US$1,000 into Bitcoin at the start and cashed out at the peak would have turned US$ 1,000 into a
fortune of US$ 8.5 Billion.
United States Cryptocurrency Law Page 5 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
new and exciting, something entirely outside of the control of traditional state authorities,
unburdened by mind-numbing bureaucracies and ever-more partisan and corrupt politics, was
just as much a motivator for younger people, in particular, as the dream of easy money.
Economists, the global financial community, and government entities have taken
notice of the disruptive power of this technology to recast centralized commercial
relationships with systems designed to validate transactions using math and eco-
nomics, rather than relying on trusted third parties [like banks or stock exchan-
ges]. Cryptocurrencies have created politically independent payment systems.
Blockchain technology offers the promise of significant improvements to the cost
and speed of maintaining data. Tokenization created lucrative and controversial
fundraising techniques. The seismic shocks of these new systems, products, and
techniques are still being felt around the globe.10
Much of the promise of DLT remains to be demonstrated in practice, and the technology is still
struggling with scaling up.11 However, what ensures that Blockchain, DLT, and Decentralized
Finance (DeFi) will not become bubbles that are bound to burst and be forgotten is the sustained
investment into actual business solutions via the development of smart contract applications
running on a Blockchain. Since 2021, this sustained investment exceeded 1 billion US dollars in
every single month. By 2024, the technology itself is also celebrating its 15th birthday and we
may safely say that the investors who continue to pour ever more money into the development of
actual business models and solutions – “use cases” for cryptocurrencies – have a pretty good
understanding what the technology can and cannot achieve and what they are buying with all this
money.12 Another indicator is the fact that virtually all of the largest and best-known traditional
10 Daniel Stabile, Kimberly Prior & Andrew Hinkes, Digital Assets and Blockchain Technology – US Law and
Regulation, Edward Elgar 2020, at 7.
11 On the Ethereum Blockchain, the confirmation of a transaction could cost several US Dollars in gas fees
and take tens of minutes before the system switched from Proof-of-Work (PoW) to Proof-of-Stake (PoS) on
15 September 2022. While this “merge” reduced the energy consumption of Ethereum mining by more than
99%, wait times in 2023 are still between 15 seconds and five minutes (see, e.g., https://cointele-
graph.com/news/how-to-check-an-ethereum-transaction), and gas fees, which depend on network traffic
volume, can still be in the range of several US Dollars (see, e.g., https://bitinfocharts.com/compari-
son/ethereum-transactionfees.html#3y). Obviously, this won’t work for someone who just wants to pay for
a coffee at Starbucks or check out with a shopping cart at the mall.
12 For explanations of the shortcoming of centralized finance that are addressed by decentralized finance
(DeFi), see Campbell R. Harvey, Ashwin Ramachandran & Joey Santoro, DeFi and the Future of Finance,
Wiley 2021, in particular chapters I and V.
To give just a few examples of use cases that are actually in the works or already available:
– international funds transfers in competition with banks or financial service providers like
WesternUnion (e.g. https://stellar.org/);
– secure long-term data storage, for example to document authorship or copyright of artists (see,
e.g. https://www.artory.com/);
– tracking of sensitive and valuable information to protect against falsification or abuse (see, e.g.
DeBeers Tracr for the provenance and ownership of diamonds https://www.debeersgroup.com/sus-
tainability-and-ethics/leading-ethical-practices-across-the-industry/tracr), or Trustgrid’s manage-
ment of personal medical records https://trustgrid.com/personal-medical-records/).
United States Cryptocurrency Law Page 6 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
financial service providers are staking their claims and participating in the revolution, in order
not to be left behind.13
What is far less clear, however, is the guidance provided by the regulators in different juris-
dictions. The inventors of digital money were partly motivated by a rejection of traditional
government control over money and money supply. When Satoshi Nakamoto published his
famous white paper in 2009,14 the world was trying to climb out of the 2007/08 Financial Crisis15
and the U.S. Federal Government had just bailed out the financial sector with over US$ 1
Trillion in funds that were essentially newly printed money, diluting the existing money supply
and, therefore, the value of assets and savings in the hands of corporations and private citizens.1 6
For more information see Sam Daley, 34 Blockchain Applications and Real-World Use Cases Disrupting
the Status Quo, 16 December 2021, https://builtin.com/blockchain/blockchain-applications. See also Centre
for Finance, Technology and Entrepreneurship (CFTE), Blockchain and Digital Assets Projects Worldwide
in 2023, available at https://courses.cfte.education/blockchain-and-defi-projects/.
13 Again, just a few random examples: Deloitte, one of the Big Five accounting firms, had the following on its
website in February 2023: “Are you looking to unravel the complexities of blockchain and digital assets?
What may be a new and uncertain space to you is territory we’ve been charting for more than a decade.
Regulatory compliance? We’ve got you covered. Technology and systems implementation? Been there,
solved that. You can trust Deloitte’s Blockchain & Digital Assets team to meet your business where it’s at
and likely take it further than you can imagine...” (https://www2.deloitte.com/us/en/pages/about-deloitte/so-
lutions/blockchain-and-digital-assets.html?id=us:2ps:3gl:bdastr22:awa:abt:090222:defi%20bank:b:c:kwd-9
84113104755&gclid=Cj0KCQiAi8KfBhCuARIsADp-A570Bl47HUwWQRcAXuHaTRm6MD-s66mLzcG
KCAzv1f_ub4b78IoIPOsaAq_iEALw_wcB). UBS, the biggest bank in Switzerland, announced the follow-
ing in November 2022: “UBS AG launches the world’s first digital bond that is publicly traded and settled
on both blockchain-based and traditional exchanges. The CHF 375 million bond is digital only, and will be
issued on the blockchain-based platform of SIX Digital Exchange (SDX) while being dual listed and traded
on SDX and SIX Swiss Exchange (SIX).” (https://www.ubs.com/global/en/media/display-page-ndp/en-
20221103-digital-bond.html). Last but not least, some 30 of the largest insurance companies in North
America, including giants like Nationwide, have created The Institutes RiskStream Collaborative, “the
insurance industry’s largest blockchain consortium.” They are aiming “to create an ecosystem that
leverages a scalable, enterprise-level blockchain and or distributed ledger framework in order to streamline
data flow and verification, lower operating costs, reduce vendor costs, drive efficiencies, and enhance the
customer experience.” An example would be a standardized “First Notice of Loss Data Sharing” function
that will simplify the filing of certain types of claims and automatically share the loss data between the
members of the consortium, facilitating early agreement on liability, and reducing the potential for
fraudulent or parallel claims. (https://www.riskstream.org/about; and https://marketplace.guide-
wire.com/s/product/riskstream-
accelerator-for-first-notice-of-loss-data-sharing-for-claimcenter/01t3n00000GfLPfAAN?language=en_US).
14 Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, https://bitcoin.org/bitcoin.pdf.
15 A detailed historic analysis of the causes of the crisis is provided by Barrie Wigmore, The Financial Crisis
of 2008 – A History of US Financial Markets 2000-2012, Cambridge Univ. Press 2021. See also Timothy
Geithner, Stress Test – Reflections on Financial Crises, Broadway Books 2014. The best analysis in historic
context can be found in Alan S. Blinder, A Monetary and Fiscal History of the United States, 1961-2021,
Princeton Univ. Press 2022.
16 Much of the funds were used to purchase troubled assets. Since at least some of those were later recovered
or sold, the total cost of the bailout to the taxpayer has been estimated at around US$ 498 Billion or 3.5% of
U.S. GDP. Most of that money went to “large, unsecured creditors of large financial institutions [... in
United States Cryptocurrency Law Page 7 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
The lobbying power of the financial sector not only secured this largest ever bailout, it also made
sure that the funds were transferred literally without any strings attached. As a consequence, the
wall street institutions used much of the bailout money to bolster their balance sheets – and pay
significant bonuses to their executives – rather than keeping main street businesses going and
preventing struggling home owners and families from becoming homeless.17
Traditional fiat currencies are controlled by central banks who are overseen, whether they are
nominally independent or not, by governments and legislators, and subject to political pressures
and exigencies.18 Politicians, in turn, are beholden to powerful corporate interests and donors,
much more than the diffuse and malleable general electorate.19
particular] banks, pension and mutual funds, insurance companies”. See Deborah Lucas, Here’s How Much
the 2008 Bailouts Really Cost, MIT Sloan School of Management, https://mitsloan.mit.edu/ideas-made-to-
matter/heres-how-much-2008-bailouts-really-cost. In the EU, similar amounts of money were committed,
although recovery was more successful in some countries than in others.
17 Instead of many, see Paul Krugman, The Return of Depression Economics and the Crisis of 2008, Norton &
Co. 2009; Robert Reich, The System - Who Rigged It, How We Fix It, Alfred Knopf 2020; Joseph Stiglitz,
Freefall – America, Free Markets, and the Sinking of the World Economy, Norton & Co. 2010; Joseph
Stiglitz, Rewriting the Rules of the American Economy: An Agenda for Growth and Shared Prosperity,
Norton & Co. 2015; as well as Martin Wolf, The Shifts and the Shocks: What We’ve Learned – and Have
Still to Learn – from the Financial Crisis, Penguin 2014.
18 Even “independent” central banks like the U.S. Federal Reserve or the European Central Bank are subject
to political mandates, e.g. to promote maximum employment, price stability and/or moderate long-term
interest rates, and to indirect oversight via the appointment of officers and board members. In particular,
when choices have to be made, for example whether to prioritize full employment at the expense of price
stability or the other way around, personalities matter. It is no coincidence, therefore, that U.S. Presidents
(and politicians in other countries around the world) are keenly aware of the importance of getting certain
individuals into key positions at their respective central banks that are going to help them in the pursuit of
their respective political agendas. For further analysis see, for example, Caitlin Ainsley, The Politics of
Central Bank Appointments, The Journal of Politics 2017, Vol. 79 No. 4, at 1205-1219. The distinction
between de jure independence and de facto independence of central banks is nicely elaborated in Jasmine
Fouad, Mona Fayed, Heba Talla & A. Eman, A New Insight into the Measurement of Central Bank Inde-
pendence, Journal of Central Banking Theory and Practice 2019, Vol. 8 No. 1, at 67-96.
19 In the 2021-2022 election cycle – and this was not a presidential election year – candidates and members of
the House of Representatives raised a total of US$ 1,913,875,931. Candidates and members of the Senate –
of which only 1/3 stood for (re-)election in 2022 – were hardly outspent and raised their own US$
1,786,632,087. Just to be clear, these are Billions of Dollars! See https://www.opensecrets.org/elec-
tions-overview. It would surely be naive to think that all these political action committees and mega donors,
who contribute the bulk of the money, have no ulterior motives and expect nothing in return.
Overall, OpenSecrets recorded the 2022 “Total Cost of Election” at US$ 8.9 Billion. This was
modest, compared to the presidential election in 2020, which clocked in at a total cost of US$ 16.4 Billion.
See https://www.opensecrets.org/elections-overview/cost-of-election.
These are, of course, not one-time expenses. Thanks to the electoral system created by the U.S.
Constitution, one third of all 100 Senators and all of the 435 members of the House of Representatives are
up for (re-)election every two years, and every other cycle, i.e. every four years, is also a presidential
election. In other words, one third of U.S. Senators and all of the Representatives in the House essentially
spend every odd year soliciting donations and every even year spending those – and more – donations on
their re-election campaigns. No wonder that they have little time for actual governing.
Just for fun, we can compare these numbers to the cost of fixing homelessness in the United States,
United States Cryptocurrency Law Page 8 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Cryptocurrencies, by contrast, are either controlled by pre-determined mathematical algorithms
(for example, the cap on total supply of Bitcoin) or by consensus mechanisms potentially
involving all those who use and own the currency (miners, app developers, exchanges, wallet
providers, node operators, end users...). The decentralization of control, wrestling the currency
out of the hands of politicians seeking re-election, and giving it to stake holders seeking preser-
vation of value, is one of the key features of cryptocurrencies. Unsurprisingly, however, the
political establishment and the established financial industry is not willing to give up control
over currencies without a fight.20 In this regard, it did not help that a variety of less benevolent
uses of cryptocurrencies were also introduced, such as entrepreneurs with impressive websites
and not so impressive business models absconding with the money of retail investors, wealthy
people avoiding income taxes by relying on the anonymity offered by cryptocurrencies, as well
as willing and unwilling parties making financial transfers to and from organized crime and
terrorist organizations.21 However, there is reason to believe that illegal activity involving
cryptocurrencies is in reality no more prevalent than illegal activity involving fiat currencies.22 In
estimated at US$ 20 billion by the Department of Housing and Urban Development (HUD); see
https://aah-inc.org/wp-content/uploads/2020/09/whomeless.pdf.
20 In this context it is little known – and certainly has not featured prominently in recent debates – that the
idea of privately created currencies is not new at all. In fact, prior to the creation of the first central banks
with special and, eventually, monopoly rights granted by their respective sovereigns in the 17th and 18th
centuries, the majority of “money” was privately created. From ancient Babylonian clay tablets to more
recent promissory notes, and the most complex and highly leveraged derivatives (futures contracts, forward
contracts, options, swaps), traders and financial service providers have been creating liquidity in financial
markets merely by making promises that the bearer or named beneficiary will be paid at a certain time or if
and when certain conditions are met. And since ancient Babylonian times, the bearer or named beneficiary
not only had to bear the risk that the promisor might default but also the risk that the promised amount
might change in value by the time payment is due. Arguably, cryptocurrencies are no different at all. For
more detailed analysis see Niall Ferguson, The Ascent of Money - a Financial History of the World,
Penguin 2008; John Smithin (ed.), What Is Money?, Routledge 2000; and Jacob Goldstein, Money – The
True Story of a Made-Up Thing, Hachette 2020, in particular Chapters 13 and 15.
21 To give but one example, on 13 January 2022, BBC News reported that the “[l]argest darknet stolen credit
card site closes”. A company or website called “UniCC” that could be found only on the Tor or Dark Web,
a secretive part of the internet or WorldWideWeb that can only be accessed with special software and is
almost exclusively used for illegal activities, was no longer offering stolen credit card details for millions of
individuals because the owners were retiring. According to the BBC, the administrators of this illegal
marketplace had earned “an estimated $358 [Million]”, in cryptocurrency payments from 2013 to 2021. See
https://www.bbc.com/news/technology-59983950. Additional examples are provided in Neel Mehta, Aditya
Agashe & Parth Detroja, Bubble or Revolution? The Present and Future of Blockchain and Crypto-
currencies, Paravane Ventures 2020, at 70-75.
22 Various sources now estimate that the percentage of illicit activity on Blockchains is no greater than the
percentage of illicit activities being conducted in the traditional banking system. Thibault Schrepel recently
referred to an estimate of 0.15% (Schrepel, Blockchain + The Law, conference presentation, Amsterdam 3
February 2022). SEC Commissioner Peirce quoted a study putting the criminal activity at 0.34% of crypto
transactions, with a total volume of US$ 10 Billion. This sounds like a lot until we remind ourselves that the
overall size of illegal activity is estimated at US$ 2.25 to 2.5 Trillion per year or between 11 and 12% of
global GDP (Hester Peirce, supra note 1). US$ 10 Billion in crypto-related illegal activity would be a tiny
0.5% slice of that pie.
United States Cryptocurrency Law Page 9 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
fact, since all cryptocurrency transactions can be tracked by anyone and forever on their
respective Blockchains, this technology is more transparent and ultimately safer than traditional
financial transactions that can be routed quickly through banks in offshore financial centers, let
alone traditional cash transactions that cannot be tracked at all.2 3
This report will provide an overview of official responses, regulatory guidance, and legislative
mandates created for DLT and cryptocurrencies at the level of the U.S. Federal Government and
at the level of the Governments of the Several States in the Union. Part II introduces relevant
Federal laws currently in force, none of which were specifically crafted or adapted for
cryptocurrencies. Part III explains what the various Federal agencies have done to regulate
cryptocurrencies in the absence of more suitable legislative guidance. Part IV looks at
discussions being had in the U.S. Congress, in particular after multiple bankruptcies and crashes
of cryptobusinesses in 2021 and 2022. There seems to be at least a chance that Federal
legislation is emerging, after all. Part V explains what the Several States of the U.S. have done to
date. Almost all States have adopted some and some States have adopted quantitatively and
qualitatively impressive legislation. The analysis will single out Wyoming and New York as
examples and, in a way, polar opposites, to showcase State approaches. Finally, the report will
conclude with an assessment of the extent sensible regulatory guidance is currently being
provided in the U.S. and how this guidance might be improved in future.
II. U.S. FEDERAL LAWS IN FORCE
1. Introduction
The United States Constitution provides for a federal structure of government, and grants to the
Federal Government only the powers enumerated in the Constitution itself. All remaining powers
are reserved to the Several States. Neither the Constitution of 1787, nor any of the subsequent
amendments to it, mention regulation of the internet, distributed ledger technology, or digital
currencies, as a power of the Federal Government. Furthermore, within the Federal Congress and
the U.S. Supreme Court, the dominant views oppose pretty much any expansion of Federal
powers at the expense of the Several States.24 Nevertheless, it is equally obvious that the Federal
Government would have the power to regulate cryptocurrencies on the basis of the interstate
commerce clause, which grants to the Federal Government the power “[t]o regulate Commerce
23 A good example is the 2016 hack of Bitfinex. The hackers stole what was US$ 71 Million worth of Bitcoin
at the time. However, the BTC were traceable and sitting in a wallet under observation by the U.S.
authorities. Since 2016, the value of the loot had increased to almost US$ 4 Billion, while “the loot sat in
plain sight online [...] as if a robber’s getaway car were permanently parked outside the bank, locked tight,
money still inside” (Ali Watkins & Benjamin Weiser, Modern Crime, a Tech Couple And a Trail of
Syphoned Crypto, New York Times 13 February 2022, at A1 and A18). When the hackers finally tried to
remove the loot, they were identified, arrested, and are now facing up to 25 years in prison (id.).
24 See, e.g. United States v. Lopez, 514 U.S. 549, and commentary by Steven Calabresi, “A Government of
Limited and Enumerated Powers”: In Defense of United States v. Lopez, Michigan Law Rev. Vol. 94, No.
3 (Dec., 1995), at 752-831.
United States Cryptocurrency Law Page 10 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
with foreign Nations, and among the several States...].25 So far it has not done so and, not least
because of the highly partisan environment in Congress, it is highly unlikely that specific
legislation will be developed at the Federal level in the foreseeable future.
However, this does not mean that there is no Federal law, let alone that the Federal level is of no
concern to developers, traders, and users of cryptocurrencies.
First, there are Federal laws of relevance, even if they were not designed for and do not
explicitly mention DLT technology or digital money. Second, there are regulatory agencies like
the Securities and Exchange Commission (SEC) issuing rules and opinions within their
respective areas of responsibility.
Among the Federal laws of relevance are banking- and money services business laws and
regulations,26 as well as a variety of consumer protection laws.27 The financial and securities
industry is specifically governed by the following Federal laws:
• Securities Act of 1933
• Securities Exchange Act of 1934
• Commodity Exchange Act (CEA) of 1936
• Trust Indenture Act of 1939
• Investment Company Act of 1940
• Investment Advisers Act of 1940
• Sarbanes-Oxley Act of 2002
• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
• Jumpstart Our Business Startups (JOBS) Act of 2012, as well as
• a number of Federal Agency Rules and Regulations28
25 U.S. Constitution, Article 1, Section 8, Clause 3. For detailed analysis see Erwin Chemerinsky, Constitu-
tional Law, Wolters Kluwer, 6th ed. 2019, in particular Chapter 2.C., as well as William Eskridge & John
Ferejohn, The Elastic Commerce Clause: A Political Theory of American Federalism, Vand. L. Rev. 1994,
Vol. 47, at 1355-1400.
26 For a complete list of and links to Federal banking laws (U.S. Code Title 12) see https://www.law.cor-
nell.edu/uscode/text/12. For links to the specific laws see https://www.investor.gov/introduction-in-
vesting/investing-basics/role-sec/researching-federal-securities-laws-through-sec. For a list of and links to
the respective Federal rules and regulations provided by the SEC see
https://www.sec.gov/about/laws/secrulesregs.htm.
27 For a list of the main consumer protection laws of relevance in the financial services sector see
https://www.consumerfinance.gov/rules-policy/regulations/. The most important of these laws and
regulations, and the powers of the Consumer Financial Protection Bureau (CFPB), are discussed infra,
notes 198-218 and accompanying text.
28 By contrast, the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022, better
known as the CHIPS and Science Act, primarily provides Federal funding to expand semiconductor
production capacity and various types of science- and artificial intelligence research and development. To
this end, it provides US$ 280 Billion in subsidies over 10 years. The boost it will provide to the high tech
sector in the U.S., combined with restrictions on high tech imports from and exports to China, will only
indirectly affect the Blockchain and DeFi markets. Beyond that, the CHIPS and Science Act does not
regulate financial or securities markets or the providers of cryptocurrency- or DeFi services.
United States Cryptocurrency Law Page 11 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Prior to 2002, the two main Federal laws providing minimum standards of investor protection in
their relations with publicly listed corporations were the Securities Act of 1933 (as amended) and
the Securities Exchange Act of 1934 (as amended).29 Those laws will be discussed below in the
context of the approach taken by the Securities and Exchange Commission (SEC) toward crypto-
currencies and businesses using them. Another set of laws and regulations aimed less at retail
investors and more at manipulation in established markets is the Commodity Exchange Act and
the regulations adopted by the Commodities Futures Trading Commission (CFTC).30 This will
also be discussed below in the context of the agency’s regulations and opinions.
2. Sarbanes-Oxley
The Sarbanes-Oxley Act of 200231 was adopted in response to a series of spectacular corporate
scandals, including Enron, WorldCom, and others.32 The common features were manipulations of
corporate financial statements, for example moving liabilities and losses into “special purpose
vehicles”, which were signed-off by corporate auditors like Arthur Anderson, unwilling to risk
lucrative business relations. To counter these problems, Sarbanes-Oxley (SOX) provided a
reform of the audit profession (Title I), requirements for auditor independence (Title II), stricter
rules for corporate and management accountability (Title III), requirements for disclosure of off-
balance sheet transactions and loans (Title IV), stronger protections for whistleblowers (Title
VIII), as well as stricter penalties for managers and external auditors, including prison for up to
20 years (Titles IX and XI).33 The SOX Act applies to all publicly traded companies in the U.S.,
as well as foreign companies if they are publicly traded and doing business in the U.S. This
includes cryptocurrency businesses if the shares are traded on public exchanges. However, what
has not yet been definitively resolved is the question whether the SOX Act applies to companies
merely because their proprietary coins or tokens are publicly traded on crypto exchanges. On the
one hand, this was clearly not envisaged by the legislature when the Act was first conceived. On
the other hand, the SOX Act refers to “issuers” of securities (15 U.S. Code 7201, Sec. 2(7)) and
is applied and enforced by the SEC which has classified most cryptocurrencies to be securities.34
29 The 1933 Act is focused on initial offerings or sales of securities; the 1934 Act is focused on subsequent
trading of securities on exchanges.
30 https://www.law.cornell.edu/uscode/text/7/chapter-1.
31 Public Law 107-204, 15 U.S. Code 7201 et seq. https://www.govinfo.gov/con-
tent/pkg/PLAW-107publ204/html/PLAW-107publ204.htm.
32 For discussion see, e.g., James Marmerchant, Sarbanes Oxley-Act Completed Guide: Risk Management
Personnel, Auditors and Senior Managers, 2018; as well as William S. Lerach, Plundering America: How
American Investors Got Taken for Trillions by Corporate Insiders – The Rise of the New Kleptocracy,
Stanford Journal of Law, Business & Finance 2002, Vol. 8, pp. 69-152, with many additional references.
33 For more information see, e.g., Sanjay Anand, Sarbanes-Oxley Guide for Finance and Information
Technology Professionals, Wiley, 2nd ed. 2006; and Stephen Bainbridge, The Complete Guide to Sarbanes-
Oxley – Understanding How Sarbanes-Oxley Affects Your Business, Adams Business 2007.
34 This is the approach taken by Chairmen Jay Clayton (2017-2020) and Gary Gensler (since 2020), see
discussion infra, notes 102 et seq. and accompanying text. However, the 2019 SEC Framework for
“Investment Contract” Analysis of Digital Assets at least tries to provide criteria when a digital asset is and
is not a security; see https://www.sec.gov/files/dlt-framework.pdf.
United States Cryptocurrency Law Page 12 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Bitcoin (BTC) and Ether (ETH) are exceptions in this regard since they have never been offered
by an original issuer in anything that could resemble an investment contract. Nevertheless,
businesses trading in BTC or ETH may be offering “investment contracts.”35
The safe view is probably that SOX applies to larger businesses planning or implementing an
Initial Coin Offering (ICO) at least in part in the U.S., even if they are otherwise not publicly
traded. Such businesses should adhere to SOX requirements for financial reporting, internal
controls, and executive accountability. The same would not be the case for businesses issuing
stablecoins, since they would normally not be classified as securities, and for small businesses
not comparable to most publicly traded companies, and not issuing significant quantities of
cryptocurrency.36
3. Jumpstart Our Business Startups (JOBS)
Since some of the requirements of the SOX Act were perceived as unduly onerous and dis-
couraging smaller companies from going public, the JOBS Act of 2012 provides some relief for
smaller companies and extends the period when newly listed companies have to start with full
reporting from two to five years.37 The best known part of the JOBS Act, however, is Title III,
commonly known as the Crowdfund Act.38 This Title amended the Securities Act of 1933 and
created exceptions for small scale crowdfunding efforts. These are defined as not exceeding
US$1 Million in total funds raised and not exceeding
(i) the greater of $2,000 or 5 percent of the annual income or net worth of [raised
from any one individual] investor, as applicable, if either the annual income or the
net worth of the investor is less than $100,000; and
(ii)10 percent of the annual income or net worth of such investor, as applicable, not to
exceed a maximum aggregate amount sold of $100,000, if either the annual income or net
worth of the investor is equal to or more than $100,000.39
However, even small scale crowdfunding efforts have to be “conducted through a broker or
funding portal” that is registered with the SEC and meets no fewer than eleven additional con-
ditions.40 Furthermore, the issuer itself has to comply with a half dozen conditions, including
making a complex filing with the SEC.41 Last but not least, the Crowdfund Act provides far
35 See the example of Bitcoin Savings and Trust (BTCST), infra notes 102-106 and accompanying text.
36 The threshold question should be whether the businesses are able to influence financial markets. This
remains to be confirmed by the SEC and other regulators, and ultimately the courts, however.
37 https://www.govinfo.gov/content/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf.
38 The full name of this Title is “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure
Act of 2012”. See Sec. 301 of the Act.
39 Id., Sec. 302(a).
40 See Sec. 4A(a) of the Securities Act of 1933, as amended (15 U.S.C. 77a et seq.).
41 Id., Sec. 4A(b).
United States Cryptocurrency Law Page 13 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
reaching civil liability for issuers who do not (fully) comply with the requirements of the act,42
and even for brokers and funding portals that previously did not have to fact-check the infor-
mation provided by prospective issuers. The SEC fleshed out the requirements with a set of
regulations that entered into force in 2016.43 Unsurprisingly, the practical allure of the Crowd-
fund Act has been limited, and the stated goal of facilitating access to capital for start-ups was
largely missed.44
4. Dodd-Frank
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 201045 was created in
response to the financial crisis of 2007/08. By contrast to the situation in 2002, when corporate
scandals triggered legislation, this time it was misbehavior in the financial sector.
The financial crisis of 2007-2008 was one of the worst economic disasters in
modern U.S. history, and it was in large part caused by bad behavior at banks.
The Dodd-Frank Act was created in an attempt to keep anything similar from
happening again.
In the 25 years leading up to the financial crisis of 2007-2008, financial industry
deregulation permitted – some might even say encouraged – U.S. financial
services firms to take bigger and bigger gambles, and lend in riskier ways than
ever before. The result was an epic bubble in the U.S. housing sector that wrecked
the banking industry and crashed stock markets at home and abroad, driving the
worst global recession seen in generations.46
One reason why the Act took two years to draft and pass into law is the sheer scale of the
venture, 848 pages of small print.47 Even after it was adopted, much of the Dodd Frank Act
required implementation via Federal regulations and/or agency restructuring, another time
consuming venture. Furthermore, many elements of the Act have been controversial and, among
others, President Trump tried to roll-back a number of its provisions. That being said, although it
42 Sec. 12(a)(2) of the Securities Act of 1933 now provides not only that investors can sue the issuer for
damages but also provides a cause of action directly and personally against any “officers and directors for
false or misleading statements or omissions in any written or oral communication. A plaintiff need only
prove that an untrue statement or misleading omission occurred and that the defendant did not exercise
reasonable care, even if loss causation, reliance, and scienter are not shown.” See David Mashburn, The
Anti-Crowd Pleaser: Fixing the Crowdfund Act’s Hidden Risks and Inadequate Remedies, 63 Emory L. J.
127 (2013), at 127.
43 17 C.F.R. pt. 200, 227, 232, 239, 240 and 249.
44 See, e.g. Patricia Lee, Access To Capital or Just More Blues? Issuer Decision-Making Post SEC
Crowdfunding Regulation, 18 Tenn. J. Bus. L. (2016).
45 For the full text see https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/docu-
ments/file/hr4173_enrolledbill.pdf.
46 Kelly Anne Smith, How the Dodd-Frank Act Protects Your Money, Forbes Advisor, 20 July 2020,
https://www.forbes.com/advisor/investing/dodd-frank-act/.
47 Supra, note 45.
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is complex and not exactly a model of high quality legislative drafting, the Act pursues three
clear and important objectives, and does so reasonably well.48
The first goal of Dodd Frank is to reign in the riskiest activities of banks and financial service
providers. The Volcker Rule prevents banks from proprietary speculative trading in securities,
futures, options, and other derivatives.49 The Securities and Exchange Commission’s powers
were extended and it is now charged with regulating derivative trading50 as part of a broader
push to better manage the risks emanating from the shadow banking system51 and its creation of
ever more artificial money in the form of derivatives. This goal is pursued, inter alia, by a
requirement that derivatives be cleared and traded on exchanges, effectively guaranteeing the
performance of both sides via clearinghouses.52 This is relevant in the present context. If a smart
contract “incorporates software code to automate aspects of the derivative transaction and
operates on a distributed ledger, such as a blockchain”,53 it is called a “smart derivatives
48 Although he may not be entirely neutral when it comes to an assessment of the strengths and weaknesses of
the Act, Senator Dodd commented in 2020, when reviewing the Act in light of the Coronavirus crisis, that
“we would be in a far deeper mess today if we had not done what we did in 2010”; see
https://www.brookings.edu/events/a-decade-of-dodd-frank/.
49 Section 619 of the Dodd Frank Act. For a detailed description see David Carpenter & Maureen Murphy,
The Volcker Rule: A Legal Analysis, Congressional Research Service 2014, https://ecommons.cor-
nell.edu/xmlui/bitstream/handle/1813/78975/CRS_The_Volcker_Rule.pdf?sequence=1. Critical reviews are
provided, inter alia, by John Coates, The Volcker Rule as Structural Law: Implications for Cost-Benefit
Analysis and Administrative Law, European Corporate Governance Institute Working Paper No. 299/2015,
and Charles Whitehead, The Volcker Rule and Evolving Financial Markets, 1 Harv. Bus. L. Rev. 39 (2011).
50 Titles VI, VII and IX of the Act.
51 Investopia defines the shadow banking system as “the group of financial intermediaries facilitating the
creation of credit across the global financial system but whose members are not subject to regulatory
oversight. The shadow banking system also refers to unregulated activities by regulated institutions.
Examples of intermediaries not subject to regulation include hedge funds, unlisted derivatives, and other
unlisted instruments, while examples of unregulated activities by regulated institutions include credit
default swaps.” See https://www.investopedia.com/terms/s/shadow-banking-system.asp.
52 Title VIII of the Act. David Skeel explains the effects using the example of the hedging strategy used by
Southwest Airlines to reduce the impact of rising oil prices: “An airline may buy an oil derivative—a
contract under which it will be paid if the price of oil has risen at the end of the contract term—to hedge
against changes in oil prices. Southwest Air’s judicious use of these derivatives was one of the keys to its
early success. [...] To clear a derivative (or anything else, for that matter), the parties arrange for a clearing-
house to backstop both parties’ performance on the contract. If the bank that had sold Southwest an oil
derivative failed, for instance, the clearinghouse would pay Southwest the difference between the current
and original oil price or would pay for Southwest to buy a substitute contract. If the same derivative were
exchange traded, it would have standardized terms and would be purchased on an organized exchange,
rather than negotiated privately by Southwest and the bank. Clearing reduces the risk to each of the parties
directly, while exchange trading reduces risk to them and to the financial system indirectly by making the
derivatives market more transparent.” See David Skeel, The New Financial Deal: Understanding the
Dodd-Frank Act and its (Unintended) Consequences, Wiley 2010, p. 5.
53 Quoted from the Derivatives & Repo Report of Perkins Coie LLP, 21 December 2020, https://www.deriva-
tivesandreporeport.com/2020/12/isda-continues-guidelines-for-smart-derivatives-contracts-series-with-credi
t-and-fx-guidelines/.
United States Cryptocurrency Law Page 15 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
contract” and subject to the provisions of Dodd Frank. This explains why Coinbase, the largest
U.S.-based crypto exchange, acquired the crypto futures exchange FairX in 2022, in order to be
able to offer crypto derivatives in the U.S.54
Second, the Dodd Frank Act creates a system to oversee financial institutions and limit the
damage caused by potential failure of one or more large financial institutions. In essence, this
part of the Dodd Frank Act is intended to keep banks and other financial service providers from
overly risky business conduct and from becoming too big to fail.55 This section is increasingly
relevant for the DLT financial service industry since some providers are already meeting the
thresholds or could be deemed systemically important companies.56
54 Reuters, Coinbase Buys Crypto Futures Exchanges, Plans to Sell Derivatives in U.S., 13 January 2022, see
https://www.reuters.com/technology/coinbase-buys-crypto-futures-exchanges-plans-sell-derivatives-us-202
2-01-13/.
55 There are several components of the Act in pursuit of this goal. The Federal Reserve now has to conduct
annual stress tests for the largest banks and financial institutions (Title I). Title II provides rules and
authorities for the Securities Investor Corporation (SPIC) for the orderly liquidation of troubled financial
companies. The insurance industry is being supervised by the Federal Insurance Office (FIO) at the
Treasury Department (Title V). Hedge Funds have to register with the SEC and provide information about
their trades and portfolios (Title IV).
Title I Section 112 of the Act on the authority of the Financial Stability Oversight Council (FSOC)
includes the goal “to promote market discipline, by eliminating expectations on the part of shareholders,
creditors, and counterparties of [large, interconnected bank holding companies or nonbank financial
companies] that the Government will shield them from losses in the event of failure”, the so-called moral
hazard. For additional analysis see, e.g. Charles Goodhart, The Regulatory Response to the Financial Crisis,
Edward Elgar Publishing 2009; Elisa Kao, Moral Hazard during the Savings and Loan Crisis and the
Financial Crisis of 2008-09: Implications for Reform and the Regulation of Systemic Risk through
Disincentive Structures to Manage Firm Size and Interconnectedness, 67 N.Y.U. Ann. Surv. Am. L.
(2011-2012), at 817-860; Jack Knott, The President, Congress, and the Financial Crisis: Ideology and
Moral Hazard in Economic Governance, Presidential Studies Quarterly 2012, Vol. 42, No. 1, at 81-100;
Karl S. Okamoto, After the Bailout: Regulating Systemic Moral Hazard, 57 UCLA L. Rev. 183
(2009-2010), at 183-236; as well as Noel Murray, Ajay K. Manrai, and Lalita Ajay Manrai, The Financial
Services Industry and Society: the Role of Incentives/Punishments, Moral Hazard, and Conflicts of Interests
in the 2008 Financial Crisis, Journal of Economics, Finance and Administrative Science 2017, Vol 22, No.
43, at 168-190.
56 The Dodd Frank Act focuses on bank holding companies with more than US$ 50 Billion in assets, as well
as “nonbank financial institutions such as investment banks or insurance holding companies that a new
Financial Stability Oversight Council deems to be systemically important.” See David Skeel, The New
Financial Deal: Understanding the Dodd-Frank Act and its (Unintended) Consequences, Wiley 2010, p. 5.
BlockFi, a large Decentralized Finance (DeFi) service provider based in Jersey City, NJ, was recently
valued somewhere between US$ 5 and 10 Billion. Since it advertises its services as intended to “Redefine
Banking” and provides interest bearing accounts, as well as loans, BlockFi is probably a bank (Investopia
calls it a “crypto bank”, whatever that means, see https://www.investopedia.com/blockfi-vs-coinbase-5188-
425#:~:text=While%20BlockFi%20is%20privately%20owned,services%20and%20interest%2Dbear-
ing%20accounts) and, therefore, still too small to meet the threshold of Dodd Frank (but see note 68). By
contrast, Coinbase, founded in San Francisco in 2012 and today the largest crypto exchange based in the
U.S., soared to a market valuation of US$ 85 Billion after it started trading on Nasdaq, putting it easily
within reach of the Dodd Frank mechanisms. Importantly, the Dodd Frank Act also covers foreign banks if
they maintain “a branch or agency in a State” or control “a commercial lending company organized under
United States Cryptocurrency Law Page 16 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
The third central goal of the Dodd Frank Act is being pursued with the creation of the Consumer
Financial Protection Bureau (CFPB). The CFPB is a powerful new Federal agency “that makes
sure banks, lenders, and other financial companies treat [consumers] fairly.”57 The CFPB has the
power to order “restitution, disgorgement, injunctive relief, and significant civil penalties for
violations of the 19 federal statutes under its purview”.58 The potential overlap and need for
delimitation of powers between the SEC and the CFPB is obvious, even if at least some of the
established consumer protection laws and regulations do not easily apply to transactions
involving DLT and cryptocurrencies. For example, in 1987 the Federal Congress passed the
Expedited Funds Availability Act (EFAA),59 “establishing maximum permissible hold periods for
checks and other deposits.”60 This was supplemented in 2003 by the Check Clearing for the 21st
Century Act (Check 21).61 Both pieces of legislation are implemented in Regulation CC, adopted
by the Board of Governors of the Federal Reserve System.62 The ongoing tectonic shift of
payment transactions away from traditional banks to online financial service providers is already
making these rules look a lot less “21st Century”. Instant clearing as part of a smart contract on a
Blockchain will make them outright obsolete.
5. Other Consumer Protection Laws at the Federal Level
Some but not all Federal laws and regulations dealing with consumer protection in the financial
sector will lose their purpose when financial transactions shift to DLT and cryptocurrencies. For
example, the Consumer Credit Protection Act, and in particular its Subchapters I (Truth in
Lending Act TILA), II (Restrictions on Garnishments), IV (Equal Credit Opportunity Act),63 V
State law” (Sec. 102(a)(1) in combination with 12 U.S.C. 3106(a)), as well as “foreign nonbank financial
compan[ies]” with regard to their operations in the U.S. Although it is somewhat hard to predict which
nonbanks will be considered systemically important, larger DeFi operators need to be aware of and comply
with the requirements under Dodd Frank.
57 See https://www.consumerfinance.gov/.
58 See https://www.consumerfinance.gov/rules-policy/final-rules/code-federal-regulations/. The broad powers
of the CFPB have been confirmed as constitutional, although there are questions about the governance by a
single director. See, Seila Law LLC v. Consumer Financial Protection Bureau, 140 S.Ct. 2183.
The statutes are listed infra, notes 198 et seq. and accompanying text.
59 U.S. Code 2010, Title 12, Chapter 41. https://www.govinfo.gov/content/pkg/US-
CODE-2010-title12/pdf/USCODE-2010-title12-chap41.pdf.
60 https://www.federalreserve.gov/paymentsystems/regcc-about.htm.
61 Public Law 108-100, 117 Stat. 1177. Available at https://www.govinfo.gov/con-
tent/pkg/PLAW-108publ100/pdf/PLAW-108publ100.pdf.
62 Regulation CC – Availability of Funds and Collection of Checks, 12 CFR 229. Available at
https://www.federalreserve.gov/supervisionreg/reglisting.htm,
63 The act makes it unlawful for “any creditor to discriminate against any applicant, with respect to any aspect
of a credit transaction– (1) on the basis of race, color, religion, national origin, sex or marital status, or age
[...]” (15 U.S. Code § 1691(a)). The Civil Rights Act of 1964 provides for equal employment opportunities
regardless of “race, color, religion, sex, or national origin” (42 U.S. Code § 2000e-2(a)(1), and prohibits
discrimination by service providers like hotels, restaurants, cinemas, and certain other businesses (42 U.S.
Code § 2000a). To fill a gap that appeared in practice, the U.S. Senate Banking Committee proposed the
Fair Access to Financial Services Act in October 2020. The Act would have prohibited discrimination by
United States Cryptocurrency Law Page 17 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
(Fair Debt Collection Practices Act FDCPA), and VI (Electronic Funds Transfer Act EFTA) are
broadly construed and cover any natural or legal persons regularly extending credit to consumers
“in connection with loans, sales of property or services, or otherwise”, including credit card
issuers.64 Without question, these rules are not limited to conventional banks but also applicable
to any form of consumer credit provided by technology companies in the area of Decentralized
Finance or DeFi, utilizing digital wallets and smart contracts instead of banks, bank accounts,
and wire transfers.65 In particular, it does not matter in this regard whether or not the technology
company or financial service provider has a bank charter66 and/or a securities license,67 although
it is increasingly unlikely that a larger financial services company can operate without.6 8
Whether some of the technology companies providing financial services will become banks –
“any financial institution” as defined in the Payment, Clearing, and Settlement Supervision Act of 2010 (12
U.S. Code 5462); see https://www.govtrack.us/congress/bills/116/s4801/text. While the proposed Act did
not become law yet, The Office of the Comptroller of the Currency (OCC) drew up a rule prohibiting dis-
crimination by large banks with US$ 1 Billion or more in total assets (https://www.occ.gov/news-
issuances/news-releases/2021/nr-occ-2021-8.html). Because of the transition from the Trump to the Biden
administration, this rule is still on hold. It is unclear at the present time whether the OCC will publish the
rule and/or whether the U.S. Congress will pick up a broader measure that would apply to more and smaller
financial service providers, potentially including crypto businesses.
64 See Consumer Credit Protection Act, 15 U.S. Code 1602(g). For a full list of Federal Regulations applied
by the CFPB in its implementation of Federal consumer protection laws see https://www.consumer-
finance.gov/rules-policy/final-rules/code-federal-regulations/, as well as infra, notes 198-218 and
accompanying text.
65 For more information on DeFi see, inter alia, Campbell Harvey, Ashwin Ramachandran & Joey Santoro,
DeFi and the Future of Finance, Wiley 2021.
66 The Office of the Comptroller of the Currency (OCC), an independent bureau within the U.S. Department
of the Treasury, is handling applications for new charters by national banks and federal savings
associations. Local and regional banks can be chartered at the State level. See also infra, note 221.
67 The Financial Industry Regulatory Authority (FINRA) is in charge of examining and licensing of securities
dealers and brokers. For more information see https://www.finra.org/#/.
68 To give but one example, effective 20 July 2021, the New Jersey Bureau of Securities ordered one of the
largest DeFi operators, the company BlockFi, to discontinue offering interest-bearing cryptocurrency
accounts. BlockFi had been accepting a variety of cryptocurrencies into wallets held by BlockFi in return
for attractive interest rates, paid monthly in cryptocurrency. In this way, BlockFi had collected deposits in
excess of US$ 14 Billion and paid interest at rates around 9% per annum. The interest was earned via
proprietary trading and, according to the Bureau, “at least in part through the sale of unregistered securities
in violation of the Securities Law” (https://www.njoag.gov/new-jersey-bureau-of-securities-orders-crypto-
currency-company-blockfi-to-stop-offering-interest-bearing-accounts/); the order is State of New Jersey
Bureau of Securities, Summary Cease and Desist Order in the Matter of BlockFi Inc., BlockFi Lending
LLC, and BlockFi Trading LLC, Newark 19 July 2021, available at https://www.nj.gov/oag/news-
releases21/BlockFi-Cease-and-Desist-Order.pdf.)
In plain English, BlockFi had sold cryptocurrencies, which the SEC classifies as securities,
without the requisite securities trading license. The cease-and-desist order was certainly harsh for the
customers, in particular in times when a regular savings account with a chartered bank typically bears about
0.25% interest per annum. However, it is likely that not all customers were fully aware of the fact that their
deposits were not secured in any way and it is at least possible that BlockFi may have been running a Ponzi
scheme. The latter, however, remains to be seen. At least for now, BlockFi is not only continuing with its
operations but expanding into credit card and other financial services. See https://blockfi.com/.
United States Cryptocurrency Law Page 18 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
albeit not of the brick-and-mortar kind – or not, consumer protection laws apply to them.69
Similarly, while protection by the Federal Deposit Insurance Corporation (FDIC) is traditio-
nally insuring only bank deposits against losses up to US$ 250,000, there is no reason, in
principle, why a DeFi corporation could not become a member of the FDIC and obtain deposit
insurance.
Along the same lines, other Federal consumer protection laws on matters such as data protection
and privacy,70 as well as deceptive advertising,71 are fully applicable to financial service pro-
viders in the Blockchain space. Additional consumer protection provisions exist at the State
level, in particular State laws on Unfair or Deceptive Acts or Practices (UDAP).72
Additional Federal regulations, for example for the protection of consumer assets held by
financial institutions, are discussed in Part III.
69 For international comparative analysis see Tsai-Jyh Chen, An International Comparison of Financial
Consumer Protection, Springer 2018.
70 At the Federal level, “financial institutions”, defined as “any institution the business of which is engaging in
financial activities”, are subject to the privacy rules of 15 U.S.C. §§6801-6827 and, in particular, the
Gramm-Leach-Bliley Act on Disclosure of Nonpublic Personal Information (§§6801-6809),
https://www.law.cornell.edu/uscode/text/15/chapter-94/subchapter-I. The Payment Card Industry Data
Security Standard (PCI DSS) for protecting credit card information may also play a role here, although it is
not a Federal law or regulation but merely an industry standard adopted by Visa, Mastercard, Discover,
JCB, and American Express in 2004. However, this standard is often incorporated into contractual relations
between consumers and their financial service providers. For more information see Muhammad N.M.
Bhutta et al., Toward Secure IoT-Based Payments by Extension of Payment Card Industry Data Security
Standard (PCI DSS), Wireless Communications and Mobile Computing 2022,
https://doi.org/10.1155/2022/9942270.
71 At the Federal level, individuals and corporations are subject to the Federal Trade Commission Act (15
U.S.C. §§41-58, https://www.law.cornell.edu/uscode/text/15/chapter-2/subchapter-I.
72 For example, under Sec. 1780 of the California Consumer Legal Remedies Act, “[a]ny consumer who
suffers a damage as a result of the use or employment by any person of a method, act , or practice declared
to be unlawful by Section 1770 may bring an action against that person to recover or obtain any of the
following:
(1) Actual damages, [...]
(2) An order enjoining the methods, acts, or practices.
(3) Restitution of property.
(4) Punitive damages.
(5) Any other relief that the court deems proper.
Sec. 1770 prohibits, inter alia, “(5) Representing that goods or services have sponsorship, approval,
characteristics, ingredients, uses, benefits, or quantities that they do not have or that a person has a
sponsorship, approval, status, affiliation, or connection that the person does not have.” I am surprised that to
the best of my knowledge, nobody has yet tried to recover damages from persons who sold unregistered
coins or tokens in an ICO and then did not deliver a successful business model that caused the coins or
tokens to go up in value, in particular since class actions are possible under these kind of statutes.
United States Cryptocurrency Law Page 19 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
III. REGULATIONS, RULES AND OPINIONS OF FEDERAL REGULATORY AGENCIES
1. Overview
At the Federal level, a multitude of agencies and authorities are currently involved in oversight
of cryptocurrency businesses:
• the Securities and Exchange Commission (SEC) has oversight of securities issuers and
traders;
• the Commodities Futures Trading Commission (CFTC) has oversight of traders and
trading places (exchanges) dealing with commodities futures;73
• the Department of Justice is charged with fraud prevention, for example in the form of
Ponzi schemes;
• the Federal Reserve, i.e. the central bank of the U.S., has oversight of banks and financial
institutions to ensure their safety and soundness;
• the Financial Crimes Enforcement Network (FinCEN) at the Treasury Department is
charged with combating money laundering, terrorist financing, and other large scale
financial crimes; cryptocurrency business may have to obtain licenses as “money services
businesses;”
• the Office of Foreign Assets Control (OFAC) at the Treasury Department administers
and enforces trade sanctions against particular countries, individuals, and companies;
• the Office of the Comptroller of the Currency (OCC) supervises banks and other financial
institutions;
• The Financial Stability Oversight Council (FSOC) at the Treasury Department advises
the Secretary of the Treasury about potential risks to the economy emanating from banks
and other financial companies; in October 2022, it published a Report on Digital Asset
Financial Stability Risks and Regulation74 and identified certain vulnerabilities within the
crypto ecosystem, as well as risks stemming from interconnections between the crypto
universe and the traditional financial system; the Report also made recommendations for
a variety of regulations to address current regulatory gaps;
• the Consumer Financial Protection Bureau (CFPB) protects consumers against unfair
treatment by banks, lenders, and other financial companies;
• the Internal Revenue Service (IRS) at the Treasury Department is responsible for
assessment and collection of taxes on income and assets;
73 Cryptocurrency businesses may need licenses or registration as Derivatives Clearing Organization (DCO),
Designated Contract Market (DCM), Swap Execution Facility (SEF), Swap Data Repository (SDR),
Commodity Pool Operator (CPO), Commodity Trading Advisor (CTA), Futures Commission Merchant
(FCM), Introducing Broker (IB), Swap Dealer (SD), and/or Foreign Boards of Trade.
74 https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
United States Cryptocurrency Law Page 20 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
• the Federal Trade Commission and the Commerce Department, together with the
Department of Justice, are charged with the enforcement of antitrust legislation;
• the Environmental Protection Agency (EPA) may yet get involved if the current
expansion of Bitcoin and other energy intensive mining operations in Texas and other
places continues;
• several Self-Regulatory Organizations (SROs) like the Financial Industry Regulatory
Authority (FINRA) or the National Futures Association (NFA) set industry standards and
regulations;
• Federal courts oversee the rulemaking by and activities of the Federal agencies.
In addition, there may be registration or licensing requirements at the State level. State
legislative branches have created laws and licensing requirements for issuers of securities
(promising easy money, hence “blue sky laws”, see note 176), money transmitters, sellers of
payment instruments and checks, etc. State legislative branches are also in charge of the adoption
of contract and commercial laws like the UCC. Regulatory agencies at the State level have a
variety of names, e.g.
• District of Columbia Department of Insurance, Securities and Banking,
• Florida Office of Financial Regulation,
• Illinois Division of Banking,
• Maryland Commissioner of Financial Regulation, or
• Washington Division of Consumer Services.
State attorney generals are responsible for the enforcement of consumer laws such as Unfair or
Deceptive Acts and Practices (UDAP) laws. Last but not least, State courts oversee the State
regulatory agencies, apply the UCC and other State laws, and develop the common law of
contract.
The most important Federal agencies will be analyzed in this section. Some examples of State
legislation and regulation will be provided in Part V.
2. The Financial Crimes Enforcement Network (FinCEN) and the Enforcement of
Know-Your-Customer (KYC) and Anti-Money Laundering (AML) Requirements
Beyond the provisions of the Dodd Frank Act, all financial services providers have to comply
with transparency rules regarding their customer base. The provision of “money transmission
services” is only one example among the ways a “money services business” is defined in by the
Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the
Treasury charged with combating money laundering, terrorism financing, and other major
United States Cryptocurrency Law Page 21 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
financial crimes.75 Banks, money services businesses, casinos, brokers or dealers in securities,
loan or finance companies, and a number of similar enterprises, are subject to registration and
reporting requirements, as well as implementation of Know Your Customer (KYC) and Anti-
Money Laundering (AML) procedures.76 Even those technology companies that do not as such
provide money transmission services are considered “virtual asset service providers” by the
Financial Action Task Force (FATF)77 and, therefore, “have the same full set of obligations as
financial institutions and [certain] designated non-financial businesses and professions.”78 Based
on the Bank Secrecy Act (BSA),79 18 U.S. Code 95,80 respectively 31 U.S. Code 53 §§5320 to
5322,81 FinCEN has the power to issue injunctions and temporary restraining orders for ongoing
75 For more information see https://www.fincen.gov/ and, in particular, FinCEN, Application of FinCEN’s
Regulations to Certain Business Models Involving Convertible Virtual Currencies, FIN-2019-G001, 9 May
2019 (https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-cer-
tain-business-models).
76 31 CFR Chapter X Parts 1000-1060, https://www.law.cornell.edu/cfr/text/31/chapter-X. On 18 March 2013,
FinCEN issued an “interpretive guidance to clarify the applicability of the regulations implementing the
Bank Secrecy Act (‘BSA’) to persons creating, obtaining, distributing, exchanging, accepting, or
transmitting virtual currencies. [...] A user is a person that obtains virtual currency to purchase goods or
services. An exchanger is a person engaged as a business in the exchange of virtual currency for real
currency, funds, or other virtual currency. An administrator is a person engaged as a business in issuing
(putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circu-
lation) such virtual currency. [...] A user who obtains convertible virtual currency and uses it to purchase
real or virtual goods or services is not an MSB under FinCEN’s regulations. Such activity, in and of itself,
does not fit within the definition of ‘money transmission services’ and therefore is not subject to FinCEN's
registration, reporting, and recordkeeping regulations for MSBs. [...] An administrator or exchanger that (1)
accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any
reason is a money transmitter under FinCEN's regulations [...].” See FinCEN, Application of FinCEN's
Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, available at
https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-per-
sons-administering, emphasis in original, footnotes omitted.
For comprehensive analysis of current KYC and AML requirements for cryptocurrency businesses
see, inter alia, Mohamed Karim, AML & KYC Compliance: A Comprehensive Guide to Mastering the
Regulatory Game, Mohamed Karim 2023, ISBN 978-8294051328; Deborah R Meshulam & Michael Jason
Fluhr (eds.), Cryptocurrency and Digital Asset Regulation: A Practical Guide for Multinational Counsel
and Transactional Lawyers, ABA Publishing 2022; Suzana M. B. M. Moreno, Jean-Marc Seigneur &
Gueorgui Gotzev, A Survey of KYC/AML for Cryptocurrencies Transactions, in Maria Manuela
Cruz-Cunha & Nuno Mateus-Coelho (eds.), Handbook of Research on Cyber Crime and Information
Privacy, IGI Global Publishing 2020, pp. 21-42; and Fedor Poskriakov & Christophe Cavin,
Cryptocurrency Compliance and Risks: A European KYC/AML Perspective, in Josias Dewey (ed.),
Blockchain & Cryptocurrency Regulation, Global Legal Group, 4th ed. 2022, pp. 130-145.
77 Supra, note 6.
78 See Financial Action Task Force (FATF), Virtual Assets and Virtual Asset Service Providers – Updated
Guidance for a Risk-Based Approach, Paris 2021, at 4.
79 12 U.S. Code Chapter 21, Financial Recordkeeping,
https://www.law.cornell.edu/uscode/text/12/chapter-21.
80 https://www.law.cornell.edu/uscode/text/18/part-I/chapter-95.
81 https://www.law.cornell.edu/uscode/text/31/subtitle-IV/chapter-53/subchapter-II.
United States Cryptocurrency Law Page 22 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
violations, and to sanction those violations with civil and criminal penalties, including imprison-
ment.82
3. The Environmental Protection Agency (EPA)
The EPA has the power to require a company or even an entire industry to reduce its environ-
mental impact by changing its products or upgrading its production processes. We usually only
think of the EPA in such a context when it issues fuel efficiency standards for automakers.83
However, at a time when more and more Bitcoin mining activity is moving to the U.S. from
China, where the government is cracking down on miners, and countries like Kazakhstan, where
the political situation has become unstable, it is not only possible but quite likely that the EPA
will take an interest.84
4. The Commodities Futures Trading Commission (CFTC)
Actual rules and regulations for the crypto industry have been produced for years by the CFTC.
Originally created to supervise futures contracts for agricultural commodities, the mission of the
CFTC is “to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets
through sound regulation.”85 Pursuant to the Commodity Exchange Act of 1936, the CFTC
82 An example where FinCEN made use of these powers is Decision No. 2017-03 of 26 July 2017 In the
Matter of BTC-e a/k/a Canton Business Corp. & Alexander Vinnik. BTC-e was one of the largest crypto
exchanges by volume in the world, operated by Mr. Vinnik out of Russia. It exchanged fiat into crypto and
facilitated transactions between various cryptocurrencies, including Bitcoin, Ether, Litecoin, Dash, and
others, including tens of thousands of transactions involving customers in the U.S. FinCEN “determined
that [...] : (a) BTC-e and Alexander Vinnik willfully violated MSB registration requirements; (b) BTC-e
willfully violated the requirement to implement an effective anti-money laundering (AML) program, the
requirement to detect suspicious transactions and file suspicious activity reports (SARs), and the require-
ment to obtain and retain records relating to transmittals of funds in amounts of $3,000 or more; and (c)
Alexander Vinnik willfully participated in violations of AML program and SAR requirements” and
imposed a civil penalty in the amount of US$ 110 Million on BTC-e and a civil penalty of US$ 12 Million
on Mr. Vinnik (https://www.fincen.gov/sites/default/files/enforcement_action/2020-05-21/Assess-
ment%20for%20BTCeVinnik%20FINAL2.pdf).
83 See https://www.epa.gov/fueleconomy.
84 The energy consumption of Bitcoing mining goes up with the value of the coin because more miners will be
competing to validate the next block on the chain if the value of their reward is going up. In 2009, one
Bitcoin could be mined with a standard desktop computer in a few minutes. The electricity consumption
was negligible. So was the value of the coin. By 2021, mining of Bitcoin requires an entire room full of
highly specialized servers and each successful block validation costs about US$ 12,500 in electricity (New
York Times, 3 September 2021, https://www.nytimes.com/interactive/2021/09/03/climate/bitcoin-car-
bon-footprint-electricity.html). However, the winner of the guessing game currently receives 6.25 Bitcoin
for a new block, equivalent to about US$ 250,000. This explains why there are many mining operations
around the world and why the total energy consumption is so high. It also means that Bitcoin mining has a
carbon footprint comparable to medium size countries. For more information on the energy consumption of
other cryptocurrencies see, e.g. Jingming Li, Nianping Li, Jinqing Peng, Haijiao Cui & Zhibin Wu, Energy
Consumption of Cryptocurrency Mining: a Study of Electricity Consumption in Mining Cryptocurrencies,
Energy, Vol. 168, February 2019, at 160-168.
85 https://www.cftc.gov/About/AboutTheCommission.
United States Cryptocurrency Law Page 23 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
shall have exclusive jurisdiction [...] with respect to accounts, agreements
(including any transaction which is of the character of, or is commonly known to
the trade as, an “option”, “privilege”, “indemnity”, “bid”, “offer”, “put”, “call”,
“advance guaranty”, or “decline guaranty”), and transactions involving swaps or
contracts of sale of a commodity for future delivery (including significant price
discovery contracts), traded or executed on a contract market [...] or a swap
execution facility [...] or any other board of trade, exchange, or market, and
transactions subject to regulation by the Commission [...].86
With few exceptions, the Commodities Exchange Act makes it unlawful to enter into or execute
a transaction “for the purchase or sale of a commodity for future delivery”, unless the transaction
is conducted on a registered exchange and “evidenced by a record in writing which shows the
date, the parties to such contract and their addresses, the property covered and its price, and the
terms of delivery”.87 The supervisory powers of the CFTC extend even to foreign boards of trade
if they provide access to traders located in the U.S.
In order to assert its authority to regulate cryptocurrencies, the CFTC announced that “virtual
currencies, such as Bitcoin, have been determined to be commodities under the Commodity
Exchange Act.”88 At least in part this was based on the fact that Bitcoin and other virtual
currencies can and are being used to create derivatives. The CFTC’s approach was confirmed in
CFTC v. McDonnell and CabbageTech, Corp. d/b/a Coin Drop Market.89 The McDonnell court
held that
Congress has yet to authorize a system to regulate virtual currency. [...] Until
Congress acts to regulate virtual currency the following alternatives appear to be
available:
1. No regulation. [...]
86 7 U.S. Code § 2(a)(1)(A).
87 Id., § 6(a), as well as 7 U.S. Code § 6d. For the link to all implementing regulations adopted by the CFTC
see https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
88 See https://www.cftc.gov/sites/default/files/2019-12/oceo_bitcoinbasics0218.pdf. The first application
already happened in 2015 in the Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the
Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions, In the Matter of Coinflip,
Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29 (17 September 2015).
Commodities are normally “defined broadly to include not only ‘physical commodities,’ such as
cotton or gold, but also currencies or interest rates. The definition also includes ‘all services, rights, and
interests ... in which contracts for future delivery are presently or in the future dealt in.’ 7 U.S.C. §1(a)(9).
As a general matter, the CFTC has oversight over futures, options, and derivatives contracts. [It] also has
jurisdiction where there is fraud or manipulation involving commodities trade in interstate commerce”. See
Stabile, Prior & Hinkes, supra note 10, at 68.
For a discussion of smart contracts as derivatives see Primavera de Filippi & Aaron Wright,
Blockchain and the Law - The Rule of Code, Harvard 2018, at 89-104.
89 CFTC v. McDonnell et al., U.S. District Court, E.D. New York, 5 March 2018, 287 F.Supp.3d 213.
United States Cryptocurrency Law Page 24 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
2. Partial regulation through criminal law prosecutions of Ponzi–like schemes by
the Department of Justice, or state criminal agencies, or civil substantive suits
based on allegations of fraud. [...]
3. Regulation by the Commodity Futures Trading Commission (“CFTC”). [...]
4. Regulation by the Securities and Exchange Commission (“SEC”) as securities.
[...]
5. Regulation by the Treasury Department’s Financial Enforcement Network
(“FinCEN”). [...]
6. Regulation by the Internal Revenue Service (“IRS”). [...]
7. [Self-]Regulation by private exchanges. [...]
8. State regulations. [...]
9. A combination of any of the above.
The CFTC is one of the federal administrative bodies currently exercising partial
supervision of virtual currencies. [...] Administrative and civil action has been
utilized by the CFTC to expand its control [...]. The SEC, IRS, DOJ, Treasury
Department, and state agencies have increased their regulatory action in the field
of virtual currencies without displacing CFTC’s concurrent authority.90
The application of the Commodity Exchange Act to cryptocurrencies means that any person
found in violation of the Act is subject to civil liability for actual damages and/or enforcement of
the respective contract (specific performance) pursuant to 7 U.S. Code § 25 - Private Rights of
Action. If a registered entity is violating the provisions of the Act, it can be suspended from
trading.91 Furthermore, the CFTC can impose monetary penalties of up to US$1 Million or
“triple the monetary gain to the person for each such violation”, whichever is greater, as well as
“restitution to customers of damages proximately caused by violations of the person.”92
5. The Securities and Exchange Commission (SEC)
Much better known than the CFTC and even more powerful is the SEC. It was created by the
Securities Exchange Act of 1934 in response to the stock market crash of 1929. It is charged
with the application of the Securities Act of 1933, the Securities Exchange Act of 1934, and a
number of other U.S. Federal investment and investor protection laws.93 It has the power of
90 Id., at 220-222. Future generations may well refer to this situation as the textbook example of the proverb
according to which too many cooks spoil the broth.
91 7 U.S. Code § 7b.
92 7 U.S. Code §9(10).
93 These include, in particular, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the
Investment Advisers Act of 1940, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010, and the Jumpstart Our Business Startups Act of 2012 (the list and the
relevant links are available at https://www.investor.gov/introduction-investing/inves-
United States Cryptocurrency Law Page 25 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
adopting rules that have the force of Federal law. The Securities Act of 1933 requires that
corporations must provide “adequate, thorough and accurate financial information about
securities being offered for sale to the public.”94 Corporations have to go through a registration
process and publish a prospectus before they can offer securities for sale to the public.95
Securities exchanges can seek registration with the SEC pursuant to Section 6 to obtain
exemption from certain requirements of the Securities Exchange Act.96 While such registration is
not mandatory, “[i]t shall be unlawful for any person to effect transactions in security futures
products that are not listed on a national securities exchange or a national securities association
registered pursuant to section 78o–3(a) of [the Securities Exchange Act].”97 This creates a
potential conflict between the regulatory authority of the SEC and the CFTC. In a nutshell, the
CFTC is focused on futures, i.e. contracts for delivery of a commodity at a set price at some time
in the future, usually between professional traders on registered exchanges.98 By contrast, the
SEC is focused on securities, i.e. contracts for immediate delivery of a security at a set price,
usually between an issuer and members of the public. The distinction gets murky because
contracts can also be for securities futures. These are futures contracts for the delivery of a
security at a set price and some time in the future. Firms trading in securities futures have to
ting-basics/role-sec/laws-govern-securities-industry#secexact1934). Furthermore, there are a number of
Federal Rules and Regulations of relevance (see https://www.sec.gov/about/laws/secrulesregs.htm).
94 James Marmerchant, Sarbanes Oxley Act Completed Guide, supra, note 32, at 4.
95 “[S]ecurities sold in the U.S. must be registered. The registration forms companies file provide essential
facts while minimizing the burden and expense of complying with the law. In general, registration forms
call for:
– a description of the company’s properties and business;
– a description of the security to be offered for sale;
– information about the management of the company; and
– financial statements certified by independent accountants.
Registration statements and prospectuses become public shortly after filing with the SEC. [...] Registration
statements are subject to examination for compliance with disclosure requirements. [It is unlawful to sell
securities to the public before the SEC has declared a registration statement ‘effective’.]
Not all offerings of securities must be registered with the Commission. Some exemptions from the
registration requirement include:
– private offerings to a limited number of persons or institutions;
– offerings of limited size;
– intrastate offerings; and
– securities of municipal, state, and federal governments.”
See https://www.investor.gov/introduction-investing/investing-basics/role-sec/laws-govern-securi-
ties-industry.
96 For a list of registered National Securities Exchanges in the U.S. see
https://www.sec.gov/fast-answers/divisionsmarketregmrexchangesshtml.html.
97 15 U.S. Code § 78f(h)(1).
98 Futures in and of themselves are a category of derivatives. The latter also include options, forwards, and
swaps, and all fall under the regulatory authority of the CFTC. For details see, e.g. Aron Gottesman,
Derivatives Essentials, Wiley 2016; or Robert Jarrow & Arkadev Chatterjea, An Introduction to Derivative
Securities, Financial Markets, and Risk Management, World Scientific, 2nd ed. 2019.
United States Cryptocurrency Law Page 26 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
comply with both the Securities Exchange Act and the Commodity Exchange Act and be regis-
tered with both the SEC and the CFTC.99
For businesses in the cryptocurrency markets, the situation is particularly complicated because
the CFTC decided that cryptocurrencies are commodities and subject to CFTC regulatory
oversight, and the SEC decided that cryptocurrencies, for the most part, are securities and
subject to SEC regulatory oversight. Trying to bring some clarity to the situation is slightly
easier on the CFTC side. First, while all cryptocurrencies have been qualified as commodities, an
exchange of fiat for crypto or crypto for (other) crypto is not a futures contract if it is executed
immediately. Second, a purchase of goods or services paid with crypto is not a commodities
transaction, at least if it is executed immediately. On the SEC side, almost everything depends on
the classification of the digital asset, whether or not it is a security. As we will see, almost
anyone who is offering digital coins or tokens in exchange for fiat or other digital coins or tokens
could be an issuer subject to SEC regulation – and that includes not just a company in an ICO or
a crypto exchange but potentially any business offering goods or services in the crypto markets if
it accepts fiat or crypto and returns not just goods or services but also (other) crypto. Moreover,
if a business offers smart contracts that lock crypto in while the contract is pending and pay it to
the seller or return it to the buyer in the future, once the transaction is complete (or abandoned),
this could very well also qualify as a futures trade and be subject to CFTC regulation.
For the SEC, the definition of “security” is crucial. Unfortunately, the large body of opinions,
adjudicative orders, as well as administrative law judge orders and initial decisions of the SEC100
is neither transparent nor consistent.
15 U.S.C §77b(a)(1), the Securities Act, as amended, defines “security” as
any note, stock, treasury stock, security future, security-based swap, bond,
debenture, evidence of indebtedness, certificate of interest or participation in any
profit-sharing agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil, gas, or
other mineral rights, any put, call, straddle, option, or privilege on any security,
certificate of deposit, or group or index of securities (including any interest
therein or based on the value thereof), or any put, call, straddle, option, or
privilege entered into on a national securities exchange relating to foreign
currency, or, in general, any interest or instrument commonly known as a
“security”, or any certificate of interest or participation in, temporary or interim
99 In December 2020, the American Bar Association (ABA) published a White Paper on Digital and Digitized
Assets: Federal and State Jurisdictional Issues (available at https://www.americanbar.org/con-
tent/dam/aba/administrative/business_law/idpps_whitepaper.pdf). The regulatory conflict between the
CFTC and the SEC is outlined at 47-275. Section 5 is specifically dedicated to “The Need for a Better
CFTC and SEC Regulatory Scheme for Digital Assets”, at 243-275.
100 For the gateway to these opinions and decisions see
https://www.sec.gov/page/enforcement-section-landing.
United States Cryptocurrency Law Page 27 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
certificate for, receipt for, guarantee of, or warrant or right to subscribe to or
purchase, any of the foregoing.101
An early official statement of the SEC about cryptocurrency markets came in 2013, when it
launched a securities fraud civil enforcement action against Bitcoin Savings and Trust (BTCST),
an unincorporated Texas venture, and its owner/operator, Mr. Trendon Shavers.102 From
February 2011 to August 2012, Shavers solicited investments in BTCST over the internet and
promised returns of up to 1% per day or 7% weekly, based on Shaver’s success at trading
Bitcoin. Shavers accepted funds from anybody providing an internet username, an e-mail
address, and the keys to a Bitcoin wallet. He held the private keys to the wallets of each investor
and effectively controlled the Bitcoin in those wallets. Shavers used the majority of the funds to
build a Bitcoin mining operation and held only a smaller portion in a “reserve fund” for investors
seeking to cash out. After Shavers reduced the interest payments on the common accounts from
7% to 3.9% per week, too many investors claimed their money back and Shavers had to shut
down since he could not honor all demands. The SEC determined that Shavers was operating a
Ponzi scheme. The investigation showed that he had taken in “at least 732,050 bitcoins” from
investors and ultimately returned only about 551,231 BTC to the investors in interest and
principal. He used at least 150,000 BTC for personal expenses and the Court eventually found
that “[d]efendants’ illicit gains obtained as a result of their fraud (bitcoins received from BTCST
investors less bitcoins returned to them) total 180,819 bitcoins, or more than $101 million based
on currently available bitcoin exchange rates. The collective loss to BTCST investors who
suffered net losses (there were also net winners) was 265,678 bitcoins, or more than $149
million at current exchange rates.”103 Shavers admitted that he had met most of his investors in
chat rooms on the Tor Network (Dark Web) and had not conducted any KYC or AML
procedures. He also admitted that neither his trading nor his mining activities would have
supported the interest payments he promised to the investors. Although Shavers claimed that
securities laws simply did not apply to cryptocurrency investments and, therefore, that the
Federal Court lacked jurisdiction, the Court entered an order regarding its subject-matter
jurisdiction holding that “BTCST investments in this cases were investment contracts, and, thus,
securities”.104 Since
Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17
C.F.R. § 240.10b-5] make it unlawful for any person, in connection with the
purchase or sale of a security, directly or indirectly, to (a) “employ any device,
scheme, or artifice to defraud”; (b) “make an untrue statement of a material fact”
101 https://www.law.cornell.edu/uscode/text/15/77b.
102 The facts are summarized in the 18 September 2014 Memorandum Opinion and Order of Judge Mazzant in
Case 4:13-CV-416, Securities and Exchange Commission v. Trendon T. Shavers and Bitcoin Savings and
Trust, U.S. District Court for the Eastern District of Texas.
103 Id., at 9-10. At the peak of the market in September 2021, the 180,819 BTC in “illicit gains” realized by
Shavers and BTCST would have amounted to a staggering US$ 12,296,957,733 or 12.3 Billion!
104 Id, at 12.
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or a material omission; or (c) “engage in any act, practice, or course of business
which operates … as a fraud or deceit upon any person,
the Court found that “Shavers knowingly and intentionally operated BTCST as a sham and a
Ponzi scheme, repeatedly making misrepresentations to BTCST investors and potential investors
concerning the use of their bitcoins; how he would generate the promised returns; and the safety
of the investments”.105 The Court issued a permanent injunction against Shavers and BTCST
from violating the Securities Exchange Act, ordered disgorgement of US$ 40.4 Million in illicit
profits, and issued civil penalties of US$ 150,000 each against Shavers and BTCST. In all this,
the Court did not question the classification of cryptocurrency sales as an issue of “securities”.
The SEC based its assessment on the so-called Howey Test. In a 1946 decision, the U.S.
Supreme Court held that
“an investment contract for purposes of the Securities Act means a contract,
transaction or scheme whereby a person invests his money in a common
enterprise and is led to expect profits solely from the efforts of the promoter or a
third party, it being immaterial whether the shares in the enterprise are evidenced
by formal certificates or by nominal interests in the physical assets employed in
the enterprise.”106
While Shavers operated BTCST as something that could be considered a common enterprise
and, indeed, the investors gave him their “money” – in the form of Bitcoin – and expected profits
solely from his efforts at trading or investing or mining, these features are not necessarily found
in every sale of cryptocurrency by a creator or developer.
In another case, the SEC ruled in July 2017 that the creators of The DAO tokens were in
violation of the Securities and Exchange Act 1934 when they were using “a Decentralized
Autonomous Organization (‘DAO Entity’), or other distributed ledger or blockchain-enabled
means for capital raising”.107 From April to May 2016, the creators of The DAO, based in
Germany, sold over 1 Billion DAO Tokens for a total of around 12 Million Ether, equivalent at
the time to about US$ 150 Million. Among more than 11,000 buyers were several hundred
individuals in the United States. The White Paper published by the creators described a “crowd-
funding contract” for the creation of a new type of company entirely in the crypto space, i.e.
without a physical address or incorporation, created to invest in other Blockchain projects.
Among the innovative elements was a promise that the governance of The DAO would be fully
decentralized and automated, without any corporate officers, instead giving all token holders
proposal and voting rights in the selection of projects for investment. Furthermore, “the consti-
105 Id., at 15.
106 328 U.S. 293 (1946), Securities and Exchange Commission v. W. J. Howey Co. et al., at 298-299. Howey
had sold fractional ownership in a citrus plantation. The investors partook in the revenue generated from
Howey’s management of the plantation.
107 See SEC, Report of Investigation Pursuant to Section 21(A) of the Securities and Exchange Act of 1934:
The DAO, SEC Release No. 81207, 25 July 2017, at 2.
United States Cryptocurrency Law Page 29 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
tution” of The DAO would be a smart contract on the Ethereum Blockchain and, therefore,
immutable. Token holders would earn profits from the return on their investments,108 and benefit
from increases in value of the DAO Token, as it was going to be trading on several major
exchanges. The SEC, however, primarily saw an ICO for fundraising purposes in violation of
Section 5 of the Securities Act since The DAO had neither registered with the SEC, nor
delivered “a statutory prospectus containing information necessary to enable prospective
purchasers to make an informed investment decision”.109 However, since The DAO had already
been delisted by major exchanges after a security vulnerability, the SEC did not see it necessary
to go further and pursue an actual enforcement action.
The first time the SEC investigated a crypto exchange resulted in the cease and desist order No.
84553 of 8 November 2018 against Zachary Coburn, founder and owner of the EtherDelta online
platform and resident of Chicago, Illinois. EtherDelta was launched in July 2016 and enabled
users to buy and sell Ethererum, as well as ERC20 tokens, i.e. other cryptocurrencies secured on
the Ethereum Blockchain. The SEC investigation concluded that “EtherDelta meets the criteria
of an ‘exchange’ as defined by Section 3(a)(1) of the Exchange Act and Rule 3b-16 thereunder”,
yet was neither registered with the SEC nor beneficiary of an exemption from registration.110 The
SEC concluded that EtherDelta was in violation of Section 5 of the Securities Exchange Act “as
a market place for bringing together the orders of multiple buyers and sellers in tokens that
included securities as defined by Section 3(a)(10) of the Exchange Act.”111 The SEC ordered
Coburn to cease and desist from further violations of the Exchange Act, to pay disgorgement of
profits and interest in the amount of US$ 313,000, and to pay a civil penalty of US$ 75,000. The
penalty was relatively low “based upon [Coburn’s] cooperation in a Commission investigation
and his agreement to testify in any related enforcement action.”112 Coburn saved EtherDelta by
selling it to a foreign buyer, rather than seeking SEC registration for it.
Since 2018, there have been several enforcement actions of the SEC against crypto exchanges
and many against companies and individuals involved in unregistered initial coin offerings
(ICOs).113 One of the high profile ICO cases was the SEC’s emergency action against
108 In a YouTube video, one of the creators explicitly compared investment in The DAO to “buying shares in a
company and getting ... dividends.” See Slockit, Slock.it DAO demo at Devcon1: IoT + Blockchain,
Youtube (13 November 2015), https://www.youtube.com/watch?v=49wHQoJxYPo.
109 SEC Release No. 81207, supra note 107, at 10.
110 SEC Release No. 84553 of 8 November 2018, at 3.
111 Id., at 9.
112 Id., at 11.
113 A comprehensive list, with links to the relevant decisions, can be found at https://www.sec.gov/spot-
light/cybersecurity-enforcement-actions. The former SEC Chairman actually testified before the U.S.
Senate that “I believe every ICO I’ve seen is a security.” See Jay Clayton, Virtual Currencies: The
Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading
Commission, U.S. Senate Committee on Banking, Housing, and Urban Affairs, 6 February 2018,
https://www.banking.senate.gov/hearings/virtual-currencies-the-oversight-role-of-the-us-securi-
ties-and-exchange-commission-and-the-us-commodity-futures-trading-commission.
When hearing Clayton (or his successor Gensler), at least some of us may be reminded of Maslow
United States Cryptocurrency Law Page 30 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Telegram’s pre-sale of Grams. The case was brought in Federal court in New York, although
Telegram is incorporated in the UK and operates out of Dubai.114 Another example involving an
non-U.S. entity is the enforcement actions against UK-based Blotics Ltd. f/d/b/a Coinschedule
Ltd. for publicizing current and upcoming ICOs by third parties on a website that was accessible
in the United States.115
Under its Chairman Gary Gensler, the SEC has literally been waging war116 against the crypto
industry and claims to have obtained almost US$5 Billion in fines for the SEC and reimburse-
ments for investors. The list of enforcement actions taken by the SEC by now reads like a who-
is-who in crypto,117 including NVIDIA, Morgan Stanley, JP Morgan, UBS Financial, BTC
Trading, Bitcoin Investment Trust, Munchee, TokenLot, EtherDelta, Paragon, DJ Khaled, Steven
Seagal, Meta 1 Coin Trust, High Street Capital Partners, FLiK, Coinspark, Unikrn, McAfee,
Ripple Labs, Qin, Wireline, Coinseed, LBRY, Blotics, Blockchain Credit Partners, Poloniex,
BitConnect, Rivetz, GTV Media, BlockFi, Bloom Protocol, Dragonchain, Sparkster, Arbitrade,
Kim Kardashian, Bankman-Fried, FTX, Thor, Genesis and Gemini, Kraken, Terraform, BKCoin,
Tron, BitTorrent, Bittrex, Binance, Coinbase, and many, many others. Some may go as far as
saying that if you are not on the list and in the cross hairs of the SEC, you don’t really matter in
crypto.
and his famous statement that if the only tool you have is a hammer, everything you see starts to look like a
nail.
114 The Telegram pre-sale had already raised about US$ 1.7 Billion. The complaint sought to stop Telegram
from distributing the token already sold and from continuing the ICO. The SEC also asked the Court to rule
“that the Commission may take expedited discovery;” to restrain the company “from destroying, altering,
conceiling or otherwise interfering with the access of the Commission to relevant documents;” and to enter
a final judgment for disgorgement of all ill-gotten gains, payment of civil money penalties, as well as
“prohibiting Defendants from participating in any offering of digital asset securities pursuant to Section
21(d)(5) of the Exchange Act [15 U.S.C. § 78u(d)(5)]”. See Securities and Exchange Commission v.
Telegram Group Inc. et al., Complaint 19 Civ. 9439 of 11 October 2019, United States District Court
Southern District of New York.
115 SEC Release No. 10956 of 14 July 2021. In a materially similar case, John McAfee was charged with
recommending at least seven initial coin offerings of third parties to his hundreds of thousands of followers
on Twitter without disclosing that he was being paid to promote these ICOs; see Securities and Exchange
Commission v. John David McAffee et al., Complaint 20 Civ. 8281 of 5 October 2020, United States
District Court Southern District of New York. In other promotion cases, the actor Steven Seagal (SEC
Release No. 10760 of 27 February 2020), the boxer Floyd Mayweather (SEC Release No. 10578 of 29
November 2018), and the music producer DJ Khaled (SEC Release 10579 of 29 November 2018) received
a cease-and-desist orders. See also the cease-and-desist order against ICO Rating, SEC Release No. 10673
of 20 August 2019. The relevant provision is Sec. 17(b) of the Securities Act which makes it unlawful for
any person to accept payment in exchange for the promotion of a security without disclosing the payment to
the target audience.
116 The expression has become widespread. For an example see Dave Michaels, Big Battles Loom in SEC’s
War on Crypto, Wall Street Journal 28 December 2023, https://www.wsj.com/finance/regulation/big-batt-
les-loom-in-secs-war-on-crypto-aeff0d78. See also infra, notes 141 and 250 and accompanying text.
117 https://www.sec.gov/spotlight/cybersecurity-enforcement-actions.
United States Cryptocurrency Law Page 31 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Furthermore, in this regard, the SEC has not been shy – to say it politely – to make use of
extremely far reaching extraterritorial powers.118 In a nutshell, it applies its rules and
enforcement powers to any (crypto) business based in the U.S.,119 based abroad but with
branches or subsidiaries in the U.S.,120 based abroad but advertising and selling to natural or
legal persons in the U.S.,121 based abroad and excluding but not preventing sales to U.S. natural
118 For detailed analysis see Joshua D. Roth & Alexander R. Weiner, A New Era for Extraterritorial SEC
Enforcement Actions, Banking Law Journal 2019, Vol. 136, No. 6, pp. 320-326, and, in particular, Frank
Emmert, The Long Arm of the SEC in the Regulation of Digital Currencies, Indiana Int’l & Comp. Law
Rev. 2023, Vol. 33, No. 1, pp. 1-37.
119 In the case of Rivetz, the SEC moved against an unlicensed sale of securities. Although the Rivetz or RvT
tokens were issued by a Cayman Island corporation, Rivetz International, the controlling owner of Rivetz
and Rivetz Int’l was a Massachusetts resident. See https://www.sec.gov/files/litigation/com-
plaints/2021/comp25198.pdf, as well as SEC v. Rivetz Corp., No. 3:21-CV-30092 (D. Mass. 8 September
2021).
120 In Vuuzle, a company based in the UAE and ultimately controlled by a company based in the Philippines,
had established minimal operations in the U.S. to create the impression that it was a successful multi-
national corporation. The U.S. district court not only held that a bank account and leased office space were
enough to establish personal jurisdiction of U.S. authorities over the entire group of companies. It also ruled
that the foreign entities were “properly served” via e-mail. See U.S. Sec. & Exch. Comm’n v. Vuuzle Media
Corp., CIVIL 21-cv-1226 (KSH) (CLW) (D.N.J. 22 June 2023), at pp. 6-7. See also infra, note 124.
A similar constellation can be found in the Digitex case before the CFTC. Digitex Futures was a
digital asset derivatives trading platform operating out of St. Vincent & the Grenadines. The owner, Adam
Todd, was a citizen of the United Kingdom and had incorporated several related entities in the Seychelles,
Ireland, and Gibraltar. However, Todd also maintained an office and a secondary residence in Miami,
Florida. See CFTC v. Todd, No. 1:22-CV-23174 (S.D. Fla. 30 September 2022).
121 In Pinker v. Roche Holdings, 292 F.3d 361, the U.S. Court of Appeals considered “the aggregation of the
national contacts of an alien defendant” to determine whether U.S. authorities had personal jurisdiction over
that defendant. It concluded that “personal jurisdiction [is] appropriate where a foreign corporation has
directly solicited investments from the American market.” Id., at pp. 370-371.
In several cases, the SEC and the Department of Justice (DoJ) moved against foreign individuals
and enterprises because they had recruited promoters or representatives in the U.S. in an effort at marketing
their unregistered coins or tokens to American buyers. See, for example SEC v. Okhotnikov, No.
1:22-CV-03978 (N.D. Ill. 1 August 2022); United States v. Kumbhani, No. 3:22-CR-00395 (S.D. Cal. 25
February 2022); SEC v. Arbitrade Ltd., No. 1:22-CV-23171 (S.D. Fla. 30 September 2022); as well as
United States v. Le Ahn Tuan, No. 2:22-CR-00273 (C.D. Cal. 30 September 2022)
United States Cryptocurrency Law Page 32 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
or legal persons,122 or even just with a website that can be accessed from the U.S.123 In other
122 In Barron v. Helbiz, the district judge initially exercised judicial restraint and held that U.S. authorities did
not have personal jurisdiction over natural or legal persons in Singapore who had explicitly prohibited
residents of the U.S. from purchasing coins in their ICO. Although the coins or tokens were not listed on
any U.S.-based exchanges, plaintiffs had argued that many servers running the Ethereum blockchain, so-
called Ethernodes, were located in the U.S. and, therefore, U.S. law should be applied to transactions made
by U.S. residents in any coins and tokens running on the Ethereum blockchain. The district judge rejected
this idea, referring to the precedent set by the U.S. Supreme Court in Morrison v. National Australia Bank
Ltd (561 U.S. 247 (2010); see Barron v. Helbiz, Inc., 20 Civ. 4703 (LLS) (S.D.N.Y. 22 January 2021).
However, the U.S. Court of Appeals for the Second Circuit overruled this decision because plaintiffs had
meanwhile identified at least one U.S. individual who had been able to purchase HelbizCoin or HBZ tokens
in Texas in spite of the prohibition; see Barron v. Helbiz, Inc. No. 21-278 (2d Cir. 4 October 2021), at pp.
6-8.
123 See, for example, Gucci America v. Huoqing, C 09-05969 CRB (N.D. Cal. 5 January 2011). The standard
most commonly applied was established in the interstate trademark infringement case Zippo Mfg. Co. v.
Zippo Dot Com, Inc. The U.S. District Court for the Western District of Pennsylvania developed the
following test, commonly referred to as “the Zippo sliding scale:”
“The Constitutional limitations on the exercise of personal jurisdiction differ depending upon
whether a court seeks to exercise general or specific jurisdiction over a non-resident defendant. Mellon, 960
F.2d at 1221. General jurisdiction permits a court to exercise personal jurisdiction over a non-resident
defendant for non-forum related activities when the defendant has engaged in ‘systematic and continuous’
activities in the forum state. Helicopteros Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 414-16, 104
S.Ct. 1868, 1872-73, 80 L.Ed.2d 404 (1984). In the absence of general jurisdiction, specific jurisdiction
permits a court to exercise personal jurisdiction over a non-resident defendant for forum-related activities
where the ‘relationship between the defendant and the forum falls within the 'minimum contacts'
framework’ of International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945) and
its progeny. Mellon, 960 F.2d at 1221. [...]
A three-pronged test has emerged for determining whether the exercise of specific personal
jurisdiction over a non-resident defendant is appropriate: (1) the defendant must have sufficient ‘minimum
contacts’ with the forum state, (2) the claim asserted against the defendant must arise out of those contacts,
and (3) the exercise of jurisdiction must be reasonable. Id. The ‘Constitutional touchstone’ of the minimum
contacts analysis is embodied in the first prong, ‘whether the defendant purposefully established’ contacts
with the forum state. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475, 105 S.Ct. 2174, 2183-84, 85
L.Ed.2d 528 (1985) (citing International Shoe Co. v. Washington, 326 U.S. 310, 319, 66 S.Ct. 154, 159-60,
90 L.Ed. 95 (1945)). [...]
‘[T]he foreseeability that is critical to the due process analysis is . . . that the defendant's conduct
and connection with the forum State are such that he should reasonably expect to be haled into court there.’
World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 S.Ct. 559, 567, 62 L.Ed.2d 490 (1980).
This protects defendants from being forced to answer for their actions in a foreign jurisdiction based on
‘random, fortuitous or attenuated’ contacts. Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 774, 104 S.Ct.
1473, 1478, 79 L.Ed.2d 790 (1984). [...]
The ‘reasonableness’ prong exists to protect defendants against unfairly inconvenient litigation.
World-Wide Volkswagen, 444 U.S. at 292, 100 S.Ct. at 564-65. Under this prong, the exercise of jurisdic-
tion will be reasonable if it does not offend ‘traditional notions of fair play and substantial justice.’ Inter-
national Shoe, 326 U.S. at 316, 66 S.Ct. at 158. When determining the reasonableness of a particular forum,
the court must consider the burden on the defendant in light of other factors including: ‘the forum state’s
interest in adjudicating the dispute; the plaintiff's interest in obtaining convenient and effective relief, at
least when that interest is not adequately protected by the plaintiff's right to choose the forum; the interstate
judicial system’s interest in obtaining the most efficient resolution of controversies; and the shared interest
of the several states in furthering fundamental substantive social policies.’ World-Wide Volkswagen, 444
United States Cryptocurrency Law Page 33 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
words, the SEC – whether we like it or not – is de facto a global regulator for crypto businesses
and more often than not also has the power to enforce its rules and decisions. Moreover, U.S.
courts have confirmed on numerous occasions that service of process, i.e. the initiation of legal
proceedings that require an appearance with legal representation to prevent a default judgment,
can be effected with as little as a notice by e-mail.124
U.S. at 292, 100 S.Ct. at 564 [...].
Enter the Internet, a global ‘'super-network' of over 15,000 computer networks used by over 30
million individuals, corporations, organizations, and educational institutions worldwide.’ Panavision
Intern., L.P. v. Toeppen, 938 F. Supp. 616 (C.D.Cal. 1996) (citing American Civil Liberties Union v. Reno,
929 F. Supp. 824, 830-48 (E.D.Pa. 1996)). [...] With this global revolution looming on the horizon, the
development of the law concerning the permissible scope of personal jurisdiction based on Internet use is in
its infant stages. [... O]ur review of the available cases and materials reveals that the likelihood that
personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of
commercial activity that an entity conducts over the Internet. This sliding scale is consistent with well
developed personal jurisdiction principles. At one end of the spectrum are situations where a defendant
clearly does business over the Internet. If the defendant enters into contracts with residents of a foreign
jurisdiction that involve the knowing and repeated transmission of computer files over the Internet, personal
jurisdiction is proper. E.g. CompuServe, Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996). At the opposite end
are situations where a defendant has simply posted information on an Internet Web site which is accessible
to users in foreign jurisdictions. A passive Web site that does little more than make information available to
those who are interested in it is not grounds for the exercise personal jurisdiction. E.g. Bensusan Restaurant
Corp., v. King, 937 F. Supp. 295 (S.D.N.Y. 1996). The middle ground is occupied by interactive Web sites
where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is
determined by examining the level of interactivity and commercial nature of the exchange of information
that occurs on the Web site. E.g. Maritz, Inc. v. Cybergold, Inc., 947 F. Supp. 1328 (E.D.Mo. 1996).”
124 In Zanghi v. Ritella, several defendants were Italian nationals living in Italy. Plaintiffs used FedEx Inter-
national Priority shipping for service of process but it was undisputed that some of the FedEx letters were
simply sent to Italian law firms that had represented some of the defendants in the past and others were
returned as undeliverable. Plaintiffs then proceeded to serve several Italian natural and legal persons via e-
mail. The court first analyzed Fed. R. Civ. P. 4(f)(2)(A), pursuant to which “an individual . . . may be
served at a place not within any judicial district of the United States . . . if [1] an international agreement
allows but does not specify other means, [2] by a method that is reasonably calculated to give notice . . .
[and] [3] as prescribed by the foreign country’s law for service in that country in an action in its courts of
general jurisdiction.” The court correctly found that the U.S. and Italy are both signatories to the 1965
Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial
Matters (https://www.hcch.net/en/instruments/conventions/full-text/?cid=17) and have to abide by it. The
court elaborated as follows: “As one would expect for a treaty ratified in 1965, the Hague Convention does
not address service by email. Clever litigants have accordingly argued that email is a ‘postal channel[]’
within the meaning of Article 10(a) of the Hague Convention, which states that ‘[p]rovided the State of
destination does not object, the present Convention shall not interfere with . . . the freedom to send judicial
documents, by postal channels, directly to persons abroad.’ [...] However, most courts that have considered
that argument, including all pertinent decisions from the Southern District of New York, have rejected it.”
Zanghi v. Ritella, 19 Civ. 5830 (NRB) (S.D.N.Y. 5 February 2020), at pp. 13-14, with multiple references.
The court would have been wise to leave matters at that. However, the court instead proceeded to examine
whether “alternative methods” of service of process could be authorized under Fed. R. Civ. P. (4)(f)(3)
which states that a defendant located outside of the U.S. may be served “by other means not prohibited by
international agreement, as the court orders.” The court then found a precedent stating that “[t]he decision
whether to allow alternative methods of serving process under Rule 4(f)(3) is committed to the sound
discretion of the district court. Madu, Edozie & Madu, P.C. v. SocketWorks Ltd. Nigeria, 265 F.R.D. 106,
United States Cryptocurrency Law Page 34 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Even foreign and domestic companies registered with the SEC can get in trouble if the SEC finds
that their public disclosures about the development of their cryptocurrency platforms are
inaccurate.125
Although many SEC actions involve ICOs classified as unregistered securities offerings, there
are numerous cases not connected to coin or token sales or fundraising. While the current and the
former chairman of the SEC seem to agree “that cryptocurrency tokens [and coins?!] are
‘largely’ used to raise money for enterpreneurs and, as such, meet ‘the time-tested definitions of
an investment contract and are thus under the securities laws,’”126 the more interesting question
is to what extent entrepreneurs can do other business with cryptocurrencies without falling foul
of the securities laws and regulations. The SEC’s own 2019 guidance document Framework for
“Investment Contract” Analysis of Digital Assets127 is of limited help in this regard. In this
document the SEC purports to “provide a framework for analyzing whether a digital asset is an
investment contract and whether offers and sales of a digital asset are securities transactions.”
Yet, the Commission really does not go beyond the Howey criteria of investment of money,
common enterprise, and reasonable expectation of profits128 derived from efforts of others.129
115 (S.D.N.Y. 2010)” and another stating that “[a]n alternative method of service under Rule 4(f)(3) ‘is
acceptable if it (1) is not prohibited by international agreement; and (2) comports with constitutional
notions of due process.’ Fisher v. Petr Konchalovsky Found., No. 15 Civ. 9831 (AJN), 2016 WL 1047394,
at *2 (S.D.N.Y. Mar. 10, 2016) (quoting U.S. S.E.C. v. China Intelligent Lighting & Elecs., Inc., No. 13
Civ. 5079 (JMF), 2014 WL 338817, at *1 (S.D.N.Y. Jan. 30, 2014)).” Finally, the court found several
precedents stating that the Hague Convention does not prohibit service by e-mail (e.g. RSM Prod. Corp. v.
Fridman, No. 06 Civ. 11512 (DLC), 2007 WL 2295907, at *3 (S.D.N.Y. Aug. 10, 2007); and Sulzer
Mixpac AG, 312 F.R.D. at 331). After these legalistic acrobatics, the court came to the following and rather
surprising conclusion: Even though service of process cannot be done by ordinary mail if a country has
objected, the objection to postal channels does not extend to e-mail. Consequently, if a country has not
specifically objected to service of process by e-mail, this method is perfectly acceptable, as long as “it is
‘reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the
action and afford them an opportunity to present their objections.’ [...] (quoting Mullane v. Cent. Hanover
Bank & Trust Co., 339 U.S. 306, 314 (1950)).” Finally, adding insult to injury, the court found that the
requirement of apprising interested parties and giving them an opportunity to present their objections was
satisfied because ‘[s]ervice by email alone comports with due process where a plaintiff demonstrates that
the email is likely to reach the defendant.” (Zanghi v. Ritella, op. cit., at p. 16, with reference to Pecon
Software Ltd., 2013 WL 4016272, at *5, emphasis added).
125 As an example, an order pursuant to Sec. 12(k) of the Securities Exchange Act of 1934 was entered against
IBITX Software Inc., see SEC Release No. 83084 of 20 April 2018.
126 Ephrat Livni, S.E.C. Chiefs From Left and Right Agree: Regulate Crypto, New York Times, Friday 3
December 2021, at B3, emphasis added.
127 https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets, as last amended on 8
March 2023.
128 The Guidance provides the following criteria that make it likely that there is a reasonable expectation of
profits: “The digital asset gives the holder rights to share in the enterprise's income or profits or to realize
gain from capital appreciation of the digital asset. The opportunity may result from appreciation in the value
of the digital asset that comes, at least in part, from the operation, promotion, improvement, or other
positive developments in the network, particularly if there is a secondary trading market that enables digital
asset holders to resell their digital assets and realize gains. This also can be the case where the digital asset
United States Cryptocurrency Law Page 35 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Beyond that, “[w]hether a particular digital asset at the time of its offer or sale satisfies the
Howey test depends on the specific facts and circumstances.” The Guidance document lists some
characteristics that make it unlikely that the digital asset is a security pursuant to Howey:
“The distributed ledger network and digital asset are fully developed and operational.
Holders of the digital asset are immediately able to use it for its intended functionality on
the network, particularly where there are built-in incentives to encourage such use.
gives the holder rights to dividends or distributions. [...] The digital asset is offered and purchased in
quantities indicative of investment intent instead of quantities indicative of a user of the network. For
example, it is offered and purchased in quantities significantly greater than any likely user would
reasonably need, [...] There is little apparent correlation between the purchase/offering price of the digital
asset and the market price of the particular goods or services that can be acquired in exchange for the digital
asset. There is little apparent correlation between quantities the digital asset typically trades in (or the
amounts that purchasers typically purchase) and the amount of the underlying goods or services a typical
consumer would purchase for use or consumption. [...] The digital asset is marketed, directly or indirectly,
using any of the following: [...] The digital asset is marketed in terms that indicate it is an investment or that
the solicited holders are investors. The intended use of the proceeds from the sale of the digital asset is to
develop the network or digital asset. The future (and not present) functionality of the network or digital
asset, and the prospect that an AP will deliver that functionality. The promise (implied or explicit) to build a
business or operation as opposed to delivering currently available goods or services for use on an existing
network.” Id., footnotes omitted.
129 The Guidance provides the following criteria that make it “likely [...] that a purchaser of a digital asset is
relying on the ‘efforts of others’: An [Active Participant or AP] is responsible for the development,
improvement (or enhancement), operation, or promotion of the network, particularly if purchasers of the
digital asset expect an AP to be performing or overseeing tasks that are necessary for the network or digital
asset to achieve or retain its intended purpose or functionality. [...] There are essential tasks or responsi-
bilities performed and expected to be performed by an AP, rather than an unaffiliated, dispersed community
of network users (commonly known as a ‘decentralized’ network). An AP creates or supports a market for,
or the price of, the digital asset. This can include, for example, an AP that: (1) controls the creation and
issuance of the digital asset; or (2) takes other actions to support a market price of the digital asset, such as
by limiting supply or ensuring scarcity, through, for example, buybacks, ‘burning,’ or other activities. An
AP has a lead or central role in the direction of the ongoing development of the network or the digital asset.
In particular, an AP plays a lead or central role in deciding governance issues, code updates, or how third
parties participate in the validation of transactions that occur with respect to the digital asset. An AP has a
continuing managerial role in making decisions about or exercising judgment concerning the network or the
characteristics or rights the digital asset represents including, for example: Determining whether and how to
compensate persons providing services to the network or to the entity or entities charged with oversight of
the network. Determining whether and where the digital asset will trade. For example, purchasers may
reasonably rely on an AP for liquidity, such as where the AP has arranged, or promised to arrange for, the
trading of the digital asset on a secondary market or platform. Determining who will receive additional
digital assets and under what conditions. Making or contributing to managerial level business decisions,
such as how to deploy funds raised from sales of the digital asset. Playing a leading role in the validation or
confirmation of transactions on the network, or in some other way having responsibility for the ongoing
security of the network. Making other managerial judgments or decisions that will directly or indirectly
impact the success of the network or the value of the digital asset generally. [...]” Id., footnotes omitted.,
emphasis added.
United States Cryptocurrency Law Page 36 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
The digital assets’ creation and structure is designed and implemented to meet the needs
of its users, rather than to feed speculation as to its value or development of its network.
For example, the digital asset can only be used on the network and generally can be held
or transferred only in amounts that correspond to a purchaser’s expected use.
Prospects for appreciation in the value of the digital asset are limited. For example, the
design of the digital asset provides that its value will remain constant or even degrade
over time, and, therefore, a reasonable purchaser would not be expected to hold the
digital asset for extended periods as an investment.
With respect to a digital asset referred to as a virtual currency, it can immediately be
used to make payments in a wide variety of contexts, or acts as a substitute for real (or
fiat) currency.
– This means that it is possible to pay for goods or services with the digital asset
without first having to convert it to another digital asset or real currency.
– If it is characterized as a virtual currency, the digital asset actually operates as a
store of value that can be saved, retrieved, and exchanged for something of value
at a later time.
With respect to a digital asset that represents rights to a good or service, it currently can
be redeemed within a developed network or platform to acquire or otherwise use those
goods or services. Relevant factors may include:
– There is a correlation between the purchase price of the digital asset and a market
price of the particular good or service for which it may be redeemed or
exchanged.
– The digital asset is available in increments that correlate with a consumptive
intent versus an investment or speculative purpose.
– An intent to consume the digital asset may also be more evident if the good or
service underlying the digital asset can only be acquired, or more efficiently
acquired, through the use of the digital asset on the network.
Any economic benefit that may be derived from appreciation in the value of the digital
asset is incidental to obtaining the right to use it for its intended functionality.
The digital asset is marketed in a manner that emphasizes the functionality of the digital
asset, and not the potential for the increase in market value of the digital asset.
Potential purchasers have the ability to use the network and use (or have used) the digital
asset for its intended functionality.
Restrictions on the transferability of the digital asset are consistent with the asset’s use
and not facilitating a speculative market.
United States Cryptocurrency Law Page 37 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
If the AP facilitates the creation of a secondary market, transfers of the digital asset may
only be made by and among users of the platform.”130
The SEC continues that “[d]igital assets with these types of use or consumption characteristics
are less likely to be investment contracts.”131 This will hardly be comforting for anyone seeking
to develop a DLT or cryptocurrency business with activities in the United States. A good
example is the SEC’s cease and desist order against TokenLot. The SEC did not make a
distinction between coins or tokens that are securities and others that are not and ordered all
coins and all tokens in all wallets of the corporation to be destroyed.132 Similarly, when Munchee
Inc. announced an ICO for MUN utility tokens, the white paper stated that the company had
done a “Howey analysis” pursuant to the SEC’s DAO report and that “as currently designed, the
sale of MUN utility tokens does not pose a significant risk of implicating federal securities
laws.”133 Since the token supply was limited and an increase in value was expected, the SEC
disagreed with Munchee’s analysis and stated that even if the tokens “had a practical use at the
time of the offering, it would not preclude the token from being a security.”134 In the 2021 case
of the DeFi company Blockchain Credit Partners, the SEC treated interest bearing asset tokens
and governance tokens equally as unregistered securities, forced the business to shut down and
return the funds raised in the sale, and fined the owners.135 The list goes on.
The status quo may be summarized as follows: Digital coins offered for fundraising purposes or
likely to increase in value because of limited supply and broadening use options can be referred
to as investment coins. At present, an ICO or any other sale of such coins is likely to be qualified
as an investment contract by the SEC and needs to be registered. An issue of utility tokens not
130 SEC, Framework for “Investment Contract” Analysis of Digital Assets, https://www.sec.gov/corpfin/frame-
work-investment-contract-analysis-digital-assets; supra, note 127, emphasis added.
131 Id.
132 It is not entirely clear, however, whether the SEC demanded that all coins and tokens are to be treated
equally or whether the unregistered broker-dealer was poorly advised and voluntarily agreed to go beyond
what might have been required by law. The SEC accepted the following “undertakings” from the
respondents:
A. Retain at their own expense a qualified independent intermediary (the ‘Independent Intermediary’) not
unacceptable to the Commission staff and require the Independent Intermediary to:
1. Take possession of all remaining digital tokens in TokenLot’s inventory (‘Current Inventory’);
2. Take possession of all digital tokens that TokenLot has paid for but not yet received (‘Pending
Inventory’);
3. Destroy the digital tokens in the Current Inventory within 30 days of the date of this Order and Pending
Inventory within 30 days of receipt by TokenLot; and
4. Provide the Commission staff with written documentation that demonstrates the completion of the steps
of Paragraphs 16.A.1 – 3 above. [...]” https://www.sec.gov/litigation/admin/2018/33-10543.pdf, at p. 6.
133 SEC Release No. 10445 of 11 December 2017, at 3-4.
134 Id., at 9.
135 https://www.sec.gov/news/press-release/2021-145.
United States Cryptocurrency Law Page 38 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
intended as currency136 is still likely to be qualified as an investment contract by the SEC if the
token supply is limited and the tokens are traded on exchanges and there may be an expectation
of increase in value. The same may be true for non-fungible tokens (NFTs), if they are easily
traded and there is an expectation of increasing value.137 The situation is different mainly for
coins or tokens that cannot increase in value, making them unsuitable for speculative invest-
ments. The main examples are stablecoins, as well as coins or tokens with unlimited supply or
fixed prices that function more like gift cards or prepaid vouchers.
This status quo is currently being challenged in Federal court. The SEC filed a lawsuit against
Ripple Labs and two of its executives in December 2020, claiming that their sale of some US$
1.3 Billion worth of XRP was an unregistered issue of securities.138 While most of the SEC
136 Different definitions have been offered for coins and tokens. Some definitions rely on differences in
technology, namely that a coin is running on its own Blockchain (Bitcoin, Ether, etc.), while a token is
running on another Blockchain, e.g. ERC-20 tokens running on the Ethereum Blockchain. Other definitions
look at the functionality, where coins are intended to have much of the functionality of a currency, i.e. a
widely accepted medium of exchange and store of value, while tokens are application-specific for a
particular business and can be traded only for goods and services of that business. However, the
terminology has not been consistently used and many of the buyers of cryptocurrencies are either unaware
of or indifferent to these distinctions.
137 Until recently, the SEC had not expressed an opinion about the sale of non-fungible tokens or NFTs,
whether or not a trading platform for NFTs would need to be registered with the SEC. However, at least
Forbes was already speculating that “[w]here financial innovation goes, the SEC is bound to follow”, in an
article entitled Digital Art May Be Next in the SEC’s Crosshairs (https://www.forbes.com/sites/in-
sider/2021/07/15/digital-art-may-be-next-in-the-secs-crosshairs/?sh=698f690a32df).
Sure enough, on 28 August 2023, the SEC “charged Impact Theory, LLC, a media and entertain-
ment company headquartered in Los Angeles, with conducting an unregistered offering of crypto asset
securities in the form of purported non-fungible tokens (NFTs). Impact Theory raised approximately $30
million from hundreds of investors, including investors across the United States, through the offering.
According to the SEC’s order, from October to December 2021, Impact Theory offered and sold three tiers
of NFTs, known as Founder’s Keys, [...]. The order finds that Impact Theory encouraged potential investors
to view the purchase of a Founder’s Key as an investment into the business, stating that investors would
profit from their purchases if Impact Theory was successful in its efforts. Among other things, Impact
Theory emphasized that it was ‘trying to build the next Disney,’ and, if successful, it would deliver ‘tremen-
dous value’ to Founder’s Key purchasers. The order finds that the NFTs offered and sold to investors were
investment contracts and therefore securities. Accordingly, Impact Theory violated the federal securities
laws by offering and selling these crypto asset securities to the public in an unregistered offering that was
not otherwise exempt from registration” (https://www.sec.gov/news/press-release/2023- 163). The SEC did
not elaborate whether these NFTs were specifically problematic or whether all kinds of NFTs would be
considered investment contracts. “Without admitting or denying the SEC’s findings, Impact Theory agreed
to a cease-and-desist order finding that it violated registration provisions of the Securities Act of 1933 and
ordering it to pay a combined total of more than $6.1 million in disgorgement, prejudgment interest, and a
civil penalty. The order also establishes a Fair Fund to return monies that injured investors paid to purchase
the NFTs. Impact Theory agreed to destroy all Founder’s Keys in its possession or control, publish notice of
the order on its websites and social media channels, and eliminate any royalty that Impact Theory might
otherwise receive from future secondary market transactions involving the Founder’s Keys.” Id.
138 The SEC has asked the court to permanently enjoin defendants “from violating, directly or indirectly,
Sections 5(a) and 5(c) of the Securities Act,” to order disgorgement of all ill-gotten gains, to prohibit
defendants “from participating in any offering of digital asset securities pursuant to Section 21(d)(5) of the
United States Cryptocurrency Law Page 39 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
enforcement actions are either settled or accepted by the respective companies, Ripple Labs is
fighting the assessment of the SEC that XRP is a security.139 Importantly, Ripple Labs also
claimed that it was unfair for the SEC to watch the business grow over nine years and then
decide, without fair notice, that Ripple Labs had been in violation of registration provisions of
the Securities Act of 1933 since 2013, and to attempt to shut the company down via injunctive
relief, disgorgement of profits with prejudgment interest, and civil penalties for Ripple Labs and
its founders.140 Ripple Labs further pointed out that the SEC is not considering Ethereum to be a
security because of its decentralized structure, although Ether was originally launched with an
ICO. By contrast, XRP is being classified as a security although Ripple started with venture
capital and is nowadays similarly decentralized as Ether.141 To support its case, Ripple Labs
suggested “a novel ‘essential ingredients’ test, arguing that, in addition to the Howey test, all
investment contracts must contain three ‘essential ingredients’: (1) ‘a contract between a
promoter and an investor that establishe[s] the investor’s rights as to an investment,’ which
contract (2) ‘impose[s] post-sale obligations on the promoter to take specific actions for the
investor’s benefit’ and (3) ‘grant[s] the investor a right to share in profits from the promoter’s
efforts to generate a return on the use of investor funds.’”142
On 13 July 2023, Ripple Labs scored a major win when Judge Torres ruled that Ripple did not
violate securities laws with XRP sales to the general public.143 However, the court also ruled that
XRP sales to institutional investors in the amount of US$728.9 million constituted unregistered
sales of securities.144 While the court did not follow the proposed ‘essential ingredients’ test, it
relied on Howey and the fact that institutional investors were seeking speculative gains (from the
efforts of others). By contrast, the general public purchasing XRP on the secondary market did
not know to whom it was giving money. According to the court, this made it impossible for the
general public to expect speculative gains from the efforts of others. The court literally said that
“it is not enough for the SEC to argue that Ripple ‘explicitly targeted speculators’ or that
‘Ripple understood that people were speculating on XRP as an investment,’ [...] because
Exchange Act,” and to order payment of “civil money penalties pursuant to Sections 20(d) of the Securities
Act.” See Securities and Exchange Commission v. Ripple Labs, Inc., et al., 22 December 2020, 20 Civ.
10832, United States District Court, S.D. New York.
139 On 5 October 2016, Ripple Labs had filed a “Form D” with the SEC, notifying an exempt offering of
securities (https://www.sec.gov/Archives/edgar/data/1685012/000168501216000001/xslFormDX01/pri-
mary_doc.xml). Subsequently, Ripple Labs did not file further information, in particular with Forms 10-Q,
10-K, or 8-K, about any securities offerings of XRP.
140 A useful summary of the facts can be found at https://www.sec.gov/news/press-release/2020-338.
141 At least one author called the SEC action against Ripple Labs “misguided” and evidence of a pattern of
“cryptocurrency overreach” by the SEC; see J. Carl Cecere, Ripple’s Historic Showdown on SEC
Cryptocurrency Overreach Heats Up, Bloomberg Law, 2 March 2022, https://news.bloomberg-
law.com/banking-law/ripples-historic-showdown-on-sec-cryptocurrency-overreach-heats-up.
142 Sec. & Exch. Comm’n v. Ripple Labs., 20 Civ. 10832 (AT) (S.D.N.Y. 13 July 2023), at p. 11.
143 Id., at p. 25.
144 Id., at p. 22.
United States Cryptocurrency Law Page 40 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
a speculative motive ‘on the part of the purchaser or seller does not evidence the exis-
tence of an ' investment contract' within the meaning of the [Securities Act],’ Sinva, Inc.
v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 253 F.Supp. 359, 367 (S.D.N.Y. 1966).
‘[A]nyone who buys or sells[, for example,] a horse or an automobile hopes to realize a
profitable ' investment.' But the expected return is not contingent upon the continuing
efforts of another.’ Id. (citing SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 348
(1943)). The relevant inquiry is whether this speculative motive ‘derived from the entre-
preneurial or managerial efforts of others.’ Forman, 421 U.S. at 852. It may certainly be
the case that many Programmatic Buyers purchased XRP with an expectation of profit,
but they did not derive that expectation from Ripple’s efforts (as opposed to other factors,
such as general cryptocurrency market trends)-particularly because none of the Program-
matic Buyers were aware that they were buying XRP from Ripple.”145
Readers will be forgiven if they are now even more confused than before. It seems that the court
interpreted Howey as requiring “reasonable expectation of profits derived from efforts of specific
others.” We may safely expect this decision to be appealed and further complexities to be added.
Entrepreneurs planning to sell goods or services for cryptocurrency and unsure whether they
need to register with the SEC can ask for a “No-Action Letter” from the Commission.146 The
applicants need to provide a detailed description of their business model and arguments why it
would not be in violation of the securities laws and regulations. However, “[t]he no-action
process can be time consuming, and the SEC staff has no obligation to consider every no-action
request. The no-action relief [if any] is provided only to the requester [and only] based on the
145 Id., at pp. 23-24.
146 https://www.investor.gov/introduction-investing/investing-basics/glossary/no-action-letters. For a practical
example see the no-action letter issued to Turnkey Jet Inc. of Palm Beach, Florida on 2 April 2019. Turnkey
“propose[d] to offer and sell blockchain-based digital assets in the form of ‘tokenized’ jet cards (‘Tokens’).
[...Turnkey] propose[d] to launch a Token membership program [...] and develop a Token platform [...] to
facilitate Token sales for air charter services via a private blockchain network [...]. [...] There will be three
types of users of the Platform [...]. Users who buy Tokens to consume air charter services are consumers
[...]. Users who take part on the Platform by brokering charter flights between Consumers and carriers are
brokers [...]. Users who deliver charter flights directly to Consumers via the Platform with their own fleet of
planes are carriers [...]. All Members will be required to pay membership subscription fees to take part in
the Program and purchase Tokens. [...]”; see https://www.sec.gov/divisions/corpfin/cf-noaction/2019/turn-
key-jet-040219-2a1-incoming.pdf. Although other businesses of similar features and complexity have come
under less friendly scrutiny of the SEC, a no-action letter was issued in the present case. The most likely
explanation is the fact that Turnkey promised to always only sell and redeem the tokens at the price of US$
1. This really just made them analogous to pre-paid vouchers or gift cards. The open question is whether the
SEC (and the CFTC?) would remain disinterested if Turnkey at some point offered discounted cards for
future travel, for example sell US$10,000 tokens for US$5,000, provided they would not be used during
busy blackout times or not before a certain waiting time, let alone if a secondary market were to develop on
which the discounted tokens would be tradeable at market rates. Without those kind of evolutionary
changes, however, the real question is whether Turnkey’s tokens should even have qualified as securities;
to that effect see Commissioner Hester Peirce, How We Howey, 9 May 2019,
https://www.sec.gov/news/speech/peirce-how-we-howey-050919.
United States Cryptocurrency Law Page 41 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
specific facts and circumstances detailed in the request letter.”147 If the business model evolves
during the implementation, the letter is worthless. Furthermore, “the SEC staff reserves the right
to change the positions reflected in prior no-action letters.”148
One could of course ask whether the SEC’s lack of clarity on what is and what is not a security
and a business in need of registration, and by implication the notion that anything in the crypto
space might be, is caused more by the difficulties of understanding the technology and figuring
out how to regulate it,149 or by a desire to assert current influence and power and to project
influence and power into a future where the financial markets will inevitably be shared with, if
not dominated by digital money businesses.150
While we probably want the SEC to exercise some oversight of the crypto markets, the current
approach makes it almost impossible to develop any kind of legitimate business dealing with
cryptocurrency and smart contracts and soliciting partners and investors in the U.S. for anyone
without massive financial resources. I will argue that the legal basis for this approach is at best
shaky, that the Howey Test gives poor guidance for the sale of cryptocurrencies, and that there
are better ways of protecting consumers and markets.
Traditionally, the market primarily distinguished three types of securities: equity and equity
interests (shares) providing ownership rights to investors, debt (notes, bonds), and combinations
thereof. According to the SEC, a Blockchain enterprise engaging in an initial coin offering (ICO)
for fundraising purposes is to be equated with a traditional enterprise engaging in an initial
public offering (IPO) and listing its shares on one or more public exchanges. However, the
Blockchain enterprise is selling neither ownership rights, nor rights to dividends or profit shares,
nor promises of future repurchase or repayment. In many ways, the Blockchain enterprise more
closely resembles a budding artist whose early masterworks are snatched up by investors hoping
they will be sellable years later at great profit. In both cases, the current value of the coins or
artworks is highly subjective and untethered from any objective standards or measures. In both
cases, after the transaction is complete, the parties go their separate ways with one side keeping
the fiat money and the other side the crypto coins or the artworks, and the complete freedom to
do with their respective property as they please. In both cases, the buyer of the coins or artworks
has no claims whatsoever against the creator of those coins or artworks for any further goods or
147 See Stabile, Prior & Hinkes, supra note 10, at 175.
148 Id.
149 However, Gary Gensler, the current chair of the SEC, used to teach Blockchain Basics & Cryptography at
the Massachusetts Institute of Technology (MIT) Sloan School of Management and, from 2009 to 2014,
served as chairman of the Commodity Futures Trading Commission. He clearly knows what he is talking
about. More importantly, the SEC created a special Cyber Unit in 2017 focusing inter alia on “[m]arket
manipulation schemes involving false information spread through electronic and social media [...and]
[v]iolations involving distributed ledger technology and initial coin offerings”; see
https://www.sec.gov/news/press-release/2017-176.
150 For very interesting reflections on strategies and power games at Federal agencies see Brigham Daniels,
When Agencies Go Nuclear: A Game Theoretic Approach to the Biggest Sticks in an Agency’s Arsenal, 80
Geo. Wash. L. Rev. 442 (2012).
United States Cryptocurrency Law Page 42 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
services or shares or profits, let alone compensation of any losses. Nevertheless, in both cases,
subsequent professional success or failure of the creator can have a decisive impact on the
valuation of the coins or artworks. As a result, both purchases are highly risky and should
certainly not be made with borrowed money. The only difference between the two transactions is
the fact that the buyer of the art usually obtains a tangible object that she can enjoy while waiting
for the value to go up. However, even that difference has been obliterated by art collectors who
keep their collection packed away in offshore vaults. To give but one example, the Free Port of
Geneva is said to hold about 1.2 million artworks with a combined value in excess of US$ 100
Billion – including about a thousand Picassos – in a “museum with no visitors”.151 Although the
owners of these treasures never actually get to see them and primarily keep them for speculative
purposes,152 no one in their right mind would say that the artists need to register their individual
works as securities before they can sell their creations to the public or that such a sale would
qualify as an “investment contract.” And for anyone thinking that artworks are unique while
crypto coins are fungible, let us throw limited editions of art prints or photographs into the
conversation on the one side and non-fungible tokens (NFTs) on the other.
The case is only marginally different for Blockchain companies selling tokens instead of coins. If
the Blockchain company promises to redeem the tokens at a later date with a specific, or at least
identifiable amount of goods or services, the definition of a security would be met because the
tokens would in effect be notes, or bonds, or other evidence of indebtedness. By contrast, if the
Blockchain company is selling tokens and merely promises to accept those tokens at a later date
in exchange for an amount of goods or services determined by the token’s market value, this
cannot seriously be considered a loan agreement or sale of an ownership interest. By contrast to
a security future, such a token sale does not contain a specific quantity or value. And by contrast
to an options contract, such a token sale does not specify a strike price or other specific value,
nor an expiration date or even a specific promise that any goods or services will be available at
any specific time or price. In reality, the buyer of a digital token is in the same shoes as the buyer
of a digital coin, or the buyer of a work of art, namely hoping that the acquisition will be
tradeable – preferably at a higher value – at a future time and place that is quite unspecified and
even unforeseeable.
The distinction between coins and tokens was emphasized by Blockchain companies only after
authorities like the SEC announced that they would treat ICOs much like IPOs and coins like
securities. In response, some technology companies called their cryptocurrencies “utility
tokens,” suggesting that they would not be tradeable like currency but only redeemable with the
issuer, similar to gift cards or prepaid vouchers. However, the difference between coins and
151 See Marie-Madeleine Renauld, Geneva Free Port: The World’s Most Secretive Art Warehouse, THE
COLLECTOR, 1 May 2021, available at https://www.thecollector.com/geneva-free-port-the-worlds-most-se-
cretive-art-warehouse/. See also Daniela Tanico, The Secret Lives of Freeports: an Analysis of the
Regulation of Freeports and the Illicit Antiquities Inside, Fordham Int'l L.J. 2022, Vol. 45, No. 4, pp. 717-
749.
152 Alternatively, the owners are engaged in tax evasion or money laundering. Since those, however, are illegal
purposes, they will all agree that they are merely interested in value appreciation.
United States Cryptocurrency Law Page 43 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
tokens is largely an artificial distinction that the market has not taken up. Once they are traded
on major exchanges, there is little difference between cryptocurrencies that originally emerged
as coins and others that originally emerged as tokens, and both may go up or down in value,
meeting the SEC definition of an “investment contract.”
The fact that issuers of coins and tokens usually publish some kind of “white paper” describing
their human- and other resources and their business plan, does not impact this analysis either.
Although one could argue that the white papers are supposed to convince investors of the
commercial potential of the venture and therefore are a kind of prospectus, they neither fulfill the
requirements of a prospectus, nor do they pursue exactly the same goals.153 More importantly,
the rule is that issuers of any kind of securities in the U.S. necessarily have to file a prospectus.
The rule is not that issuers of any kind of prospectus necessarily become issuers of securities.
What is so bad, we may ask, if a Blockchain business needs to register with the SEC? After all,
there have been quite a few cases of fraud and/or spectacular failures of business ventures in the
crypto space. There are two problems however. First, the SEC registration process is complex,
time consuming, and expensive. Second, the outcome may very well not justify the expenditure.
Prospective issuers of securities generally have to register with the SEC pursuant to Sections 6 to
8 of the Securities Act,154 using Form 10155 about the filer, and Form S-1156 about the securities,
unless they fall under one of the exemptions. Form S-1 has to be accompanied by a prospectus
that meets the requirements outlined in Sec. 10 of the Act and the Form itself.157 Extensive
annexes with exhibits pursuant to 17 CFR § 229.601158 and financial statements pursuant to 17
CFR Part 210159 are also required, which makes the registration so complex and costly. Once
Form S-1 is filed, the SEC engages in a complex review procedure, typically involving a
back-and-forth of questions and clarifications with the applicant. Pursuant to Sec. 5, securities
can only be issued after the SEC has declared the registration “effective.” Once an IPO is
153 A prospectus pursuant to the Securities Act is a required step in the registration process for securities to be
publicly sold in the U.S. By contrast, a white paper is providing less formalized information to potential
investors in many countries and is not a part of any formal procedure of approval or registration in any
jurisdiction.
154 https://www.govinfo.gov/content/pkg/COMPS-1884/pdf/COMPS-1884.pdf. For details, see Marc
Steinberg, Understanding Securities Law, Carolina Academic, 7th ed. 2018, at 125-152 and 51-124.
155 chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.sec.gov/files/form10.pdf.
156 https://www.sec.gov/files/forms-1.pdf.
157 “In the prospectus, the ‘issuer’ of the securities must describe in the prospectus important facts about its
business operations, financial condition, results of operations, risk factors, and management. It must also
include audited financial statements.” See American Bar Association (ABA), What Constitutes a Security
and Requirements Relating to the Offer and Sales of Securities and Exemptions From Registration
Associated Therewith, 27 April 2017, https://www.americanbar.org/groups/business_law/publica-
tions/blt/2017/04/06_loev/.
158 https://www.law.cornell.edu/cfr/text/17/229.601.
159 https://www.law.cornell.edu/cfr/text/17/part-210.
United States Cryptocurrency Law Page 44 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
completed, there are various disclosure and regular filing requirements for as long as the
company remains in business.160
Somewhat different procedures apply to broker-dealers161 and exchanges.162 The threshold for
national securities exchanges pursuant to Section 6 of the Securities Exchange Act of 1934 is
particularly high and to date, no crypto exchange has successfully registered.
Several exemptions for issuers of securities can be of interest in the context of cryptocurrency
businesses and ICOs. Rule 506 of Regulation D – the Exemption for Limited Offers and Sales
Without Regard to Dollar Amount of Offering163 – provides two exemptions that can be used by
issuers of securities. The first option is Rule 506(b). A company relying on this exemption can
sell an unlimited number of securities to “accredited investors”164 and to up to thirty-five non-
accredited investors.165 Under this Rule, however, the company is not allowed to market or
advertise an ICO to the public. The second option is Rule 506(c). A company relying on this
exemption can market and advertise an ICO but sell only to accredited investors. The company
has to verify the status of the investors; for example, by reviewing bank and brokerage
statements. Under both options, the securities are restricted. They cannot be re-sold for six
months or a year unless they are being registered. Moreover, a company wanting to avail itself of
Rule 506 needs to file a Form D with the SEC after selling securities. In this form it must
disclose details about the company. Last but not least, the offering for sale of the securities might
have to be filed with State regulators.
Regulation A+ was created by the SEC based on a mandate in the Jumpstart Our Business
Startups (JOBS) Act of 2012 to make it easier for startup companies to conduct crowdfunding
160 For additional details, see Steinberg, supra note 154, at 153 et seq.
161 See Form BD, https://www.sec.gov/files/formbd.pdf; and see https://www.sec.gov/reportspubs/inves-
tor-publications/divisionsmarketregbdguidehtm.html.
162 See Form 1, https://www.sec.gov/files/form1.pdf. Under certain conditions, “alternative trading systems”
with a broker-dealer registration can be exempt from registering as exchanges and need only notify the SEC
with form ATS when beginning trading operations.
163 https://www.law.cornell.edu/cfr/text/17/230.506.
164 Accredited investors are natural persons with “earned income that exceeded $200,000 (or $300,000 together
with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the
current year, OR has a net worth over $1 million, either alone or together with a spouse or spousal
equivalent (excluding the value of the person’s primary residence), OR holds in good standing a Series 7,
65 or 82 license” (https://www.investor.gov/introduction-investing/general-resources/news-
alerts/alerts-bulletins/investor-bulletins/updated-3). The respective licenses are financial professional
licenses obtained after an examination by FINRA (Series 7 and 82) or the North American Securities
Administrators Association (NASAA) (Series 65). A trust with assets in excess of US$ 5 Million and
certain other legal persons can also be accredited investors.
165 Even the non-accredited investors have to be “financially sophisticated”; for more information see SEC
Investor Bulletin: Private Placements Under Regulation D, 24 September 2014,
https://www.sec.gov/oiea/investor-alerts-bulletins/ib_privateplacements.html.
United States Cryptocurrency Law Page 45 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
and certain limited public offerings, as an alternative to a full-scale IPO.166 Regulation A pre-
dated the JOBS Act but was limited, after the most recent amendment in 1992, to a maximum of
US$ 5 Million. On the basis of the JOBS Act, the limit was initially raised to US$ 50 million in
2015. Since 2021, small and medium sized businesses and entrepreneurs have a choice between
Tier 1 (offerings up to US$ 20 Million) and Tier 2 (offerings up to US$ 75 Million). Only
companies incorporated in the United States or Canada can avail themselves of this exemption.
Both Tiers allow public solicitations. In a Tier 2 offering, securities can only be sold to
accredited investors or to natural or legal persons who meet certain income criteria.167 For both
types of offerings, the issuer has to file Form 1-A.168 For Tier 2, the requirements of the filing are
stricter. Another important detail is that a Tier 1 offering does not preempt State registration and
qualification requirements. By contrast, an offering filed with the SEC under Tier 2 does
preempt State restrictions or requirements.169
The Tier 2 exemption in Regulation A+ is an attractive alternative to a regular filing with use of
Form S-1, in particular since the issuer need not concern herself with parallel requirements at the
State level. However, even under Regulation A+, the procedure is complicated, time consuming,
and costly. As a result, it will rarely be worthwhile for a company to go through this procedure
unless the issuer is planning – and confident – to sell securities for at least US$ 5 Million.
Unsurprisingly, even the exemptions to a full SEC registration have seen little use by crypto-
currency businesses. Cointelegraph commented in 2020: “The Death of the ICO: Has the US
SEC Closed the Global Window on New Tokens?”170
Highly restrictive and costly procedures may well be worthwhile if they actually accomplish
significant benefits for investors and markets. However, this is questionable. Registration with
the SEC secures a high level of transparency and a certain level of standardization of information
provided to the public. It does not provide any kind of quality seal of approval for the proposed
166 For detailed analysis see David Feldman, Regulation A+ and Other Alternatives to a Traditional IPO,
Wiley 2018.
167 §230.251(d)(2)(i)(C) provides that “the aggregate purchase price to be paid by the purchaser for the
securities (including the actual or maximum estimated conversion, exercise, or exchange price for any
underlying securities that have been qualified) is no more than ten percent (10%) of the greater of such
purchaser’s: (1) Annual income or net worth if a natural person (with annual income and net worth for such
natural person purchasers determined as provided in Rule 501 (§ 230.501)); or (2) Revenue or net assets for
such purchaser’s most recently completed fiscal year end if a non-natural person.” (https://www.law.cor-
nell.edu/cfr/text/17/230.251
168 https://www.sec.gov/files/form1-a.pdf.
169 https://www.federalregister.gov/documents/2021/01/14/2020-24749/facilitating-capital-forma-
tion-and-expanding-investment-opportunities-by-improving-access-to-capital.
170 https://cointelegraph.com/news/the-death-of-the-ico-has-the-us-sec-closed-the-global-window-on-new-to-
kens. Technology writer Brian Schuster recently added that “[m]ost ICOs do their best to avoid being seen
as a security. If they have to register as a security, most of the incentives to do an ICO vanish”; see
https://www.quora.com/Must-an-ICO-be-registered-with-the-SEC-before-the-ICO-be-
gins-or-can-it-register-during-the-ICO.
United States Cryptocurrency Law Page 46 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
business model because the SEC does not evaluate a prospectus on the merits.171 As a conse-
quence, issuers with deep pockets can register almost any business for an IPO or ICO, including
hare brained investments. By contrast, startups with viable use cases for cryptocurrencies but
limited funding are largely excluded from the capital markets and/or pushed into offshore
jurisdictions.172 We only need to look at the treatment of SPACs by the SEC to see that big
money rules and usually gets whatever it wants. Special Purpose Acquisition Companies
(SPACs) are empty shell companies with no operations. They are created to collect investor
funding and to subsequently acquire a target that will supposedly produce significant profits for
the investors. Since SPACs are typically backed by deep-pocketed interests, they register with
the SEC without problems, although there is literally no useful information available for
potential investors since the companies have no operations to date and do not know – or at least
do not disclose at the time of the IPO – any investment targets they may go after. Indeed, in
many cases, a SPAC may be deliberately used to reduce disclosure of information and potential
liabilities of the operators and targets.173 At least in the opinion of this reviewer, an ICO by a real
171 See Stabile, Prior & Hinkes, supra note 10, at 191. SEC Commissioner Peirce used the very apt term
“disclosure regulator” for the SEC, see Hester Peirce, supra note 1 (emphasis in original).
172 Under SEC Regulation S (17 CFR § 230.901-905), offshore offers and sales of securities do not have to be
registered under the Securities Act. To benefit from this exemption many Blockchain businesses exclude
customers domiciled in the U.S. from purchasing their cryptocurrencies. The exclusion has to be compre-
hensive, however, and include indirect distributions and resales into the United States; see SEC Release No.
33-7505; 34-39668; File No. S7-8-97 International Series Release No. 1118; RIN 3235-AG34 Offshore
Offers and Sales. Concrete examples of crypto exchanges and other Blockchain businesses trying to avoid
the U.S. regulatory mess can be found via links on the Ethereum website. For example dYdX excludes any
and all customers from the United States; Loopring DEX does not serve residents of New York State, while
residents of other States of the U.S. seem to be okay. Yet others include terms with complicated disclaimers
that the average customer will not be able to assess appropriately to ensure compliance.
Uniswap, although based in New York City, discloses that “We are not registered with the U.S.
Securities and Exchange Commission as a national securities exchange or in any other capacity. You
understand and acknowledge that we do not broker trading orders on your behalf nor do we collect or earn
fees from your trades on the Protocol. We also do not facilitate the execution or settlement of your trades,
which occur entirely on the public distributed Ethereum blockchain.” Whether this will insulate the
exchange or its users from SEC interventions remains to be seen, since the SEC has already launched an
investigation (File no. 97-02-22). However, the fact that an exchange like Uniswap, with an average daily
trading volume of more than US$ 200 Million and a current market valuation of Billions of dollars does not
get an SEC registration and prefers to operate with a considerable measure of legal uncertainty should be
ample evidence that full compliance is too hard and expensive. In April 2022, a group of users launched a
class-action lawsuit against Uniswap after they bought coins and tokens that subsequently lost money.
Judge Failla of the U.S. District Court for the Southern District of New York threw out this case on 29
August 2023, reasoning that the Uniswap exchange may have facilitated but had not become a party to
unlicensed securities transactions, nor had Uniswap solicited coin or token sales (see Risley et al. v
Universal Navigation Inc. d/b/a Uniswap Labs et al., Case 1:22-cv-02780). It remains to be seen whether
this decision survives on appeal, but it is very carefully reasoned. Interestingly, Judge Katherine Polk Failla
is also the judge assigned to the cases SEC v. Coinbase (Case no. 1:23-cv-04738, SDNY), and DoJ v
Tornado Cash (U.S. v. Roman Storm and Roman Semenov, Case no. 23 Cr. 0430 (KPF), SDNY).
173 See John Coates, SPACs, IPOs and Liability Risk under the Securities Laws, SEC News, 8 April 2021;
https://www.sec.gov/news/public-statement/spacs-ipos-liability-risk-under-securities-laws.
United States Cryptocurrency Law Page 47 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
company with real officers, employees, and a white paper that meets basic standards of
transparency and disclosure for an actual business idea is per se safer for investors than a
SPAC.174 Nevertheless, the SEC is playing a game of whack-a-mole with every technology
company that is trying to start a business involving the sale of cryptocurrency while it is happily
registering SPACs and other business ideas coming out of the traditional banking and finance
industry.175
The argument that the SEC would not be able to conduct an assessment of the merits and,
therefore, has to limit oversight to formal criteria, is undermined by the fact that multiple State
regulators are actually conducting merit review to ensure that an offering has merit, although
they have far more limited resources than the SEC.176
174 For example, Digital World Acquisition Corp. was created to raise money from investors “for the purpose
of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar
business combination with one or more businesses.” (https://www.sec.gov/Archives/edgar/data/000184-
9635/000110465921071982/tm2117087d1_s1.htm). In its original filing with the SEC, the company
declared that it had “not selected any specific business combination target” and that it would “focus [...] on
middle-market emerging growth technology-focused companies in the Americas, in the SaaS and Techno-
logy or Fintech and Financial Services sector.” (Id.) In the filing, the company put in bold characters the
following warning: “We are an ‘emerging growth company’ under applicable federal securities laws and
will be subject to reduced public company reporting requirements. Investing in our securities involves a
high degree of risk. [...] Investors will not be entitled to protections normally afforded to investors in Rule
419 blank check offerings. Neither the U.S. Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.” (Id.) After successfully raising over
US$ 300 Million, it merged with Trump Media and is now focusing on the development of Trump’s Truth
Social media platform. The SEC is investigating “whether Digital World Acquisitions flouted securities
regulations in planning its merger with Trump Media.” See, Matthew Goldstein & Ryan Mac, Trump’s
Truth Social Platform Is Poised to Join a Crowded Field, New York Times 22 February 2022, at B2.
175 For additional information see Frank Fagan & Saul Levermore, SPACs, PIPEs, and Common Investors,
U.Penn. J. Bus.Law 2023, Vol. 25, No. 1, pp. 103-139; as well as Michael Klausner, Michael Ohlrogge &
Emily Ruan, A Sober Look at SPACs, Yale Journal on Regulation 2022, Vol. 39, pp. 228-303.
176 Philip Feigin has pointed out in this regard, “[a]t least one ‘elephant in the room’ in the Reg. A+ debate was
‘merit review,’ the ‘M’ word. [...] Merit review was the heart and soul of the original ‘blue sky’ laws, the
authority of state securities administrators to deny securities registration to an offering that, in the
administrator’s view, was ‘unfair, unjust or inequitable’ to, or [by promising the blue sky] would ‘tend to
work a fraud’ on investors. At its height in the ’70s and ’80s, about 36 states applied merit review standards
to new offerings already reviewed for disclosure by the SEC. [...] The goals of merit review are among the
most misunderstood in American finance, by critics and perhaps state regulators both. Detractors scoff at
the idea that some state examiner in ‘East Dakota’ can predict whether a company will be a good or bad
investment, whether the investor will make or lose money. But that is not the idea. Merit standards are
intended to make an investment ‘fair’ to the investor. It is not intended to be a predictor of profitability
(although one can argue it makes an offering more attractive). Two classic (and often the most nettlesome
for issuers) examples of merit guidelines relate to repayment of principal loans and ‘cheap stock.’ Merit
states place tight restrictions on issuers using investors’ money, offering proceeds, to pay off prior loans
made to the company by its principals. Instead, offering proceeds must be applied to the company’s
operations, to generation of revenue and, with luck, profits. Also under merit review, company insiders are
required to place some or all of their promoters’ shares aka ‘cheap stock’ (shares they received from the
company for nothing or at a price much lower than the price investors will pay for the registered shares) in
United States Cryptocurrency Law Page 48 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Finally, although the registration process costs plenty of time and money, the SEC does not even
review whether the disclosures are true. The review is a formal procedure and the main sanction
for incorrect claims are ex post facto sanctions that may or may not restore losses incurred by
investors. For example, while the SEC ordered disgorgement of profits of more than US$ 40
Million in the BTCST/Shavers case,177 Mr. Shavers was basically bankrupt by then and the
victims received little or nothing. The fact that Shavers went to prison had to be sufficient
consolation.
In the end, the SEC’s oversight of the crypto markets has mainly achieved one thing: The
respective businesses are largely unable to operate legally in U.S. markets. Instead, they move
offshore or into the shadows. Some do and some don’t exclude U.S. buyers from coin sales and
other transactions.178 However, in pretty much all the cases, the U.S. has lost the ability of
providing actual oversight and meaningful investor protection. Any companies remaining in the
U.S. and trying to be in full compliance struggle under the weight of overlapping regulation of
limited usefulness.179
Next, we will look at taxation. Things are not much clearer there.
6. The Treasury Department with the Office of Foreign Assets Control (OFAC) and
the Internal Revenue Service (IRS)
After the CFTC classified cryptocurrencies as commodities, and the SEC classified them as
securities, the Treasury Department, more specifically its Financial Crimes Enforcement Net-
work (FinCEN), classified them as currency.180 By contrast, the United States Internal Revenue
escrow until such time as the overall value of the company has increased in an amount proportional to that
‘cheap stock’/public price differential.” See Philip Feigin, SEC’s New Regulation A+ and the States’ M
Word (Merit Review), The National Law Review 2015, https://www.natlawreview.com/ar-
ticle/sec-s-new-regulation-and-states-m-word-merit-review.
While repayment of “loans” after an ICO may not always be present, founders receiving a
percentage of the total supply as vested coins or tokens is pretty much standard operating procedure.
However, as Steinberg explains, the SEC does not even have the authority to prevent an offering
from going to market just because it would be a highly speculative investment unlikely to succeed; see
Steinberg, supra note 154, at 125.
177 Supra notes 102-106 and accompanying text.
178 Supra note 122.
179 Infra, notes 352 et seq. and accompanying text.
180 The Anti-Money Laundering Act of 2020 (Division F of Pub. L. 116-283) entered into force on 1 January
2021. It defines “monetary instruments” as used in the Bank Secrecy Act (BSA), as United States coins and
currency. However, the Secretary of the Treasury “may prescribe by regulation, coins and currency of a
foreign country, travelers’ checks, bearer negotiable instruments, bearer investment securities, bearer
securities, stock on which title is passed on delivery, and similar material” to also be monetary instruments.
FinCEN proposed by regulation that convertible virtual currencies (CVCs) and digital assets with legal
tender status (LTDAs) are “similar material”. FinCEN elaborated that “pursuant to 31 U.S.C.
5312(a)(3)(D), CVC and LTDA are both value that substitute for currency and are therefore ‘monetary
instruments’ under the BSA.” (https://www.federalregister.gov/documents/2021/01/15/2021-01016/require-
ments-for-certain-transactions-involving-convertible-virtual-currency-or-digital-assets).
United States Cryptocurrency Law Page 49 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Service (IRS), also part of the Treasury Department, decided that cryptocurrencies are not
currency for taxation purposes but are property instead.181 This has significant consequences for
the tax treatment of cryptocurrencies and Blockchain businesses. First, anybody buying and
selling crypto is liable for capital gains taxes on an increase in value at the time the crypto is
sold. For example, if a person buys Bitcoin at US$20,000 and sells it at US$30,000, she has
realized a capital gain of US$10,000 per coin. The tax rate depends whether the crypto was held
for over a year or not. The long-term capital gains rate is generally more favorable. While the
IRS would have been very happy with its classification during the time when most
cryptocurrencies experienced strong appreciation in value, the corollary to the classification as
property is that a decline in value between the acquisition and the sale can also be deducted from
taxes as a loss and can be used to offset gains in other crypto transactions during the same tax
year.182 Furthermore, direct cost related to the transactions, in particular gas fees and potentially
fees related to the wallet and registration on an exchange, are also deductible expenses.
The acquisition of crypto currency may also be taxable as income. If a wallet owner acquires
digital assets for free, for example in an airdrop, after a hard fork, or as a gift, she has to report
the transaction as income. If an employee is partially paid in crypto, she has to report this as
income and the employer may have withhold Federal income tax and report the income on Form
W2. If an individual or a company are selling goods or services in exchange for crypto, they
have to account for the income and can deduct their expenses. The same is true for miners, who
have to report the fair market value of the income at the time when the mining is successful and
the crypto is credited. Of course, the miner can also deduct her expenses, in particular the cost of
acquiring and operating the computers used in the mining efforts.
Last but not least, the funds raised in an ICO are subject to income tax as long as the sale is
considered a sale of property. This is not the case for the sale of shares in a traditional IPO,
although it is not clear why the two transactions should be treated differently for purposes of
taxation other than the fact that the IRS says so. Furthermore, we have yet to figure out to what
extent – if at all – operating expenses incurred prior to the ICO can be offset against the income
from the ICO.
181 See https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies, in particular the IRS
Virtual Currency Guidance in IRS Notice 2014-21 (https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21).
182 The IRS also confirmed that a wallet owner who purchased different amounts of a particular coin at
different times for different prices can determine which of those are sold at a subsequent sales transaction.
For example, if a wallet owner purchased 10 Bitcoin at US$ 5,000, another 10 at US$ 10,000 and another
10 at US$ 20,000, and then sells 10 at US$ 30,000, the wallet owner can report US$ 25,000, 20,000 or
10,000 as capital gain per coin by designating which lot was sold. See the answer to Question 39 in the
Frequently Asked Questions on Virtual Currency Transactions, https://www.irs.gov/individuals/inter-
national-taxpayers/frequently-asked-questions-on-virtual-currency-transactions. This can be of interest if at
least one of the transactions would still fall under the short term capital gains tax rate. Furthermore, the tax
payer can defer higher tax payments to later years or see whether the coins will still be as valuable when
sold at a later time. What is less clear is the possibility of a tax payer to offset losses in crypto transactions
against gains in other property transactions, for example in real estate or art sales.
United States Cryptocurrency Law Page 50 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
The value of the digital assets has to be reported at the time when the capital gains were realized
or when the income was credited and they have to be reported in US dollars. This can cause a
variety of challenges. First, the value of a particular coin or token can vary significantly in the
course of a single day. A declaration is relatively straightforward if a transaction involves the
purchase or sale of crypto in exchange for fiat, in particular US dollars. Ether purchased at US$
3,500 is entered at that price into the tax payer’s records. Things are less clear if there is no
direct fiat transaction, for example if the digital asset is acquired by mining or in an airdrop, or if
the transaction involves the exchange of one coin for another (e.g., the purchase of ADA with
ETH). The IRS speaks of “fair market value” but I doubt that it can expect the tax payer to
account for the exact time when the decisive block is confirmed on the particular day for the
determination of the value of the cryptocurrency. Second, there are plenty of digital assets for
which there is no generally accepted “exchange rate” determined by major exchanges.
The IRS enforcement action against Coinbase may provide some direction for the approach that
will likely be taken by the IRS in the foreseeable future. Coinbase is incorporated in San
Francisco and, at least at the relevant time, was the largest cryptocurrency exchange serving U.S.
customers. In 2017, it was active in 33 countries and had 5.9 Million customers with transactions
of over US$ 6 Billion. In 2016, the IRS
filed an ex parte petition pursuant to 26 U.S.C. § 7609(h)(2) for an order
permitting the IRS to serve a ‘John Doe’ administrative summons on Coinbase
[...] The Initial Summons sought ‘information regarding United States persons
who at any time during the period January 1, 2013 through December 31, 2015
conducted transactions in a convertible virtual currency as defined in IRS Notice
2014-21.’ [...] It requested nine categories of documents including: complete user
profiles, know-your-customer due diligence, documents regarding third-party
access, transaction logs, records of payments processed, correspondence between
Coinbase and Coinbase users, account or invoice statements, records of payments,
and exception records produced by Coinbase’s AML system.183
Coinbase refused to comply with the summons and the IRS agreed to narrow the request to
accounts ‘with at least the equivalent of $20,000 in any one transaction type (buy,
sell, send, or receive) in any one year during the 2013-2015 period.’ [...] The
Narrowed Summons ‘do[es] not include users: (a) who only bought and held
bitcoin during the 2013-15 period; or (b) for which Coinbase filed Forms 1099-K
during the 2013-15 period.’184
Nevertheless, even the narrowed summons, according to Coinbase, covered about 8.9 million
transactions of some 14,355 account holders. Since Coinbase continued to refuse the broad
request by the IRS, the court had to decide, inter alia, which pieces of information would have to
be disclosed as “relevant” for the legitimate purpose of “ascertaining the correctness of any
183 United States v. Coinbase Inc. et al., Case No. 17-cv-01431-JSC, U.S. District Court, N.D. California.
184 Id.
United States Cryptocurrency Law Page 51 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
return, making a return where none has been made, determining the liability of any person for
any internal revenue tax or ... collecting any such liability....”185 In the end, the court agreed that
Coinbase had to disclose some but not all of the requested information. Specifically, Coinbase
was ordered to disclose,
for accounts with at least the equivalent of $20,000 in any one transaction type
(buy, sell, send, or receive) in any one year during the 2013 to 2015 period: (1)
the taxpayer ID number, (2) name, (3) birth date, (3) address, (4) records of
account activity including transaction logs or other records identifying the date,
amount, and type of transaction (purchase/sale/exchange), the post transaction
balance, and the names of counterparties to the transaction, and (5) all periodic
statements of account or invoices (or the equivalent).186
By contrast, the court found that “account opening records, copies of passports and driver’s
licenses, all wallet addresses, all public keys for all accounts/wallets/vaults”, as well as “records
of know-your-customer diligence, agreements or instructions granting a third-party access,
control, or transaction approval authority, and correspondence between Coinbase and the user or
any third party with access to the account/wallet/vault pertaining to the account/wallet/vault
opening, closing, or transaction activity” were not relevant at the preliminary stage of the
investigation. However, the court did not rule out IRS access to this information at later stages of
an investigation into particular account holders.187
What we can learn from the Coinbase case is the difficulty of anyone – whether it is a large
crypto exchange or the IRS – to police millions of small transactions. In theory, “[u]nder Notice
2014-21, every time a US taxpayer buys a cup of coffee with virtual currency, that act constitutes
a ‘selling of property’ that causes a gain or loss for tax purposes.”188 In practice, the IRS will
have to focus on larger transactions. However, the inability of our tax authorities to apply their
own definitions consistently and their inevitable focus on major tax cheaters is just another
example of the failure of our legislators and regulators to provide clear, comprehensive,
consistent, and practical guidance for businesses in the Blockchain space, their users, and all tax
payers.
7. The Federal Trade Commission (FTC) and the Commerce Department
By contrast to the SEC, the CFTC, and several other Federal agencies practically competing to
regulate the crypto space, dynamic antitrust oversight by the Federal Trade Commission (FTC)
and the Commerce Department is hardly to be expected in the foreseeable future, although one
could certainly argue that market participants like the Ethereum Foundation already have the size
185 Id., the court referred to 26 U.S.C.A. § 7602, I.R.C. § 7602.
186 Id.
187 Id.
188 See Stabile, Prior & Hinkes, supra note 10, at 268.
United States Cryptocurrency Law Page 52 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
and impact that could be relevant in this regard.189 However, as is widely known, U.S. antitrust
enforcement was essentially defanged under the influence of the Chicago School of Antitrust
Law,190 a movement that was institutionalized during the Reagan administration.191 Since the
1980s, antitrust oversight has been limping along in the U.S. with almost negligible impact.
However, by now inefficiency and concentration of power in many key markets, as well as
concentration of wealth and inequality in society at large,192 has reached unprecedented and
uncomfortable levels in the U.S. As a consequence, there have been calls for a renaissance of
U.S. antitrust enforcement.193
189 For detailed analysis see, inter alia, Thibault Schrepel, Blockchain + Antitrust – The Decentralization
Formula, Edward Elgar Publishing 2021. The specific argument that there is already a problematic
concentration of market power in the DeFi space see Tom Barbereau, Reilly Smethurst, Orestis Papa-
georgiou, Johannes Sedlmeir & Gilbert Fridgen, Decentralised Finance’s Unregulated Governance:
Minority Rule in the Digital Wild West, 5 January 2022, https://papers.ssrn.com/sol3/papers.cfm?ab-
stract_id=4001891. For international comparative analysis see Jay Modrall, Blockchain and Antitrust, in
Matthias Artzt & Thomas Richter (eds.), Handbook of Blockchain Law - a Guide to Understanding and
Resolving the Legal Challenges of Blockchain Technology, Wolters Kluwer 2020, at 415-443.
190 A good introduction to the Chicago School is provided by Richard Posner, The Chicago School of Antitrust
Analysis, UPenn Law Review 1979, Vol. 127, at 925-948. The ideas found their way into Supreme Court
doctrine beginning with Brunswick v. Pueblo Bowl-O-Mat, 429 U.S. 477 (1977); and Continental T.V. v.
GTE Sylvania, 433 U.S. 36 (1977).
191 Under the influence of Robert Bork and his book The Antitrust Paradox, Reagan appointed William Baxter,
an avowed critic of vigorous antitrust enforcement to head the antitrust division at the Justice Department
and later even tried to get Bork onto the Supreme Court. For more information see Amy Klobuchar,
Antitrust – Taking on Monopoly Power from the Gilded Age to the Digital Age, Alfred Knopf 2021. For a
de-politicized analysis see, e.g. Germán Gutiérrez and Thomas Philippon, How EU Markets Became More
Competitive Than US Markets: A Study of Institutional Drift, No. w24700, National Bureau of Economic
Research, New York 2018.
192 For an analysis how the Chicago School has favored capital at the expense of labor, in line with political
intent of the policy authors, see Sandeep Vaheesan, Accommodating Capital and Policing Labor: Antitrust
in the Two Gilded Ages, 78 Md.L. Rev. 766 (2019).
193 See, e.g., Maurice E. Stucke and Ariel Ezrachi, The Rise, Fall, and Rebirth of the U.S. Antitrust Movement,
Harvard Business Review 2017 (https://hbr.org/2017/12/the-rise-fall-and-rebirth-of-the-u-s-anti-
trust-movement); and Tim Wu, After Consumer Welfare, Now What? The “Protection of Competition
Standard in Practice, Competition Policy International, 2018; Columbia Public Law Research Paper No.
14-608 (2018). An example for antitrust revival, albeit a problematic one, is provided by the draft American
Innovation and Choice Online Act currently before the U.S. Congress. The act specifically targets a number
of “covered platforms”, in particular Alphabet (Google), Apple, Meta (Facebook) and Amazon. For critical
review see Richard Gilbert, The American Innovation and Choice Online Act: Lessons from the 1950
Celler-Kevaufer Amendment, Concurrentialiste, 27 January 2022.
United States Cryptocurrency Law Page 53 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Beginning in 2021 with United American v. Bitmain,194 cryptobusinesses and certain features of
blockchain technology have come into the crosshairs of a newly invigorated antitrust oversight.
After just over two years, a search for “crypto” on the website of the FTC results in many hits.
However, virtually all are still related to FTC interventions against numerous crypto scammers
for false advertising.195 While antitrust concerns about monopoly power or collusion in the
194 On 1 August 2017, Bitcoin Cash (BCH) was created as a result of a hard fork on the Bitcoin (BTC)
blockchain. The hard fork was caused by a dispute between different Bitcoin miners about the primary
purpose of Bitcoin. At the time, the small size of the blocks and the slow process of adding them meant that
Bitcoin was mostly useful for longer-term storage of value and not for swift and frequent transactions. For
the latter, the transactions were too slow and the gas fees too high. Bitmain, Kraken, and other defendants
used a software upgrade in 2017 to trigger the hard fork, in effect splitting the blockchain and the digital
currency in two, and creating BCH. Decisions about the rules governing a public blockchain are typically
taken by weighted voting of the operators of the nodes mining the currency. Weightings are assigned by
CPU power.
United American Corp. (UAC) alleged that Bitmain, Kraken and certain other Bitcoin miners had
colluded before and during the hard fork to create and take over the BCH chain. Among other allegations,
UAC claimed that defendants had temporarily re-allocated hundreds of thousands of ASIC machines from
BTC to BCH mining to gain superior voting power, although these machines were then returned to BTC
mining, after the take-over was complete.
An independent antitrust attorney commented as follows: “Despite the complexity of this case and
of the cryptocurrency industry generally, the antitrust allegations in this case are quite simple. In short, the
question is whether the defendants in this case, the Bitcoin Cash ABC faction, conspired and agreed among
themselves to restrain trade and, if so, whether the plaintiff suffered a so-called “antitrust injury.”
Defendants argue in their motions to dismiss that United American Corp. has provided no evidence to infer
an agreement between the Bitcoin Cash ABC players, who all independently pursued their own economic
interests. Moreover, even if the court could infer such an agreement, defendants argue, what was the
restraint of trade or harm to competition? Both Bitcoin Cash ABC and Bitcoin Cash SV continued to exist
and be traded, and any drop in their values (which have since recovered) cannot be directly attributed to
defendants’ actions. Although, in our view, the antitrust claims appear to be quite weak, it is possible that
the court may allow plaintiffs to take some discovery, especially given the opacity of the bitcoin network.
Assuming that discovery could reveal communications among defendants and other third parties agreeing to
hijack bitcoin cash (which seems possible), plaintiff will likely need to contend with myriad privacy and
jurisdictional issues, as discovery will necessarily involve multiple countries.” See Kristian Soltes, The
First Blockchain Antitrust Case. Or Is It?, Constantine * Cannon Blog, 29 May 2019, available at
https://constantinecannon.com/antitrust-group/payments/the-first-blockchain-antitrust-case-or-is-it/.
In the end, the court explained the standards for horizontal agreements, vertical agreements, and
so-called “hub-and-spoke” agreements under the Sherman Act but found that plaintiffs had neither
persuasively argued a contract, combination or conspiracy between defendants, nor an unreasonable
restraint on trade. The judge reminded plaintiffs that “the Complaint must state facts – not conclusions –
that plausibly suggest a conspiracy.” United Am. Corp. v. Bitmain, Inc., 530 F. Supp. 3d 1241 (S.D. Fla.
2021), at 1256.
Although the case was dismissed, it did open the doors for antitrust scrutiny of potentially
unlawful conduct in the crypto industry.
195 See, for example, Voyager Digital LLC had claimed in its marketing that the Voyager platform for
cryptocurrency trading was safe and that customer funds were “insured by the Federal Deposit Insurance
Corporation (‘FDIC’),” although the FDIC does not insure digital assets. After the company went bankrupt
in 2022, its customers lost their assets on the platform. The FTC brought a complaint for permanent
injunction, monetary relief, and other relief in the U.S. District Court SD NY on 12 October 2023 for
violations of the FTC Act (Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), prohibits “unfair or deceptive
United States Cryptocurrency Law Page 54 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
crypto sector are voiced quite regularly in the media, for example when Binance CEO
Changpeng “CZ” Zhao and FTX CEO Sam Bankman-Fried discussed a sale of FTX to
Binance,196 interventions are yet to follow. In this context, it remains to be seen whether the
updated 2023 Merger Guidelines issued on 18 December 2023 by the Antitrust Division of the
U.S. Department of Justice and the Federal Trade Commission197 will make a difference going
forward.
8. The Consumer Financial Protection Bureau (CFPB)
The CFPB develops and enforces consumer financial law and promotes fair, transparent, and
competitive markets for consumer products. Consumer financial protection laws include the
following:198
Regulation B : Equal Credit Opportunity Act199
Regulation C : Home Mortgage Disclosure200
Regulation D : Alternative Mortgage Parity201
Regulation E : Electronic Fund Transfers202
Regulation F : Fair Debt Collection Practices Act203
Regulation G : S.A.F.E. Mortgage Licensing Act – Federal Registration of Residential
Mortgage Loan Originators204
acts or practices in or affecting commerce.”), and for violations of the Gramm-Leach-Bliley Act (Section
521(a)(2) of the GLB Act, 15 U.S.C. § 6821(a), prohibits any person from “obtain[ing] or attempt[ing] to
obtain . . . customer information of a financial institution relating to another person . . . by making a false,
fictitious, or fraudulent statement or representation to a customer of a financial institution.”) See
https://www.ftc.gov/system/files/ftc_gov/pdf/voyager_complaint_filed.pdf.
Another notable example was the case against Celsius Network,
https://www.ftc.gov/legal-library/browse/cases-proceedings/222-3137-celsius-network-inc-et-al-ftc-v.
196 See, for example, Jack Schickler & Cheyenne Ligon, FTX, Binance Deal Draws Antitrust Concern,
Coindesk, 8 November 2022, https://www.coindesk.com/policy/2022/11/08/ftx-binance-deal-draws-anti-
trust-concern/.
197 https://www.justice.gov/d9/2023-12/2023%20Merger%20Guidelines.pdf. For a short summary see Jones
Day Blog, The Hammer Falls: U.S. Antitrust Agencies Issue Final Antitrust Merger Guidelines,
https://www.jonesday.com/en/insights/2023/12/the-hammer-falls-us-antitrust-agencies-issue-final-antitrust-
merger-guidelines.
198 See https://www.consumerfinance.gov/rules-policy/final-rules/code-federal-regulations/.
199 https://www.ecfr.gov/current/title-12/chapter-X/part-1002?toc=1.
200 https://www.ecfr.gov/current/title-12/chapter-X/part-1003?toc=1.
201 https://www.ecfr.gov/current/title-12/chapter-X/part-1004?toc=1.
202 https://www.ecfr.gov/current/title-12/chapter-X/part-1005?toc=1.
203 https://www.ecfr.gov/current/title-12/chapter-X/part-1006?toc=1.
204 https://www.ecfr.gov/current/title-12/chapter-X/part-1007?toc=1.
United States Cryptocurrency Law Page 55 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Regulation H : S.A.F.E. Mortgage Licensing Act – State Compliance and Bureau
Registration System205
Regulation I : Disclosure Requirements for Depository Institutions Lacking Federal
Deposit Insurance206
Regulation J : Land Registration207
Regulation K : Purchasers’ Revocation Rights, Sales Practices and Standards208
Regulation M : Consumer Leasing209
Regulation N : Mortgage Acts and Practices-Advertising210
Regulation O : Mortgage Assistance Relief Services211
Regulation P : Privacy of Consumer Financial Information212
Regulation V : Fair Credit Reporting213
Regulation X : Real Estate Settlement Procedures Act214
Regulation Z : Truth in Lending215
Regulation DD : Truth in Savings216
Although at least some of these should potentially apply in the crypto sector, for example
Regulation E on electronic funds transfers, the CFPB is still focusing on fraud in the traditional
finance sector, including auto loans, general banking services, credit cards, credit reports and
scores, debt collection, mortgages, payday loans, prepaid cards, and student loans.217 The CFPB
205 https://www.ecfr.gov/current/title-12/chapter-X/part-1008?toc=1.
206 https://www.ecfr.gov/current/title-12/chapter-X/part-1009?toc=1.
207 https://www.ecfr.gov/current/title-12/chapter-X/part-1010?toc=1.
208 https://www.ecfr.gov/current/title-12/chapter-X/part-1011?toc=1.
209 https://www.ecfr.gov/current/title-12/chapter-X/part-1013?toc=1.
210 https://www.ecfr.gov/current/title-12/chapter-X/part-1014?toc=1.
211 https://www.ecfr.gov/current/title-12/chapter-X/part-1015?toc=1.
212 https://www.ecfr.gov/current/title-12/chapter-X/part-1016?toc=1.
213 https://www.ecfr.gov/current/title-12/chapter-X/part-1022?toc=1.
214 https://www.ecfr.gov/current/title-12/chapter-X/part-1024?toc=1.
215 https://www.ecfr.gov/current/title-12/chapter-X/part-1026?toc=1.
216 https://www.ecfr.gov/current/title-12/chapter-X/part-1030?toc=1.
217 https://www.consumerfinance.gov/data-research/research-hub/.
United States Cryptocurrency Law Page 56 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
is receiving many complaints about fraud in the crypto sector218 but it does not list any
enforcement actions taken so far.
9. The Federal Reserve and the Office of the Comptroller of the Currency (OCC)
The Board of Governors of the Federal Reserve System, in short, the Federal Reserve or “the
Fed,” is the central bank of the United States. Although the Fed does not itself issue or print the
U.S. currency, it determines exactly how many new bills should be printed by the Treasury
Department’s Bureau of Engraving and Printing each year. Beyond physical expansion of the
money supply, the Fed has many other tools at its disposal to formulate and implement the
monetary policy of the U.S., including setting interest rates, adjusting reserve requirements for
commercial banks, and selling and purchasing securities on the open market. The Fed does
regulate and supervise banks and important financial institutions but it has so far not become
active in the supervision of cryptocurrency service providers.
The Fed is independent from the executive branch and the legislative branches of the U.S.
Government. It would have the power to create a central bank digital currency (CBDC),219
however, subject to oversight by Congress. Unsurprisingly, there have already been efforts in the
House of Representatives to produce legislation prohibiting the Fed from creating a CBDC.
Interestingly, these efforts are not opposed to stablecoins or digital money per se. Tom Emmer
(R-MN) called his proposed bill the “CBDC Anti-Surveillance State Act.”220
The OCC is an independent bureau within the Treasury Department and regulates and supervises
banks and federal savings institutions in the U.S.221 It has the power of granting or denying
charters for new banks or branches. The U.S. Congressional Research Service summarized in
January 2022,
A bank charter is effectively a business license that is required for depository institutions
and certain financial institutions providing other bank-like services. A financial
institution that wants to become a bank, trust, savings institution, or credit union can
apply for a charter at the state or federal level from a banking regulator. At the federal
level, the Office of the Comptroller of the Currency (OCC) grants charters. A charter
allows a financial institution to perform certain financial services, including accepting
deposits, making loans, and providing a range of fiduciary services to its customers.
218 See Consumer Financial Protection Bureau, Complaint Bulletin – An Analysis of Consumer Complaints
Related to Crypto-Assets, CFPB November 2022, https://files.consumerfinance.gov/f/docu-
ments/cfpb_complaint-bulletin_crypto-assets_2022-11.pdf.
219 In this regard see Federal Reserve, Federal Reserve Board Releases Discussion Paper That Examines Pros
and Cons of a Potential U.S. Central Bank Digital Currency (CBDC), 20 January 2022,
https://www.federalreserve.gov/newsevents/pressreleases/other20220120a.htm.
220 See https://www.congress.gov/bill/118th-congress/house-bill/1122?s=1&r=59, and, for commentary, Lynne
Marek, Congressional Committee Passes Bill to Thwart CBDC, PaymentsDive 25 September 2023,
https://www.paymentsdive.com/news/house-committee-passes-emmer-bill-thwart-central-bank-digital-curre
ncy-cbdc/694592/.
221 https://www.occ.gov/about/index-about.html.
United States Cryptocurrency Law Page 57 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
While some charters allow banks to do all of these things, others are limited in purpose to
allow only a subset of financial services. The type of charter obtained determines the
regulatory framework under which a financial depository institution operates. [...]
In 2016, the OCC announced the availability of a special purpose charter for financial
technology (fintech) firms. The OCC’s authority to issue such charters met legal
challenges, and to date, the special purpose charter option has garnered relatively little
interest. [...] More recently, charters have been a topic of discussion among lawmakers,
as cryptocurrency firms are increasingly seeking national trust charters from the OCC
and special purpose state charters in states such as Wyoming and New York.
The recent interest among fintech firms in pursuing bank charters raises another point of
interest for Congress: Which companies should be considered and regulated as banks?
Banking organizations are required to meet a range of specific regulatory standards, and
in return they receive special treatment that differentiates the banking sector from other
commercial business. For example, only banks are allowed to accept deposits and use
those funds to make loans to the public. Additionally, banking organizations enjoy
federal backstops, such as deposit insurance from the FDIC and lender-of-lastresort
facilities offered by the Federal Reserve. [...]
Interest in certain chartering policy issues has increased as Congress and bank regulators
are grappling with some of the potential risks that newer technologies, such as crypto-
currency, pose to the banking system. For example, one of the concerns over increased
use of cryptocurrency is the pseudonymous nature of transactions, which make collecting
taxes and tracing illicit financial activity more difficult. Recent legislative debate has
centered on the extent to which certain parties that facilitate cryptocurrency transactions
should be subject to reporting requirements for tax and anti-money-laundering purposes
[...]. Policymakers need to decide the extent to which banking institutions are permitted
to participate in cryptocurrency and other fintech activities and to what extent special
purpose banks will be allowed to participate in a greater range of crypto activities than
other banks.
Other risks more directly impact the chartering of banks. For example, in November
2021, the President’s Working Group on Financial Markets issued a report that
recommended that certain issuers of cryptocurrency be regulated as insured depository
institutions. The efficacy of regulating cryptocurrencies such as stablecoins, which peg
their value to other assets such as fiat currency (e.g., the U.S. dollar) as insured
depository banks raises policy questions relevant to charters. For example, would a new
bank charter be needed for stablecoin issuers? Would Congress need to pass legislation to
authorize the OCC to issue such a charter and to mandate deposit insurance for all
stablecoin issuers? Additionally, is deposit insurance a necessary or desirable mandate
United States Cryptocurrency Law Page 58 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
for non-fiat currency? The answers to these questions would directly impact the way new
types of banks are chartered. [...]222
The questions raised in the CRS Report have yet to be answered. Meanwhile, regulators tend to
err on the side of caution, even if this makes it more difficult for legitimate businesses in the
crypto sector to provide their services and distinguish themselves from unsound businesses and
scammers. An example for this unfortunate situation is Custodia Bank of Wyoming. Custodia is
a State-level chartered “special-purpose depository institution” or SPDI with four lines of
business. It offers traditional banking services, including deposit accounts and online banking
services. It offers custody of crypto assets. It issues its own crypto asset, a kind of stablecoin
called “Avits.” And it provides crypto trading services, including purchase and sale of crypto for
fiat or other crypto, as well as borrowing and lending of crypto.223
Custodia applied for Board approval under Sec. 9 of the Federal Reserve Act to become a
member bank and obtain a master account with the Federal Reserve System in August 2021. On
27 January 2023, the Fed denied the application.224 In the application, Custodia had outlined that
it wanted to become “a compliant bridge” between the traditional banking sector with fiat money
and the crypto asset ecosystem.225 Although Custodia was not seeking deposit insurance for
crypto assets from the FDIC, the Fed Board had “fundamental concerns with Custodia’s
proposal, including its novel and unprecedented features.”226 The reasons provided by the Fed
222 https://crsreports.congress.gov/product/pdf/R/R47014#:~:text=A%20financial%20institution%20that%20w
ants,Currency%20(OCC)%20grants%20charters.
223 Information provided by Sidley Austin, Banking and Financial Services Update, 30 March 2023,
https://www.sidley.com/en/insights/newsupdates/2023/03/fed-reserve-board-denies-crypto-bank-application
-for-membership-based-on-fundamental-concerns.
224 FRB Order No. 2023-02. See https://www.federalreserve.gov/newsevents/press-
releases/files/orders20230324a1.pdf.
225 Id.
226 Id. The Board continued with complaints about Custodia’s risk management system and controls “which
present[...] heightened illicit finance and safety and soundness risks [... and] significant deficiencies in
Custodia’s ability to manage the risks of its day-one activities, which consist of limited basic banking
services. Specifically, the findings indicated Custodia’s risk management and controls for its core banking
activities were insufficient, particularly with respect to overall risk management; compliance with the Bank
Secrecy Act (“BSA”) and U.S. sanctions; information technology (“IT”); internal audit; financial projec-
tions; and liquidity risk management practices. [Furthermore] Custodia has been unable to demonstrate that
it could conduct an undiversified business focused on crypto-asset-related activities in a safe and sound
manner and in compliance with BSA and Office of Foreign Assets Control (“OFAC”) requirements. In
addition, the depth of relevant banking experience and bank-specific risk management experience among
Custodia’s board of directors and management team is limited [...].” The Board also did “not believe that
approval of the application would be consistent with the financial factor. The Board generally disfavors
business plans that “result in a concentration of assets, liabilities, product offerings, customers, revenues,
geography, or business activity without effective mitigants.” Without a materially diversified business
franchise, Custodia’s revenue and funding model relies almost solely upon the existence of an active and
vibrant market for crypto-assets. However, crypto-asset markets have exhibited significant volatility. The
Financial Stability Oversight Council (“FSOC”) has observed that the value of most crypto-assets is driven
in large part by speculation and sentiment, and is not anchored to a clear economic use case. Recent events,
United States Cryptocurrency Law Page 59 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
show that it will be a while before any newly created financial service provider will receive the
approval of the Fed or OCC. Interestingly, however, the Fed and OCC do not seem to have
similar concerns about crypto-related activities of big and established banks.227 Custodia is
challenging the rejection of its application in court, arguing that the Fed discriminated against it
and does not have discretion to deny a master account to a State-chartered institution.228 Unless
Custodia prevails, the only way forward, at least in the near term, for crypto businesses would
seem to partner with or buy a bank that is already Federally chartered and a member of the
Federal Reserve System.
including the bankruptcies of crypto-asset intermediaries Celsius, Voyager, BlockFi, and FTX, have high-
lighted that the global and largely unregulated or noncompliant crypto-asset sector lacks stability and that
dislocations in the sector can result in stress at financial institutions focused on serving the crypto-asset
sector. [...] The Board does not believe that approval of the application would be consistent with the cor-
porate powers factor. [...] Given the speculative and volatile nature of the crypto-asset ecosystem, the
Board does not believe that this business model is consistent with the purposes of the Federal Reserve Act.
[...] In addition to the statutory factors, under the Board’s Regulation H, the Board considers the conve-
nience and needs of the community to be served. The Board has considered Custodia’s purported benefits
to its community. Custodia has not demonstrated that it could operate in a safe and sound manner as pro-
posed, which also indicates Custodia will not be able to meet the convenience and needs of its community.
[...] In summary, the Board believes that approving Custodia’s application as submitted would be incon-
sistent with the factors that the Board is required to consider. [...]”
To accuse the team at Custodia, under the direction of Caitlin Long, a 22-year veteran of Wall
Street, of managerial incompetence, and to throw a State-chartered bank into the same group as the
referenced crypto businesses would seem disingenuous, not to say insulting. Celsius, Voyager, and BlockFi
were essentially unregulated offshore entities. As for FTX, which had been granted various licenses and
authorizations, it succumbed to fraud and large-scale embezzlement of funds, which certainly is not unheard
of in the traditional finance sector either.
227 See SR 22-6 / CA 22-6: Engagement in Crypto-Asset-Related Activities by Federal Reserve-Supervised
Banking Organizations, Board of Governors of the Federal Reserve System, Washington, 16 August 2022
(https://www.federalreserve.gov/supervisionreg/srletters/SR2206.htm). One of the banks that has received
approval to engage in crypto-related activities was BNY Mellon. Right after, “Goldman Sachs relaunched
its crypto trading desk. Citi and State Street built digital-asset units. Morgan Stanley and Wells Fargo
unveiled investment options aimed at wealthy clients. And Bank of America set out to research crypto
technology. JPMorgan Chase, to that point, had been offering banking services to crypto exchanges Coin-
base and Gemini for about a year.” See https://www.bankingdive.com/news/bny-mellon-crypto-nydfs-bit-
coin-ether/633830/.
At least to the present author, the discrimination between large and established white shoe and
male-controlled banks, on the one side, and an innovative smaller woman-led bank on the other, tastes a lot
like white male privilege trying to make sure that only big money continuous to beget more money. The
Board conveniently forgets that none of these white shoe banks would exist today but for massive and
massively expensive bailouts in 1989, 2008, 2020, and 2021. Unless, of course, the Board places its trust in
these banks precisely on the fact that they will be bailed out again if they mess up – including in their
crypto business – while a smaller and not systemically important bank like Custodia would not...
228 For additional information see Renée Jean, David vs Goliath: Custodia Bank Survives Federal Reserve’s
Third Motion To Dismiss, Cowboy State Daily, 13 June 2023, https://cowboystatedaily.com/2023/06/-
13/custodia-bank-survives-third-motion-to-dismiss-from-federal-reserve-over-denial-of-master-account/.
United States Cryptocurrency Law Page 60 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
10. The Department of Justice (DoJ)
The DoJ is the main Federal criminal investigation and enforcement agency. It becomes involved
if individuals in the crypto sector are suspected of fraud, theft, money laundering, and related
crimes. The DoJ has a Computer Crime and Intellectual Property Section (CCIPS),229 and a
Money Laundering and Asset Recovery Section (MLARS).230 In more ordinary cases of fraud or
theft, one of the 93 U.S. Attorney offices will become involved.231
Besides the DoJ, as the enforcer of Federal criminal law, all 50 States have their own State
criminal laws and corresponding State and local law enforcement agencies. This will be
elaborated in Part V.
IV. PROPOSED U.S. FEDERAL LEGISLATION SPECIFICALLY ADDRESSING
CRYPTOCURRENCIES
Although the U.S. has yet to adopt specific legislation dealing with Blockchain and DLT,
Cryptocurrencies, and DeFi, there have been a number of proposals worth discussing here since
their core ideas may resurface in the future. This recent flurry of activity in the U.S. Congress is
clear evidence that the lawmakers have woken up to the need for sensible regulation of
cryptocurrencies after the spectacular crashes of the algorithmic stablecoin Terra/LUNA (7 May
2022), and the subsequent bankruptcy filings of the crypto-hedge fund Three Arrows Capital (1
July 2022), the cryptocurrency investment firm Voyager Digital (5 July 2022), the crypto-lender
Celsius Network (13 July 2022), and the exchanges FTX (11 November 2022), and BlockFi (28
November 2022). In combination, these crashes and bankruptcies, and the decline in crypto
valuations they triggered across the board, wiped more than US$ 2 Trillion off the total market
cap of the crypto industry.
Since 2021, there were several attempts at providing a Federal legislative framework for digital
assets that would balance desirable innovation and growth in the sector with necessary protection
of markets, investors, and consumers.232 A number of legislative drafts introduced in the U.S.
Senate will be discussed below. Across the aisle, in the House of Representatives, the House
Financial Services Committee, created of a subcommittee on Digital Assets, Financial
Technology, and Inclusion (DAFTI) on 12 January 2023. The subcommittee is charged with
“Providing clear rules of the road among federal regulators for the digital asset
ecosystem.
229 https://www.justice.gov/criminal/criminal-ccips.
230 https://www.justice.gov/criminal/criminal-mlars.
231 For example, on 13 December 2022, the DoJ charged Sam Bankman-Fried, the founder and CEO of FTX,
with fraud, money laundering, and campaign finance offenses; see https://www.justice.gov/usao-sd-
ny/pr/united-states-attorney-announces-charges-against-ftx-founder-samuel-bankman-fried.
232 For additional information see also Global Legal Insights, Blockchain & Cryptocurrency Laws and
Regulations 2024 * USA, available at https://www.globallegalinsights.com/practice-areas/block-
chain-laws-and-regulations/usa#:~:text=In%20July%202023%2C%20an%20updated,cryptoassets%20are%
20securities%20or%20commodities.
United States Cryptocurrency Law Page 61 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Developing policies that promote financial technology to reach underserved
communities.
Identifying best practices and policies that continue to strengthen diversity and
inclusion in the digital asset ecosystem.”233
Several legislative drafts presented in the House will also be described below.
In spite of these efforts, it is still too soon to tell whether any of these initiatives will result in
additional, let alone better U.S. Federal legislation for cryptocurrency markets and DLT
operators.
1. The 2021 Securities Clarity Act
H.R. 4451 was a bill introduced in the House of Representatives on 16 July 2021 to “amend the
securities laws to exclude investment contract assets from the definition of security.”234 With this
bill, the sponsors sought to clarify that an asset, like the orange grove in the famous Howey
decision, does not become a “security” merely because it is the subject of an investment con-
tract.235 The bill specifically rejected the “new approach [of the SEC], which conflates an invest-
ment contract and the asset sold pursuant to that contract or scheme” because it “has discouraged
development of the digital asset sector in the United States, and has hindered innovation in that
industry here without providing concomitant benefits to those who enter into investment
contracts for the purpose of acquiring digital assets.”236 The bill would have added the following
text to Sec. 2(a) of the Securities Act of 1933:237 “The term ‘security’ does not include an
investment contract asset [...] that is not otherwise a security...”.238 Although it had bipartisan
sponsorship, the bill died in committee.
2. The 2022 Stablecoin TRUST Act and Its Progeny
The “Stablecoin Transparency of Reserves and Uniform Safe Transactions Act” was intended to
provide a clear federal regulatory framework for stablecoins, in particular those pegged to the
U.S. Dollar, including rules on issuance and management. It would require regular disclosure of
reserves held by stablecoin issuers, as well as independent audits to verify the accuracy of
disclosures. In this way, the Act sought to enhance stability and trust, and prevent cases where an
issuer would be unable to meet redemption requests.
233 See Thomson Reuters, Cryptocurrency and Virtual Currency Regulatory Tracker, https://1.next.west-
law.com/Document/I1c0f2858505011e89bf199c0ee06c731/View/FullText.html?listSource=Foldering&orig
inationContext=clientid&transitionType=MyResearchHistoryItem&contextData=%28oc.RelatedInfo%29&
VR=3.0&RS=cblt1.0.
234 https://www.congress.gov/117/bills/hr4451/BILLS-117hr4451ih.pdf.
235 Id., Sec. 2(a)(3).
236 Id., Sec. 2(a)(5).
237 15 U.S.C. 77b(a).
238 See Sec. 3(a) of the 2021 Securities Clarity Act, supra note 234. Parallel amendments were to be added to
the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(36)), the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(10)), and the Securities Investor Protection Act of 1970 (15 U.S.C. 78lll(14)).
United States Cryptocurrency Law Page 62 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Senate Bill S.3970 was introduced on 31 March 2022 and referred to the Committee on Banking,
Housing, and Urban Affairs. Although related bills H.R. 7328 (Stablecoin Transparency Act)
and H.R. 8498 (To establish reporting requirements for persons who issue fiat currency-backed
stablecoins, and for other purposes) were introduce in the House of Representatives, the
Stablecoin TRUST Act died in Committee.239
However, the subject gained new urgency after the collapse of the largest (algorithmic)
stablecoin Terra/LUNA in May 2022, and the trouble at the second largest stablecoin USDC,
which had some US$3.3 Billion, or about 8% of its reserves, held by Silicon Valley Bank.
USDC was unable to maintain its peg to the US Dollar and was temporarily de-pegged in March
2023, when SVB collapsed. This triggered new hearings in the House of Representatives
Subcommittee on Digital Assets, Financial Technology and Inclusion on Understanding
Stablecoins’ Role in Payments and the Need for Legislation on 19 April 2023.240 An early draft
of a bill “to provide requirements for payment stablecoin issuers, research on a digital dollar, and
for other purposes” was made available by the Committee.241 Global Legal Insights described the
draft as “authorizing three options for the issuance of payment stablecoins (national limited
payment stablecoin issuers, insured depository institutions and money transmitting businesses),
subjecting all payment stablecoin issuers to standardized requirements, distinguishing stable-
coins from securities by indicating that, at a minimum, stablecoins that do not offer interest are
not securities, and applying privacy protections to transactions involving stablecoins and other
virtual currencies.”242 CoinDesk labeled it as “a potential landmark stablecoin bill.”243
While there have been no specific laws adopted for stablecoins to date, at least some of these
ideas are still being pursued in other draft laws.
3. The Digital Commodity Exchange Act of 2022
The DCEA was introduced in the House of Representatives on 28 April 2022. According to its
preamble, the bill was intended “[t]o provide for orderly and secure digital commodity exchange
markets.”244 To accomplish this, the bill was supposed to make a number of changes to the
239 For information on the Congressional procedures see https://www.congress.gov/bill/117th-congress/se-
nate-bill /3970/all-info#:~:text=This%20bill%20requires%20a%20stablecoin,dollars%20or%20other%20-
nondigital%20currency. The draft Act is available at https://www.banking.senate.gov/imo/media/doc/the_
stablecoin_trust_act.pdf. For additional analysis see Daniel W. Borneman, Bank Runs in the Digital
Economy: The Need for Stablecoin Regulation, Seton Hall Journal of Legislation and Public Policy 2023,
Vol. 47, No. 2, available at: https://scholarship.shu.edu/shlj/vol47/iss2/3; as well as Brett Hemenway Falk
& Sarah Hammer, A Comprehensive Approach to Crypto Regulation, U.Penn. J. Bus.Law 2023, Vol. 25,
pp. 415-449, in particular pp. 424 et seq.
240 https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=408691.
241 https://docs.house.gov/meetings/BA/BA21/20230419/115753/BILLS-118pih-Toproviderequirementsforpay
mentstablecoinissuersresearchonadigitaldollarandforotherpurposes.pdf.
242 https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/usa#:~:text=In%20Jul
y%202023%2C%20an%20updated,cryptoassets%20are%20securities%20or%20commodities.
243 https://www.coindesk.com/policy/2023/04/15/us-house-committee-publishes-draft-stablecoin-bill/.
244 The full text of the draft is available at https://www.congress.gov/bill/117th-congress/house-bill/7614/text.
United States Cryptocurrency Law Page 63 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Commodity Exchange Act of 1936. Specifically, the bill would have clarified the oversight
powers of the CFTC over digital commodities, i.e. “any form of fungible intangible personal
property that can be exclusively possessed and transferred person to person without necessary
reliance on an intermediary.”245 Pursuant to Sec. 2(b)(1)(B), the CFTC was to be given
“exclusive jurisdiction over any agreement, contract, or transaction involving a contract of sale
of a digital commodity in interstate commerce.” This provision would have potentially created
jurisdictional conflicts with the SEC, however.
The bill would have also introduced a requirement for digital commodity trading platforms and
exchanges to register with the CFTC246 and to meet specific standards for transparency and
security.247
Although the bill had bipartisan support, it died in Committee.
4. The McHenry-Thompson Bill and Its Progeny
In the House of Representatives, several members have been “notable fans of crypto”248 and,
with the support of industry associations like the Blockchain Association,249 they have been
trying to “[protect] tokens from what many perceive as SEC overreach.”250 Patrick McHenry (R-
NC), Chairman of the House Committee on Financial Services that oversees the SEC, and Glenn
Thompson (R-PA), Chairman of the House Committee on Agriculture that oversees the CFTC,
jointly developed draft legislation to provide more clarity for the crypto industry and secure for
both the SEC and the CFTC reasonable roles in overseeing this industry, i.e. “to establish a
much-needed regulatory framework that protects consumers and investors and fosters American
leadership in the digital asset space.”251
On 20 July 2023, Representatives Thompson, Hill and Johnson introduced the Financial
Innovation and Technology for the 21st Century or FIT Act.252 The bill is broad in scope and
provides “for a system of regulation of digital assets by the Commodity Futures Trading
Commission and the Securities and Exchange Commission, and for other purposes.”253 A short
look at the table of contents of the 212 page draft will illustrate the scope and ambition:
245 Id., Sec. 2(a)(3).
246 Id., Sec. 5i.
247 Id., Sec, 5i(c)(1)-(14).
248 Kollen Post, Major US Crypto Markets Bill is Facing a Congressional Gauntlet, Unchained, 11 September
2023, available at https://unchainedcrypto.com/major-us-crypto-markets-bill-is-facing-a-congressio-
nal-gauntlet/.
249 https://theblockchainassociation.org/.
250 Id.
251 Statement by Chairman Thompson of 20 July 2023, https://financialservices.house.gov/news/document-
single.aspx?DocumentID=408921.
252 H.R. 4763, for the full text see https://agriculture.house.gov/uploaded-
files/fit_for_the_21st_century_act_of_2023.pdf.
253 Id., at 1.
United States Cryptocurrency Law Page 64 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Sec. 1. Short title; table of contents.
TITLE I — DEFINITIONS; RULEMAKING; PROVISIONAL REGISTRATION
Sec. 101. Definitions under the Securities Act of 1933.
Sec. 102. Definitions under the Commodity Exchange Act.
Sec. 103. Definitions under this Act.
Sec. 104. Joint rulemakings.
Sec. 105. Notice of intent to register for digital commodity exchanges, brokers, and
dealers.
Sec. 106. Notice of intent to register for digital asset brokers, dealers, and trading
systems.
Sec. 107. Commodity Exchange Act savings provisions.
Sec. 108. International harmonization.
Sec. 109. Implementation.
TITLE II — DIGITAL ASSET EXEMPTIONS
Sec. 201. Exempted transactions in digital assets.
Sec. 202. Requirements to transact in certain digital assets.
Sec. 203. Enhanced disclosure requirements.
Sec. 204. Certification of certain digital assets.
Sec. 205. Effective date.
TITLE III — REGISTRATION FOR DIGITAL ASSET INTERMEDIARIES AT THE SECURITIES AND
EXCHANGE COMMISSION
Sec. 301. Treatment of digital commodities and other digital assets.
Sec. 302. Antifraud authority over permitted payment stablecoins.
Sec. 303. Registration of digital asset trading systems.
Sec. 304. Requirements for digital asset trading systems.
Sec. 305. Registration of digital asset brokers and digital asset dealers.
Sec. 306. Requirements of digital asset brokers and digital asset dealers.
Sec. 307. Rules related to conflicts of interest.
Sec. 308. Treatment of certain digital assets in connection with federally regulated
intermediaries.
Sec. 309. Dual registration.
Sec. 310. Exclusion for ancillary activities.
Sec. 311. Registration and requirements for notice-registered digital asset clearing
agencies.
Sec. 312. Treatment of custody activities by banking institutions.
TITLE IV — REGISTRATION FOR DIGITAL ASSET INTERMEDIARIES AT THE COMMODITY FUTURES
TRADING COMMISSION
Sec. 401. Commission jurisdiction over digital commodity transactions.
Sec. 402. Requiring futures commission merchants to use qualified digital commodity
custodians.
United States Cryptocurrency Law Page 65 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Sec. 403. Trading certification and approval for digital commodities.
Sec. 404. Registration of digital commodity exchanges.
Sec. 405. Qualified digital commodity custodians.
Sec. 406. Registration and regulation of digital commodity brokers and dealers.
Sec. 407. Registration of associated persons.
Sec. 408. Registration of commodity pool operators and commodity trading advisors.
Sec. 409. Exclusion for ancillary activities.
Sec. 410. Effective date.
TITLE V — INNOVATION AND TECHNOLOGY IMPROVEMENTS
Sec. 501. Codification of the SEC Strategic Hub for Innovation and Financial
Technology.
Sec. 502. Codification of LabCFTC.
Sec. 503. CFTC-SEC Joint Advisory Committee on Digital Assets.
Sec. 504.Modernization of the Securities and Exchange Commission mission.
Sec. 505. Study on decentralized finance.
Sec. 506. Study on non-fungible digital assets.
Sec. 507. Study on financial market infrastructure improvements.
The following things are notable about the draft: First, the definitions in Sec. 101 are more
numerous (30 pages!) and more detailed. Whether it is necessary to define “Blockchain,” to give
but one example, may be subject to different opinions. However, the draft also provides
potentially controversial definitions, for example for “Decentralized Network.” Since the
language is clear and unambiguous, the draft provides clarity, even if not everyone will like the
definitions, for example that a network is only decentralized if, inter alia, “no [single] digital
asset issuer or affiliated person beneficially owned, in the aggregate, 20 percent or more of the
total amount of units of such digital asset that (I) can be created, issued, or distributed in such
blockchain system; and (II) were freely transferrable or otherwise used or available to be used
for the purposes of such blockchain network;...”254
Second, the draft provides fairly generous exemptions for transactions in digital assets by smaller
enterprises. Pursuant to Sec. 201, transactions are exempt from Sec. 5 of the Securities Act of
1933, that is the rule that issuance of securities is unlawful unless a registration statement is in
effect, if “(A) the aggregate amount of units of the digital asset sold by the digital asset issuer in
reliance on the exemption provided under this paragraph, during the 12-month period preceding
the date of such transaction, including the amount sold in such transaction, is not more than
$75,000,000 [...]; (B) with respect to a transaction involving the purchase of units of a digital
asset by a person who is not an accredited investor, the aggregate amount of all units of digital
assets purchased by such person during the 12-month period preceding the date of such trans-
action, including the unit of a digital asset purchased in such transaction, does not exceed the
greater of (i) 10 percent of the person’s annual income or joint income with that person’s spouse
or spousal equivalent ; or (ii) 10 percent of the person’s net worth or joint net worth with the
254 See Sec. 101(24)(B).
United States Cryptocurrency Law Page 66 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
person’s spouse or spousal equivalent;”. In other words, if the seller does not sell more than
US$75 million of coins or tokens per year or if the buyer does not spend more than 10% of their
net annual income or net worth, the transaction does not have to follow the rules adopted by the
SEC on the basis of the Securities Act. However, there are additional requirements, namely that
the transaction must not be part of an investment contract, must not be with a foreign issuer, and
is not with a development stage company or a SPAC.
The draft also provides more detail for the registration and ongoing disclosure requirements of
issuers, trading platforms or systems, digital asset brokers and dealers, and digital asset clearing
agencies (Sec. 303-306, 311), as well as digital commodities, futures commission merchants,
digital commodity custodians, and digital commodity exchanges, digital commodity brokers and
dealers, and commodity pool operators and trading advisors (Sec. 402-406, 408).
Finally, in Title V, the draft provides some innovative ideas, for example the establishment of a
“Strategic Hub for Innovation and Financial Technology” at the SEC (Sec. 501), the establish-
ment of a “LabCFTC” to provide advice and training at the CFTC and connect with academia
and fintech professionals (Sec. 502), and the establishment of a CFTC-SEC Joint Advisory
Committee on Digital Assets (Sec. 503). Sec. 505 would commission a joint study by the SEC
and CFTC about decentralized finance, including many of the technical challenges presented by
blockchains. Sec. 506 would seek another study specifically about NFTs.
This represents the culmination of efforts in the House to date. The analysis will now turn to the
Senate and show an evolution of ideas culminating in the revised draft Lummis-Gillibrand
Responsible Financial Innovation Act. RFIA would be the Senate version to be reconciled with
the House draft Financial Innovation and Technology for the 21st Century or FIT Act for
potential adoption in 2024.
5. The 2022 Virtual Currency Tax Fairness Act
Senator Patrick Toomey introduced Senate Bill S.4608 on 26 July 2022. Its main goal was to
exempt “de minimis gains from sale or exchange of virtual currency” in consumer transactions
from capital gains taxes. It would not have exempted virtual currency trades for cash or cash
equivalent, nor commercial transactions. It also set a threshold of US$50 for gains per
transaction. Like many others, the bill died in committee.255
6. The Digital Consumer Protection Act of 2022 (DCCPA)
The DCCPA was introduced as Senate Bill S.4760 on 3 August 2022. It mainly wanted to amend
the Commodity Exchange Act of 1936 to clarify that it covers all “digital commodities.” It also
introduced the concepts of “digital commodity broker,” “digital commodity custodian,” “digital
commodity dealer,” “digital commodity trading facility,” and “digital commodity platform” and
would have given the CFTC exclusive jurisdiction over all digital commodity platforms and
trades, except for direct purchases of goods or services with digital assets.256 Furthermore, the
255 For more information see https://www.congress.gov/bill/117th-congress/senate-bill/4608.
256 https://www.congress.gov/bill/117th-congress/senate-bill/4760/text, at Sec. 3.
United States Cryptocurrency Law Page 67 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
bill would have added a new Section 5i to the Commodity Exchange Act of 1936 to require any
and all digital commodity trading platforms to register257 with the CFTC and to comply with a
series of “core principles.”258 In essence, the bill wanted to strengthen consumer protection in the
use of cryptocurrency exchanges.259 A secondary goal was the simplification of the rules for
these exchanges. To that end, the bill would have preempted any additional or different
regulation or requirements under State law.260
The bill died in the Senate Committee on Agriculture, Nutrition, and Forestry, and in the Senate
Committee on Banking, Housing, and Urban Affairs, on 15 September 2022.
7. The Digital Trading Clarity Act of 2022
Senate Bill S.5030 was introduced on 29 September 2022. It mainly reinforced the classification
of digital assets as securities and, therefore, subject to the jurisdiction of the SEC, and provided
some additional definitions and consumer protection rules. Limited in scope and usefulness, it
died in committee.261
8. The Digital Asset Anti-Money Laundering Act of 2022
Senate Bill S.5267 was introduced by Senator Elizabeth Warren on 15 December 2022. It would
direct the Financial Crimes Enforcement Network (FinCEN) to develop rules pursuant to which
wallet providers, cryptocurrency miners, validators, and other node operators, would be
classified as money services businesses with corresponding reporting requirements.262
International transactions over US$10,000 would have to be reported in compliance with section
1010.350 of title 31, Code of Federal Regulations, using the form described in that section, in
accordance with section 5314 of title 31, United States Code.263 Furthermore, the Treasury
Department would have to prohibit financial institutions and MSBs “from (1) handling, using, or
transacting business with digital asset mixers, privacy coins, and other anonymity-enhancing
technologies, as specified by the Secretary; and (2) handling, using, or transacting business with
digital assets that have been anonymized by the technologies described in paragraph (1).”264
Although the bill died in the Senate Committee on Banking, Housing, and Urban Affairs, some
of the core AML provisions meanwhile found their way into an updated draft of RFIA.
9. The 2022 Responsible Financial Innovation Act (RFIA)
257 See Sec. 4 of the bill. The registration requirement can be found in Sec. 5i(a).
258 Sec. 5i(b). For a summary of the core principles see https://www.agriculture.se-
nate.gov/imo/media/doc/crypto_bill_section_by_section1.pdf.
259 See, in particular, Sec. 5i(f) and (h).
260 Sec. 5i(n).
261 For more information see https://www.congress.gov/bill/117th-congress/senate-bill/5030?s=1&r=21.
262 https://www.congress.gov/bill/117th-congress/senate-bill/5267/text, at Sec. 3(a).
263 Id., at Sec. 3(c).
264 Id., Sec. 3(d).
United States Cryptocurrency Law Page 68 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
With some 168 pages of text,265 RFIA was the most comprehensive piece of cryptocurrency
legislation recently before the U.S. Congress. The bill was first introduced by Senators Lummis
(Republican, Wyoming) and Gillibrand (Democrat, New York) on 7 June 2022 and subsequently
sent to the Senate Committee on Banking, Housing, and Urban Affairs. After lengthy dis-
cussions, an updated version of the bill was introduced by Lummis and Gillibrand on 12 July
2023. At 274 pages of text, it has already grown substantially, mainly because it now incorp-
orates several of the key concepts of the legislative proposals discussed earlier in this section, for
example the core principles for crypto asset exchanges from the Digital Consumer Protection Act
of 2022 (now Sec. 404 of RFIA), the de minimis tax exemption for consumer transactions in
crypto from the 2022 Virtual Currency Tax Fairness Act (now Sec. 801 of RFIA), and several of
the Warren proposals in the Digital Asset Anti-Money Laundering Act of 2022 (now in Title III
of RFIA). The bill was last discussed on 26 October 2023 in the Senate Committee on Banking,
Housing, and Urban Affairs and is likely to be carried over into 2024 and evolve into draft
legislation for consideration in the House of Representatives and, potentially, adoption into law.
RFIA is intended “[t]o provide for responsible financial innovation and to bring digital assets
within the regulatory perimeter.”266 A brief look at the table of contents267 shows the scope and
ambition of the project:268
Sec. 1. Short title; table of contents.
Sec. 2. Definitions.
TITLE I — DEFINITIONS
Sec. 101. Definitions.
TITLE II — PUTTING CONSUMER PROTECTION FIRST
Sec. 201. Sense of Congress relating to crypto asset enforcement powers.
Sec. 202. Enforcement of consumer protection requirements.
Sec. 203. Mandatory proof of reserves; annual verification.
Sec. 204. Plain language crypto asset customer agreements.
Sec. 205. Basic consumer protection standards for crypto assets.
Sec. 206. Cleaning up crypto asset lending.
Sec. 207. Settlement finality.
Sec. 208. Advertisements of crypto asset intermediaries and certain other persons.
Sec. 209. Cybersecurity standards for crypto asset intermediaries.
TITLE III — COMBATING ILLICIT FINANCE
Sec. 301. Higher penalties for crypto asset crimes.
Sec. 302. Anti-money laundering examination standards.
Sec. 303. Crypto asset kiosks.
265 See https://www.congress.gov/117/bills/s4356/BILLS-117s4356is.pdf.
266 Id., and https://www.congress.gov/bill/118th-congress/senate-bill/2281/text#toc-S1.
267 For the table of contents of the original draft see supra, note 265.
268 https://www.congress.gov/bill/118th-congress/senate-bill/2281/text#toc-S1.
United States Cryptocurrency Law Page 69 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Sec. 304. Independent Financial Technology Working Group to Combat Terrorism and
Illicit Financing.
Sec. 305. Sanctions compliance responsibilities of payment stablecoin issuers.
Sec. 306. Crypto asset mixers and tumblers.
Sec. 307. Financial Crimes Enforcement Network Innovation Laboratory.
TITLE IV — RESPONSIBLE COMMODITIES REGULATION
Sec. 401. Definitions.
Sec. 402. Reporting and recordkeeping.
Sec. 403. Jurisdiction over crypto asset transactions.
Sec. 404. Registration of crypto asset exchanges.
Sec. 405. Supervision of affiliates.
Sec. 406. Violations.
Sec. 407. Market reports.
Sec. 408. Bankruptcy treatment of crypto assets.
Sec. 409. Identified banking products.
Sec. 410. Financial institutions definition.
Sec. 411. Offsetting the costs of crypto asset regulation.
TITLE V — RESPONSIBLE SECURITIES REGULATION
Sec. 501. Securities offerings involving certain intangible assets.
Sec. 502. Guidance relating to satisfactory control location.
TITLE VI — CUSTOMER PROTECTION AND MARKET INTEGRITY AUTHORITY
Sec. 601. Customer protection and market integrity authority.
Sec. 602. Registration, rulemaking, and supervision of customer protection and market
integrity authorities.
Sec. 603. Records and reports; duties and powers of customer protection and market
integrity authorities.
TITLE VII — RESPONSIBLE PAYMENTS INNOVATION
Sec. 701. Issuance of payment stablecoins.
Sec. 702. Treatment of endogenously referenced crypto assets.
Sec. 703. Certificate of authority to commence banking.
Sec. 704. Holding company supervision of covered depository institutions.
Sec. 705. Codifying custodial principles for financial institutions.
Sec. 706. Implementation rules to preserve adequate competition in payment stablecoins.
Sec. 707. Study on use of distributed ledger technology for reduction of risk in depository
institutions.
Sec. 708. Clarifying application review times with respect to the Federal banking
agencies.
Sec. 709. Conforming amendments.
TITLE VIII — RESPONSIBLE TAXATION OF CRYPTO ASSETS
Sec. 801. De minimis gain from sale or exchange of crypto assets.
Sec. 802. Information reporting requirements imposed on brokers with respect to crypto
United States Cryptocurrency Law Page 70 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
assets.
Sec. 803. Sources of income.
Sec. 804. Tax treatment of crypto asset lending agreements and related matters.
Sec. 805. Loss from wash sales of crypto assets.
Sec. 806. Mark-to-market election.
Sec. 807. Forks, airdrops, and subsidiary value.
Sec. 808. Crypto asset mining and staking.
Sec. 809. Charitable contributions and qualified appraisals.
TITLE IX — RESPONSIBLE INTERAGENCY COORDINATION
Sec. 901. Timeline for interpretive guidance issued by Federal financial agencies.
Sec. 902. State money transmission coordination relating to crypto assets.
Sec. 903. Information sharing among Federal and State financial regulators.
Sec. 904. Report on energy consumption in crypto asset markets.
Sec. 905. Analysis of energy consumption by distributed ledger technologies.
Sec. 906. Report on distributed ledger applications in energy.
Sec. 907. Permitting Federal Government employees to gain experience with crypto asset
technologies.
Sec. 908. Advisory Committee on Financial Innovation.
TITLE X — EQUIPPING AGENCIES TO PROTECT CONSUMERS AND PROMOTE RESPONSIBLE
INNOVATION
Sec. 1001. Executive Office of the President appropriations.
Sec. 1002. Financial Crimes Enforcement Network appropriations.
Sec. 1003. Commodity Futures Trading Commission appropriations.
Sec. 1004. Securities and Exchange Commission appropriations.
Sec. 1005. Federal Trade Commission appropriations.
Sec. 1006. Advisory Commission on Financial Innovation appropriations.
Compared to other draft legislation, for example the Digital Commodity Exchange Act of 2022,
the definitions in RFIA are more elaborate,269 and the overall language is still relatively compre-
hensible.270
269 For example, “crypto asset” is defined as “(A) [...] a natively electronic asset that (i) confers economic,
proprietary, or access rights of powers; and (ii) is recorded using cryptographically secured distributed
ledger technology, or any similar analogue; (iii) does not represent, derive value from, or maintain backing
by, a financial asset (except other crypto assets); and (B) includes (i) a payment stablecoin, except as
otherwise provided by this chapter; and (ii) other interests in financial assets (except other crypto assets)
represented on a distributed ledger or any similar analogue.” See
https://www.congress.gov/bill/118th-congress/senate-bill/2281/text#toc-S1, Sec. 101. Unfortunately, this
definition is already much less comprehensible than the original version of 2022.
270 Readers may judge for themselves whether this might have something to do with the fact that the bill was
developed and co-sponsored by Senator Cynthia Lummis from Wyoming, and Senator Kirsten Gillibrand
from New York, two women lawyers known for putting matter over party politics.
United States Cryptocurrency Law Page 71 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
One of the most important changes RFIA wanted to introduce was a re-definition of “securities”
under the Howey test. Like many, the present author has long struggled with the idea that pretty
much all coins or tokens, and even NFTs, are securities like stocks and bonds. This has been
elaborated above.271 Furthermore, the SEC’s analysis pursuant to which stablecoins are most
likely not securities because they cannot be used for speculative purposes makes sense, but the
classification of Bitcoin and Ethereum as not securities because they were never issued in an
ICO by an entity that could have registered with the SEC does not make sense. If we are trying
to protect investors from betting on overly risky investments without adequate information, then
Bitcoin and Ether have to be right there with altcoins and tokens. For these reasons, the original
version of RFIA classified pretty much all cryptocurrencies as commodities to be regulated by
the CFTC. For the most part, under the original RFIA, they would no longer be securities.272
However, even the original RFIA preserved the valid idea of the investment contract to remain
under the oversight of the SEC, i.e. the contractual framework within which the coins or tokens
are sold, for example in the context of an investment-like opportunity, i.e. with the kind of
promises of rags to riches that have become widespread in the crypto markets and are precisely
the problem the regulatory oversight has to fix. These kind of cases would have remained under
the oversight of the SEC and the coin- or token seller would have to make the required initial and
periodic disclosures, as has been the case in the past.273 Arguably, the change would not have had
a huge impact in practice but the proposed rules sure were doctrinally cleaner and more
logical.274 Unfortunately, in an effort to get more support for RFIA, the revised draft has given
up on this endeavor and now leaves the definitions given by the SEC under the Securities Act of
1933 and Howey untouched.
Another half-hearted reform concerns the classification of NFTs. While Sec. 403(a)(1)(B) would
add language to the Commodity Exchange Act of 1936 pursuant to which “[t]he Commission
271 See supra, notes 100 et seq.
272 https://www.congress.gov/117/bills/s4356/BILLS-117s4356is.pdf, at Sec. 101(a). A digital coin or token
was, however, (also) a security if it “provides the holder of the asset with any of the following rights in a
business entity: (i) A debt or equity interest in that entity. (ii) Liquidation rights with respect to that entity.
(iii) An entitlement to an interest or dividend payment from that entity. (iv) A profit or revenue share in that
entity solely from the entrepreneurial or managerial efforts of others. (v) Any other financial interest in that
entity.” Id., at Sec. 301. This made perfect sense since the coin or token, in these cases, is much closer to a
a traditional bond or share that trades in stock- and bond markets. The latter clarification, at least, was
retained in the updated draft, see Sec. 501.
273 https://www.congress.gov/117/bills/s4356/BILLS-117s4356is.pdf, Sec. 301. The original draft referred to
“ancillary assets” transacted in an investment contract. The updated draft still has the concept of ancillary
assets (Sec. 501) related to an investment contract but this has now become largely irrelevant since the SEC
would probably continue to classify most coins and tokens as securities.
274 Peter Van Valkenburgh, the director of research at Coin Center, provides an illustration in the context of the
Howey test. If Howey, instead of promising to pay investors out of the profits from selling oranges in the
market had promised to give them some of the oranges, we would struggle seeing oranges as securities.
However, we would still have an investment contract since the passive investors would hope to benefit from
the efforts of others (Howey). See Jack Solowey, Cato Institute Blog, 10 June 2022,
https://www.cato.org/blog/not-securities-not-so-fast-important-nuances-lummis-gillibrand-crypto-bill.
United States Cryptocurrency Law Page 72 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
shall only exercise jurisdiction over an agreement, contract, or transaction involving a contract of
sale of a crypto asset that is commercially fungible, which shall not include digital collectibles
and other unique crypto assets,” similar language for the Securities Act of 1933 is currently not
in the draft. Sec. 501 merely says that “ancillary assets” also have to be fungible. As a
consequence, NFTs would no longer be commodities or ancillary assets but the SEC could still
classify them as securities.
On the positive side, RFIA is the only cryptocurrency draft legislation explicitly requiring
interagency cooperation and expanding the latter even to information sharing between Federal
and State (financial) regulators (Title IX in general and Sec. 903 in particular). In the same spirit,
RFIA foresees the establishment of an “Innovation Laboratory” (Sec. 307) within the Financial
Crimes Enforcement Network to facilitate dialogue and information sharing between FinCEN
and the financial companies under its supervision. However, the very innovative idea of creating
an “Interstate Sandbox” (Sec. 802 of the original draft) to encourage responsible experimentation
via “program[s] created under State law that allow[...] a financial company to make an
innovative financial product or service available to customers within that State during a defined
period in order to permit regulatory dialogue, data sharing amongst regulators and financial
companies, and to promote an assessment of potential changes in law, rule, or policy to facilitate
the appropriate supervision of financial technology” can no longer be found in the updated draft.
Overall, RFIA would seem to provide highly desirable Federal coordination, combined with
equally necessary prudential regulation of the cryptocurrency industry.275 However, the
parliamentary process and the search for sufficient bipartisan support have already done
significant damage to the more elegant and more innovative original draft of the bill. Whether
RFIA will be supported by a Senate majority or whether its language will have to be further
twisted to become everything for everyone and, therefore, incomprehensible in the process,
remains to be seen. To the present author, majority support for the RFIA in more or less as it
presently stands would at least seem possible.
10. Outlook
Assuming that the Senate would adopt the Responsible Financial Innovation Act more or less in
the current version and the House of Representatives would adopt the Financial Innovation and
Technology for the 21st Century Act more or less as outlined above, the big question is whether
both chambers of Congress would be able to reconcile the two versions and agree on one text for
signature by the President. The House text would bring mostly clarifications and few substantial
changes. By contrast, the Senate text is more ambitious and contains multiple innovations, at
least some of which would most likely be quite controversial. In the current partisan environ-
ment, it is at least doubtful that the crypto fans in the House who crafted the FIT Act would
warm up to some of the heavy-handed regulation envisaged by the RFIA but Senator Warren’s
275 For additional detail and analysis see Sara Weed et al., Lummis-Gillibrand Responsible Financial
Innovation Act: an Overview of New Provisions in the Reintroduced Bill, Gibson Dunn, 22 August 2023,
available at https://www.gibsondunn.com/wp-content/uploads/2023/08/lummis-gillibrand-respon-
sible-financial-innovation-act-an-overview-of-new-provisions-in-the-reintroduced-bill.pdf
United States Cryptocurrency Law Page 73 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
AML rules, to give but one example, are neither intended nor going to inhibit legitimate crypto
businesses in the U.S. In the end, the question is whether the legislators in both chambers can put
policy before party and cut the Gordian knot that is the current regulatory framework for crypto
in the U.S.
V. CRYPTOCURRENCY LEGISLATION AND REGULATION BY THE SEVERAL STATES OF THE
UNION
1. Overview
Contrary to the United States Federal Government, quite many of the Several States have already
adopted specific legislation dealing with DLT technology and cryptocurrencies, and any
individuals or corporations developing and distributing them.
Whenever new regulatory challenges are addressed by the Several States, two logical approaches
are in competition. On the one hand, the States can adopt quite different approaches
independently of each other and serve as laboratories of democracy as U.S. Supreme Court
Justice Louis Brandeis put it as early as 1932.276 The idea is that the best approach may be hard
to predict in advance and it may be worthwhile trying out a number of different approaches to
figure out what works (better) and what does not (so much). On the other hand, the States can
seek to avoid conflicting rules and requirements that would create confusion and barriers to trade
by developing a uniform approach. To that end, the Uniform Law Commission (ULC, also
known as the National Conference of Commissioners on Uniform State Laws) was established in
1892 as a non-profit charged with the development of “non-partisan, well-conceived and well-
drafted legislation”277 in areas of State legislative powers where a high level of coordination
between the States is desirable. ULC members are lawyers, judges, legislators, and academics
appointed by State governments. Importantly, neither the ULC itself nor its members are
endowed with any legislative powers. Instead, the uniform laws developed by the ULC are
merely recommended for enactment by the Several States. The most widely known and most
successful project of the ULC is the Uniform Commercial Code (UCC), which has been adopted
– with few exceptions – by all 50 States, the District of Columbia, and the U.S. Virgin Islands.
1. Uniform Laws
With regard to DLT and cryptocurrencies, the ULC has so far only had a limited impact. The
2017 Uniform Regulation of Virtual-Currency Business Act (URVCBA)278 was designed to
provide a uniform statutory framework “for the regulation of companies engaging in
‘virtual-currency business activity,’ such as exchanging, transferring, or storing virtual currency;
holding electronic precious metals or certificates of electronic precious metals; or exchanging
276 See New State Ice Co. v. Liebmann, 285 U.S. 262 (1932), at 387.
277 https://www.uniformlaws.org/aboutulc/overview.
278 https://www.uniformlaws.org/viewdocument/final-act-with-comments-72?CommunityKey=e104aaa8-c10f-
45a7-a34a-0423c2106778&tab=librarydocuments.
United States Cryptocurrency Law Page 74 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
digital representations of value within online games for virtual currency or legal tender.”279
Depending on the type of services offered, individuals or companies are either exempt from the
act, have to register, or have to obtain a license. The act was developed at the request of various
stakeholders, including non-bank financial service providers interested in DLT and digital
money, seeking legal certainty for their business models. Several provisions for the protection of
consumers were included.280 The act does not define virtual currency and is intended to cover all
forms of digital assets. It has seven Articles281 and takes up about twenty-five pages in print,
single spaced and without prefatory note and comments. Although approved by the ULC and
supported by the American Bar Association (ABA), only Rhode Island enacted it.282 The ULC’s
2018 Supplemental Commercial Law for the Uniform Regulation of Virtual-Currency Businesses
Act (“Supplemental Act”)283 was designed to incorporate UCC Article 8 on Investment
Securities284 into agreements made between virtual currency businesses and the users of their
services,285 and to avoid State legislation of cryptocurrencies that would be incompatible with
UCC Article 9 on Secured Transactions.286 It too was adopted only by Rhode Island.287
By contrast to the URVCBA, the ULC’s 2019 Revised Fiduciary Access to Digital Assets Act
(RUFADAA) was adopted widely by the Several States.288 However, its scope and coverage is
extremely limited. The act
governs access to a person’s online accounts when the account owner dies or
loses the ability to manage the account. A fiduciary is a person appointed to
manage the property of another person, subject to strict duties to act in the other
279 https://www.uniformlaws.org/committees/community-home?communitykey=e104aaa8-c10f-45a7-a34a-042
3c2106778&tab=groupdetails.
280 Id.
281 Article 1 General Provisions; Article 2 Licensure; Article 3 Examination; Examination Fees; Disclosure of
Information Obtained During Examination; Article 4 Enforcement; Article 5 Disclosures and Other
Protections for Residents; Article 6 Policies and Procedures; Article 7 Miscellaneous Provisions.
282 See Rhode Island Bill HB 5847/SB 753 of 2019.
283 https://www.uniformlaws.org/viewdocument/final-act-with-comments-86?CommunityKey=fc398fb5-2885-
4efb-a3bb-508650106f95&tab=librarydocuments.
284 https://www.law.cornell.edu/ucc/8.
285 See Anita Ramasastry, President of the Uniform Law Commission, in her 29 January 2019 letter to
Representative Tyler Lindholm, expressing the ULC’s concerns about Wyoming’s draft law SF 125. The
letter is available at https://www.uniformlaws.org/viewdocument/communications-with-wyoming-1?Com-
munityKey=e104aaa8-c10f-45a7-a34a-0423c2106778&tab=librarydocuments.
286 https://www.law.cornell.edu/ucc/9.
287 See Rhode Island Bill HB 5847/SB 753 of 2019.
288 As of 1 January 2022, the RUFADAA was enacted by 47 States and territories, excluding only California,
Louisiana, Oklahoma, and Puerto Rico.
United States Cryptocurrency Law Page 75 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
person’s best interest. [...] The act allows fiduciaries to manage digital property
like computer files, web domains, and virtual currency....289
Beyond these model laws, the ULC has created a Joint Study Committee on the Uniform
Commercial Code and Emerging Technologies. The UCC, while centrally developed by the
ULC, is a model code that needs to be decentrally adopted and applied by the Several States. The
question whether the UCC applies to Smart Contracts and other business transactions made
electronically and secured on a Blockchain and/or involving a transfer of cryptocurrency is a
question of State law. If such a question comes before a court in the U.S., a State court will apply
its own State law and a Federal court will follow the Erie doctrine290 and also apply State law.
There is no such thing as a uniform Federal commercial law or law of contract. As a con-
sequence, the answer whether and how the UCC applies to these kind of transactions could
receive quite different answers depending on the State and the court where the question is
litigated. In a way, the creation of the Committee is a preventive measure. The ULC is trying to
prevent or at least reduce non-uniformity in the application of the UCC to the “emerging
technologies” we are talking about.
The Committee has been discussing the desirability and/or necessity of an explicit expansion of
UCC Article 2 on Sales291
to cover contract formation through electronic agents/autonomous
algorithms, sales of digital assets, transfer of digital currency, integration of the Uniform
Electronic Transactions Act (UETA) and the Electronic Signatures in Global and National
Commerce Act (E-SIGN), as well as ownership and transfer of goods subject to Blockchain or
DLT registration or identification.292 With regard to UCC Article 2a on Leases,293 the Committee
is largely looking at the same issues, as well as the question “whether a lessor should have the
right to track, disable, and recover leased goods electronically and, if so, how.”294 The fact that
the ULC has assigned contract formation to the Study Committee should be seen as an indication
that the application of the UCC is at least not beyond question.
289 https://www.uniformlaws.org/committees/community-home?communitykey=f7237fc4-74c2-4728-81c6-b39
a91ecdf22&tab=groupdetails.
290 Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).
291 https://www.law.cornell.edu/ucc/2.
292 ULC Joint Study Committee on the Uniform Commercial Code and Emerging Technologies – Suggested
Approach to the Study Committee’s Work Significant Issues that the Study Committee Might Consider, at
pp. 1-2. https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?Docu-
mentFileKey=0bac4fae-3e0f-c7de-93e6-4a621e3608f1&forceDialog=0. To get a better understanding of
the issues see Larry di Matteo, Michael Cannarsa & Cristina Poncibò (eds.), The Cambridge Handbook of
Smart Contracts, Blockchain Technology and Digital Platforms, Cambridge 2020, in particular Part II
Contract Law and Smart Contracts, at 59-140.
293 https://www.law.cornell.edu/ucc/2A.
294 ULC Joint Study Committee on the Uniform Commercial Code and Emerging Technologies, supra note
292, at 2.
United States Cryptocurrency Law Page 76 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
The Committee is also examining whether UCC Article 3 on Negotiable Instruments295 should be
updated for “an environment in which treatment of written instruments is increasingly auto-
mated”, whether concepts of transfer, negotiation, holder in due course, note, and draft, can
apply without modification to electronically recorded instruments, and whether Article 3 needs
to be explicitly extended to cover payment in private currency.296 Similar questions are raised
with regard to UCC Article 4 on Bank Deposits and Collections.297 Specifically, the Committee
is looking at collection by non-bank payment-service providers, collection of electronically
created items, and to what extent Article 4 should be “pruned back ... [to cover] only those
matters not covered by federal law”.298 Arguably, most cryptocurrency exchanges, and certainly
the providers of DeFi services, are “non-bank payment service providers”, if they don’t qualify
directly as banks. With regard to UCC Article 4A on Funds Transfers,299 the Committee is
examining “whether the provisions of Article 4A are satisfactory given new and emerging
AI/processing applications” and, specifically, whether these provisions “can accommodate the
use of distributed-ledger-based token transactions to clear and settle funds transfers”.300 What
may be of specific interest is the question “whether the security-procedure and loss-allocation
provisions (§§ 4A-201 through 4A-203) are satisfactory given cybersecurity and increasing
interloper fraud risks.” Under § 4A-201, banks can establish a “security procedure” to verify
“that a payment order [...] is that of the customer”. If a payment order did not originate from the
purported sender and was not sent by a third person authorized by the purported sender, the bank
is protected if it followed the agreed upon security procedure and made the transfer in good faith,
i.e. before it was notified of a data breach or that the payment order was otherwise made by an
unauthorized third party. The only way the customer could overcome this rule is by providing
positive evidence that the payment order was neither made by a person who had previously been
granted power of attorney to act on behalf of the customer or access information to the security
procedure, nor by a person who had gained such power or access in any other way from the
customer, with or without the customer’s knowledge or fault. It should be quite easy to see that
the customer will rarely, if ever, be able to prove that misappropriated passwords or access codes
were not stolen from him or her but acquired elsewhere. We may just as safely assume that DLT
financial service providers should be quite agreeable to the same level of protection. However,
§4A-105 defines “bank” as “a person engaged in the business of banking and includes a savings
bank, savings and loan association, credit union, and trust company.” This definition would not
cover enterprises merely selling goods or services in exchange for cryptocurrency, nor the
295 https://www.law.cornell.edu/ucc/3.
296 ULC Joint Study Committee on the Uniform Commercial Code and Emerging Technologies, supra note
292, at 2-3.
297 https://www.law.cornell.edu/ucc/4.
298 ULC Joint Study Committee on the Uniform Commercial Code and Emerging Technologies, supra note
292, at 3.
299 https://www.law.cornell.edu/ucc/4A.
300 ULC Joint Study Committee on the Uniform Commercial Code and Emerging Technologies, supra note
292, at 3.
United States Cryptocurrency Law Page 77 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
majority of currently existing exchanges. It would only cover those DeFi operators that are
actually engaged in “the business of banking”.
The charge of the ULC Committee with regard to UCC Article 5 on Letters of Credit301 is limited
to questions of presentation of electronic drafts and other electronic documents and relevant in
the context of Smart Contracts on a Blockchain that may be used in ways analogous to letters of
credit. Similar considerations apply for UCC Article 7 on Documents of Title.302
The work of the Committee is most interesting and most difficult with regard to the remaining
provisions of the UCC. UCC Article 8 on Investment Securities303 governs the ownership and
transfer of securities. UCC § 8-103 stipulates that “(a) [a] share or similar equity interest issued
by a corporation, business trust, joint stock company, or similar entity is a security. [...] (c) [an]
interest in a partnership or limited liability company is not a security unless it is dealt in or
traded on securities exchanges or in securities markets, its terms expressly provide that it is a
security governed by this Article, [...]. However, an interest in a partnership or limited liability
company is a financial asset if it is held in a securities account.” This definition is sufficiently
flexible to accommodate the SEC approach that the sale of pretty much all cryptocurrencies, with
the possible exception of stablecoins, is an issue of securities.304 However, cryptocurrencies are
typically held and transferred differently from traditional securities and the Committee is
examining whether changes need to be made to UCC Article 8 to accommodate crypto
transactions.
UCC Article 9 on Secured Transactions305 deals with transactions in which one party extends
credit, in particular for the purchase of goods or services, and obtains a security interest in
collateral owned by the other party. The concept is attractive in the crypto space because it
allows holders of coins or tokens to monetize their assets by borrowing against them, while
continuing to benefit from increases in value. By contrast to a sale of the crypto assets, the loan
is also not subject to capital gains tax. Article 9 provides for a two-step procedure. First, the
parties enter into a loan agreement that provides for security and is called a “security
agreement”. The debtor has to own the collateral and the creditor has to make the loan. This step
is the attachment of the security interest to the collateral. Second, the security interests has to be
perfected to be enforceable against third parties. For example, if the debtor falls into insolvency
or pledges the same collateral again, in exchange for another loan from another creditor, the first
secured creditor will only prevail if the security interest was perfected. Depending on the type of
collateral and security interest, perfection may be achieved by taking physical possession or
301 https://www.law.cornell.edu/ucc/5.
302 https://www.law.cornell.edu/ucc/7.
303 https://www.law.cornell.edu/ucc/8.
304 Supra notes 100 et seq., and accompanying text.
305 https://www.law.cornell.edu/ucc/9.
United States Cryptocurrency Law Page 78 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
control of the collateral, or by filing a financing statement with a designated State authority
maintaining a public record of security interests outstanding for a named debtor.306
Article 9 specifies the types of collateral that can be used for a secured transaction. In addition to
tangible goods, these include “(A) proceeds to which a security interest attaches; (B) accounts,
chattel paper, payment intangibles, and promissory notes that have been sold [...].”307 Securities
and commodities, including futures contracts, are frequently used as collateral for secured
transactions. Since the SEC defines most cryptocurrencies as securities and the CFTC has
declared all of them to be commodities, Article 9 should be applicable to transactions using
cryptocurrencies as collateral. Alternatively, cryptocurrencies could be relied upon as
(intangible) property based on the definition of the IRS. Once Article 9 applies, a lender secured
by crypto would benefit from a variety of protections.308 However, the question is how a security
interest in crypto should be perfected. An obvious solution could be the use of so-called multi-
signature wallets restricting the debtor from disposing of the crypto without the consent of the
creditor. However, in the absence of such an arrangement, and if the controlling private key has
not been transferred to the creditor, perfection may not have been achieved.309
If the ULC deems it necessary to study these questions in depth, one can at least argue that the
answers are not self-evident. This, for now, adds to the uncertainty for businesses and users in
the crypto and DLT sectors in the U.S.
The Committee has presented a draft in January 2022 with proposals for amendments across the
UCC and an entirely new UCC Article 12 on Controllable Electronic Records.310 The most
important proposals can be summarized as follows:
• The definition of “money” in § 1-201 is expanded to include “a medium of exchange that
is currently authorized or adopted by a domestic or foreign government, by an
intergovernmental organization, or pursuant to an agreement between two or more
governments.” This would include Bitcoin since its adoption as legal tender in El
Salvador. However, it would currently exclude all other cryptocurrencies.
306 See § 9-308-316. For further information see James White & Robert Summers, Uniform Commercial Code,
West Publishing, 6th ed. 2010, at 1148 et seq.; as well as Gerard Comizio, Virtual Currency Law, Wolters
Kluwer 2022, at 153 et seq.
307 See § 9-102(a)(12).
308 This is not undisputed, however. Comizio writes, “[i]f digital assets are not explicitly included in an
existing defined term in Article 9, secured lenders may find that financing arrangements that list virtual
currency as collateral lack the U.C.C.’s well-established enforcement protections. Uncertainty regarding
collateral casts a shadow over digital asset transactions that increases transaction costs, reduces efficiencies,
and leaves market participants vulnerable.” Comizio, supra note 306, at 157.
309 For further analysis see Kristen Johnson, Sarah Hsu Wilbur & Stanley Sater, (Im)Perfect Regulation:
Virtual Currency and Other Digital Assets as Collateral, 21 SMU Sci. & Tech. L. Rev. 115 (2018).
310 https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=c723
2d9c-6f39-0576-935e-8ad76333240f. Controllable electronic records are to be understood as a sub-category
of digital assets, at 89.
United States Cryptocurrency Law Page 79 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
• The criteria for a “security procedure” under § 4A-201 are clarified to exclude merely
“[r]equiring that a payment order be sent from a known e-mail, IP address or phone
number” since it has become too easy “to make a payment order from a different origin
appear to have been sent from such an address of phone number.”
• Authorized and verified payment orders according to § 4A-202 have to be based on a
recorded agreement with the client, not necessarily a written agreement.
• Payment orders for the purposes of §§ 4A-207 and 208 can be authenticated by
“attachment to or logical association with the record of an electronic symbol, sound, or
process with the present intent to adopt or accept the record.” This will be equally valid
as a signature.
• The same concept is introduced for “signing” of letters of credit in § 5-102.
• In § 7-106, control over a document of title is expanded from a single authoritative copy
to “one or more authoritative electronic copies,” as long as it is possible to distinguish
authoritative and non-authoritative copies, for example with a cryptographic key.
• § 8-102 introduces the concept and definition of “controllable account” and “controllable
electronic record” (§ 9-102(27A), “controllable payment intangible” (§ 9-102(27B), and
“electronic money” (§ 9-102(31A). The Official Comment specifies that “financial
assets” are not only securities “but also a broader category of obligations, shares,
participations, and interests.”311 Moreover,
The term financial asset is used to refer both to the underlying asset and
the particular means by which ownership of that asset is evidenced. Thus,
with respect to a certificated security, the term financial asset may, as
context requires, refer either to the interest or obligation of the issuer or to
the security certificate representing that interest or obligation. Similarly, if
a person holds a security or other financial asset through a securities
account, the term financial asset may, as context requires, refer either to
the underlying asset or to the person’s security entitlement.
If the parties agree to treat a digital asset as a financial asset under Article
8 and the digital asset is in fact held in a securities account for an entitle-
ment holder, the rules applicable to “controllable electronic records” under
Article 12 would not apply to the entitlement holder’s security entitlement
related to the financial asset. If the financial asset itself is a controllable
electronic record, however, then the rules in Article 12 would apply to the
securities intermediary’s rights with respect to the controllable electronic
record.312
311 Id., at 39.
312 Id., at 39-40.
United States Cryptocurrency Law Page 80 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Unsurprisingly, a number of amendments are proposed for UCC Article 9 to ensure
compatibility with the new technology and the new UCC Article 12.
• The definition of “chattel paper” is revised from “a record evidencing a right to payment”
to simply “a right to payment”. However, record evidencing the right to payment are still
needed for perfection of the security. Perfection can be achieved in the traditional way by
filing a financing statement with the respective State authority, or by obtaining control of
the controllable electronic record, for example the private key to a crypto wallet.313
• “A security interest in a controllable electronic record, controllable account, or
controllable payment intangible that is perfected by control has priority over a conflicting
security interest that is perfected by another method.”314
• § 9-203 on attachment and enforceability of security interests is expanded to clarify that
“a security interest is enforceable against the debtor and third parties with respect to the
collateral” if the following conditions are met:
(1) value has been given;
(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to
a secured party; and
(3) one of the following conditions is met:
313 Id., at 53, and see Draft §§ 9-312(a); 9-314(a); 9-107A(b). “Control” is further defined in Draft § 9-105(b).
“A purchaser has control of an electronic copy of a record evidencing chattel paper if:
(1) the electronic copy, a record attached to or logically associated with the electronic copy, or a system in
which the electronic copy is recorded:
(A) enables the purchaser readily to identify each electronic copy as an authoritative copy or
nonauthoritative copy;
(B) enables the purchaser readily to identify itself in any way, including by name, identifying number,
cryptographic key, office, or account number, as the assignee of each authoritative electronic copy;
and
(C) gives the purchaser exclusive power, subject to subsections (c) and (d), to:
(i) prevent others from [adding to or changing] [altering] an identified assignee of each
authoritative electronic copy; and
(ii) transfer control of the authoritative electronic copy; or
(2) another person, other than the debtor:
(A) has control of the electronic copy and acknowledges that it has control on behalf of the purchaser;
or
(B) obtains control of the electronic copy after having acknowledged that it will obtain control of the
electronic copy on behalf of the purchaser.”
“Exclusive power” is further defined to exist “even if (1) the electronic copy or a system in which the
electronic copy is recorded limits the use of the electronic record or has a protocol programmed to transfer
control; or (2) the secured party has agreed to share the power with another person” (Draft § 9-105(d)). This
accommodates smart contracts with conditionalities, as well as multi-signature wallets.
314 Draft § 9-326A.
United States Cryptocurrency Law Page 81 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
(C) the collateral is a certificated security in registered form and the security
certificate has been delivered to the secured party under Section 8-301 pursuant to
the debtor’s security agreement; or
(D) the collateral is controllable accounts, controllable electronic records, controllable
payment intangibles, deposit accounts, electronic documents, electronic money,
investment property, or letter-of-credit rights, and the secured party has control
under Section 7-106, 9-104, 9-105A, 9-106, 9-107, or 9-107A pursuant to the
debtor’s security agreement; or
(E) the collateral is chattel paper and the secured party has possession and control
under Section 9-314A pursuant to the debtor’s security agreement.
• Nevertheless, pursuant to § 9-332, a transferee of tangible money acting in good faith
takes the money free of a security interest when receiving delivery, and a transferee of
electronic money acting in good faith takes the money free of a security interest when
obtaining control of the money.
The introduction of the new UCC Article 12 is intended not only to provide rules for DLT and
Blockchain technology but also for “electronic assets that may be created using technologies that
have yet to be developed, or even imagined.”315 The Committee explains the purpose of Article
12 as follows:
The adoption of DLT has underscored two important trends in electronic
commerce. First, people have begun to assign economic value to some electronic
records that bear no relationship to extrinsic rights and interests. For example,
without any law or binding agreement, people around the world have agreed to
treat virtual currencies such as bitcoin [...] as a medium of exchange and store of
value. Second, people are using the creation or transfer of electronic records to
transfer rights to receive payment, rights to receive performance of other
obligations (e.g., services or delivery of goods), and other interests in personal
and real property.
These trends will inevitably result in disputes among claimants to electronic
records and their related rights and other benefits. Uncertainty as to the criteria
for resolving these claims creates commercial risk. [...]
[...D]raft Article 12 is designed to reduce these risks by providing the legal rules
governing the transfer – both outright and for security – of interests in [...controll-
able electronic records]. These rules specify the rights in a controllable electronic
record that a purchaser would acquire. Many systems for transferring controllable
electronic records are pseudonymous, so that the transferee of a controllable
electronic record is unable to verify the identity of the transferor or the source of
315 https://www.uniformlaws.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=c723
2d9c-6f39-0576-935e-8ad76333240f, at 87.
United States Cryptocurrency Law Page 82 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
the transferor’s title. Accordingly, the Article 12 rules would make controllable
electronic records negotiable, in the sense that a good faith purchaser for value
would take a controllable electronic record free of third-party claims of a property
interest in the controllable electronic record.316
The drafts were finalized and approved by the ULC in July 2022. It remains to be seen whether
they will be swiftly implemented by pretty much all of the Several States. If and when that
happens,317 the revised UCC will be well prepared to handle a variety of transactions involving
digital assets, including various forms of smart contracts for the transfer of rights and value.
Until then, however, the situation is less clear and the courts of the Several States will have to
fill the gaps in the current UCC. They may or may not refer to the work of the Joint Committee
in their quest to find equitable rules and solutions for disputes.
2. Non-Uniform State Laws and Regulations
Beyond the efforts of the ULC, legislative and regulatory activity at the level of the Several
States has been dynamic and diverse, with regard to cryptocurrencies. Fortunately, the National
Conference of State Legislatures (NCSL) maintains a website with links to all cryptocurrency-
related legislation adopted by any of the 50 States, as well as the District of Columbia, Guam,
the Mariana Islands, Puerto Rico, and the U.S. Virgin Islands.318 Even that website is somewhat
of a challenge to navigate, however. It is organized by year and by State or Territory, which
means that a comprehensive review would have to look at about 7 years x 55 = about 385
entries. The numbers swell with the fact that the tables include not only laws in force but also
drafts and their various iterations as they meander through the legislative procedures. To give but
one example, in the legislative session of 2021 alone, thirty-three States and Puerto Rico had
legislative drafts pending.
It would go beyond the scope of the present report to try to provide information, let alone detail,
about every significant law in force in any of the 55 States and Territories. Therefore, some
examples have to suffice. They will show that the States and Territories can essentially be
categorized into four groups. The first group consists of States and Territories like Arizona,
316 Id., at 87-88. The draft provides the specific example of a sale of Bitcoin. If seller S is the lawful owner,
Article 12 provides that buyer B acquires “whatever rights S had or had power to transfer” (Id., at 90).
However, even if S is a hacker who acquired the Bitcoin illegally from the real owner O, if “B obtains
control of the bitcoin for value, in good faith, and without notice of any claim of a property interest, B
would be a qualifying purchaser” and protected against claims by O (Id., at 91, emphasis in original). This
is commonly referred to as the “take-free rule.”
317 The State of Indiana actually adopted the new UCC Article 12 into state law before it was even finally
approved by the ULC, see SB 351, signed by the Governor on 14 March 2022, Public Law 110,
http://iga.in.gov/legislative/2022/bills/senate/351.
As of December 2023, thirteen States and the District of Columbia have adopted the revised UCC.
The States include Alabama, California, Colorado, Delaware, Hawaii, Indiana, Iowa, Nebraska, Nevada,
New Hampshire, New Mexico, North Dakota, and Washington. See David Y. Sartorio & Nikhil A. Mehta,
Digital Assets and the UCC: Article 12 Legislative Updates, Saul Ewing 29 November 2023,
https://www.saul.com/insights/alert/digital-assets-and-ucc-article-12-legislative-updates.
318 https://www.ncsl.org/financial-services/cryptocurrency-2023-legislation.
United States Cryptocurrency Law Page 83 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Delaware, Tennessee, Vermont, and Wyoming, actively encouraging or at least facilitating the
development of Blockchain-based businesses. These States have pretty much concluded that the
technology is here to stay and can be harnessed for good. States in the first group are seeking
advantages as welcoming jurisdictions attracting investment and jobs. At the opposite end of the
spectrum are States that either have not enacted any legislation or have merely created some kind
of exploratory committee to examine the matter further. Alabama, Arkansas, Florida, Georgia,
Hawaii, Idaho, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, Minnesota,
Nebraska, North Dakota, South Carolina, Utah, and West Virginia are examples of States in this
group. Next are States like California, Kentucky, Louisiana, Montana, Nevada,319 New
Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island,
and Texas,320 that have adopted some guidance and some limits, essentially trying to find a
middle ground based on the idea that Blockchain can be a legitimate and valuable industry as
long as it complies with a number of restrictive rules and regulations. Last but not least, a
number of States have adopted or at least debated what essentially has to be deemed Blockchain-
hostile legislation. This includes Connecticut,321 and Washington State.322
A superficial look at the distribution of States into the four groups would suggest that their
relative openness, indifference, or hostility to cryptocurrencies is independent of their
geographic location, geographic and population size, and political orientation. However, a closer
319 Nevada has exempted Blockchain transactions and smart contracts from State taxes and has prohibited local
governments from restricting the use of the technology. See SB 398 (2017) amending Chapter 719 of NRS.
320 The only law in force in Texas mentioning digital currencies is SB 207, which adds them to the penal code
for the offense of money laundering. Several draft pieces of legislation have been discussed during the 2021
legislative session, including restrictions on sports wagering (HB 2070, SB 736), and a clarification that
UCC Article 9 will require “control” by the creditor for the perfection of a security interest in virtual
currencies (HB 4474). Nevertheless, Texas is considered crypto friendly because its low electricity prices
and absence of State income tax are increasingly attracting Bitcoin mining operations.
321 Public Act No. 17-233 on Secured and Unsecured Lending expands and tightens licensing requirements
including for virtual currency transactions. Public Act No. 15-53 Concerning Mortgage Corresponding
Lenders, the Small Loan Act, Virtual Currencies and Security Freezes on Consumer Credit Reports clarifies
that licensing requirements apply to “money transmission businesses” dealing in virtual currency and gives
the State commissioner the power to “deny any application of a person who will or may engage in the
business of transmitting monetary value in the form of virtual currency if, in the commissioner’s discretion,
the issuance of such a license would represent undue risk of financial loss to consumers, considering the
applicant’s proposed business model” (Sec. 7(c) of section 36a-600). Furthermore, “[t]he commissioner
may, in the commissioner’s discretion, place additional requirements, restrictions or conditions upon the
license of any applicant who will or may engage in the business of transmitting monetary value in the form
of virtual currency, including the amount of surety bond required by section 36a-602, as amended by this
act” (Sec. 7(d) of section 36a-600). Last but not least, the commissioner is instructed to determine the
amount for the surety bond to be deposited “to address the current and prospective volatility of the market
in such currency or currencies” (Sec. 8(a) of section 36a-602).
322 Senate Bill 5031 of 2017 provides highly restrictive rules for “virtual currency online exchangers” who are
not banks, including a State licensing requirement, a requirement of a third-party security audit of the plat-
form, maintenance of a surety bond equal to the previous year’s money transmission dollar volume, as well
as annual assessment fees. In 2021, legislation was introduced to impose a 1% wealth tax on worldwide
assets of Washington residents – including crypto assets – exceeding US$ 1 Billion (HB 1406, SB 5426).
United States Cryptocurrency Law Page 84 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
look reveals that some States may not have enacted detailed legislation but not for lack of trying.
New York and South Carolina, for example, have drafted and debated several pieces of
legislation, even if the necessary majorities for their adoption have so far not been found. Rhode
Island has reviewed a very progressive Economic Growth Blockchain Act323 in the 2021
legislative session that may yet be approved in the foreseeable future.
In the interest of time and space, only the laws and regulations in force in New York and
Wyoming shall now be analyzed in some detail.
4. New York Law
On the basis of the New York Financial Services Law, the Department of Financial Services
issued virtual currency regulation 23 NYCRR Part 200, commonly known as “the BitLicense”.324
On the basis of this regulation, the Department has granted a number of virtual currency licenses
and charters and claims that “New Yorkers have a well-regulated way to access the virtual
currency marketplace and that New York remains at the center of technological innovation and
forward-looking regulation.”325 A BitLicense is required for anyone engaging in virtual currency
business activity “involving New York or a New York Resident”,326 i.e. not just for businesses
based in New York. Virtual currency business activity includes
(1) receiving or transmitting virtual currency,
(2) storing, holding, or maintaining custody or control of virtual currency on
behalf of others;
(3) buying and selling virtual currency as a customer business;
(4) performing exchange services as a customer business; or
(5) controlling, administering, or issuing a virtual currency.327
The only natural or legal persons involved with virtual currencies exempt from the licensing
requirement are
(1) persons that are chartered under the New York Banking Law and are approved
by the superintendent to engage in virtual currency business activity; and
323 http://webserver.rilin.state.ri.us/BillText/BillText21/HouseText21/H5425.pdf.
324 For the full text of the regulation see https://govt.westlaw.com/nycrr/Browse/Home/NewYork/NewYork-
CodesRulesandRegulations?guid=I7444ce80169611e594630000845b8d3e&originationContext=documentt
oc&transitionType=Default&contextData=(sc.Default).
325 https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses.
326 § 200.2(q).
327 Id. An exemption applies for “digital units” used exclusively within online gaming platforms and have no
market or application otherwise, digital units that can only be redeemed as part of a customer loyalty
program, as well as digital units used like prepaid cards; § 200.2(p).
United States Cryptocurrency Law Page 85 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
(2) merchants and consumers that utilize virtual currency solely for the purchase
or sale of goods or services or for investment purposes.328
Anyone else engaged in virtual currency business requires a license from the New York State
Department of Financial Services. Applicants have to use the prescribed forms and include the
following information:
(1) the exact name of the applicant, including any doing business as name, the
form of organization, the date of organization, and the jurisdiction where
organized or incorporated;
(2) a list of all of the applicant’s affiliates and an organization chart illustrating
the relationship among the applicant and such affiliates;
(3) a list of, and detailed biographical information for, each individual applicant
and each director, principal officer, principal stockholder, and principal
beneficiary of the applicant, as applicable, including such individual’s name,
physical and mailing addresses, and information and documentation regarding
such individual’s personal history, experience, and qualification, which shall be
accompanied by a form of authority, executed by such individual, to release
information to the department;
(4) a background report prepared by an independent investigatory agency
acceptable to the superintendent for each individual applicant, and each principal
officer, principal stockholder, and principal beneficiary of the applicant, as
applicable;
(5) for each individual applicant; for each principal officer, principal stockholder,
and principal beneficiary of the applicant, as applicable; and for all individuals to
be employed by the applicant who have access to any customer funds, whether
denominated in fiat currency or virtual currency:
(i) a set of completed fingerprints, or a receipt indicating the vendor (which
vendor must be acceptable to the superintendent) at which, and the date
when, the fingerprints were taken, for submission to the State Division of
Criminal Justice Services and the Federal Bureau of Investigation;
(ii) if applicable, such processing fees as prescribed by the superintendent;
and
(iii) two portrait-style photographs of the individuals measuring not more than
two inches by two inches;
(6) an organization chart of the applicant and its management structure, including
its principal officers or senior management, indicating lines of authority and the
allocation of duties among its principal officers or senior management;
328 § 200.3(c).
United States Cryptocurrency Law Page 86 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
(7) a current financial statement for the applicant and each principal officer,
principal stockholder, and principal beneficiary of the applicant, as applicable,
and a projected balance sheet and income statement for the following year of the
applicant’s operation;
(8) a description of the proposed, current, and historical business of the applicant,
including detail on the products and services provided and to be provided, all
associated website addresses, the jurisdictions in which the applicant is engaged
in business, the principal place of business, the primary market of operation, the
projected customer base, any specific marketing targets, and the physical address
of any operation in New York;
(9) details of all banking arrangements;
(10) all written policies and procedures required by, or related to, the
requirements of this Part;
(11) an affidavit describing any pending or threatened administrative, civil, or
criminal action, litigation, or proceeding before any governmental agency, court,
or arbitration tribunal against the applicant or any of its directors, principal
officers, principal stockholders, and principal beneficiaries, as applicable,
including the names of the parties, the nature of the proceeding, and the current
status of the proceeding;
(12) verification from the New York State Department of Taxation and Finance
that the applicant is compliant with all New York State tax obligations in a form
acceptable to the superintendent;
(13) if applicable, a copy of any insurance policies maintained for the benefit of
the applicant, its directors or officers, or its customers;
(14) an explanation of the methodology used to calculate the value of virtual
currency in fiat currency; and
(15) such other additional information as the superintendent may require.329
The superintendent generally has 90 days after a filing and payment of the US$ 5,000 application
fee to
investigate the financial condition and responsibility, financial and business
experience, and character and general fitness of the applicant. If the super-
intendent finds these qualities are such as to warrant the belief that the applicant’s
business will be conducted honestly, fairly, equitably, carefully, and efficiently
within the purposes and intent of this Part, and in a manner commanding the
confidence and trust of the community, the superintendent shall advise the
applicant in writing of his or her approval of the application, and shall issue to the
329 § 200.4(a).
United States Cryptocurrency Law Page 87 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
applicant a license to conduct virtual currency business activity, subject to the
provisions of this Part and such other conditions as the superintendent shall deem
appropriate; or the superintendent may deny the application.330
Once approved, a license is generally not limited in time and remains valid unless it is
surrendered by the licensee.331 However, any license can be suspended or revoked by the
superintendent at any time
on any ground on which the superintendent might refuse to issue an original
license, for a violation of any provision of this [regulation], for good cause
shown, or for failure of the licensee to pay a judgment, recovered in any court,
within or without this State [...]. ‘Good cause’ shall exist when a licensee has
defaulted or is likely to default in performing its obligations or financial
engagements or engages in unlawful, dishonest, wrongful, or inequitable conduct
or practices that may cause harm to the public.332
In order to avoid violation of any provisions of the regulation, licensees need to
maintain and enforce written compliance policies, including policies with respect
to anti-fraud, anti-money laundering, cyber security, privacy and information
security, and any other policy required under this [regulation], which must be
reviewed and approved by the licensee’s board of directors or an equivalent
governing body [...and] designate a qualified individual or individuals responsible
for coordinating and monitoring compliance with this Part and all other applicable
Federal and State laws, rules, and regulations.333
New York BitLicense holders need to “maintain at all times such capital in an amount and form
as the superintendent determines is sufficient to ensure the financial integrity of the licensee and
its ongoing operations based on an assessment of the specific risks applicable to each licensee”334
and to “maintain a surety bond or trust account in United States dollars for the benefit of its
customers in such form and amount as is acceptable to the superintendent for the protection of
the licensee’s customers.”335 Furthermore,
(b) To the extent a licensee stores, holds, or maintains custody or control of
virtual currency on behalf of another person, such licensee shall hold virtual
currency of the same type and amount as that which is owed or obligated to such
other person.
330 § 200.6(a).
331 § 200.6(b).
332 § 200.6(c).
333 § 200.7.
334 § 200.8(a).
335 § 200.9(a).
United States Cryptocurrency Law Page 88 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
(c) Each licensee is prohibited from selling, transferring, assigning, lending,
hypothecating, pledging, or otherwise using or encumbering assets, including
virtual currency, stored, held, or maintained by, or under the custody or control
of, such licensee on behalf of another person except for the sale, transfer, or
assignment of such assets at the direction of such other person.336
There are also extensive recordkeeping requirements (§ 200.12), required reports and financial
disclosures (§ 200.14), as well as disclosure requirements for consumer protection (§ 200.19).
For the most part, these requirements are comparable to those applying to publicly traded
companies. The superintendent also has expansive examination powers (§ 200.13), and there are
the usual anti-money laundering obligations, in particular for larger transactions over US$ 3,000
(§ 200.15).
To its credit, it must be said that the BitLicense regulation is one of the most clearly written
pieces of legislation or regulation applicable to cryptocurrency businesses in the United States.
By contrast to pretty much any rules and regulations emanating from the SEC, issuers of coins
and tokens, exchanges, and other cryptocurrency businesses do not need specialized lawyers to
understand their rights and obligations under New York law. That being said, the BitLicense
regulation “is generally regarded as the most onerous regulation of virtual currency businesses in
the United States.”337 Alex Adelman and Aubrey Strobel have complained that
New York, generally regarded as the financial capital of the world, has clung to
regulations that make it immensely difficult for crypto companies, especially
smaller startups, to operate in the state. [...] The [BitLicense] has staved off
grassroots innovation in the city by ensuring that only companies with abundant
disposable capital can shoulder its notoriously time and capital-intensive
application and compliance measures.338
According to their information, “the time allocation, legal fees and other costs drive the total cost
of pursuing a BitLicense to more than $100,000, surpassing the means of most early stage
startups.”339 Adelman and Strobel continue to point out that
companies applying for a BitLicense are already beholden to both the stringent
regulatory oversight and reporting requirements of federal agencies such as the
Securities and Exchange Commission (SEC), the Commodity Futures Trading
336 § 200.9.
337 See Stabile, Prior & Hinkes, supra note 10, at 108.
338 See Alex Adelman & Aubrey Strobel, Kill the Bitlicense – The State’s Regulatory Regime Has Been Bad
for New York and Bad for Crypto, CoinDesk 19 October 2021,
https://www.coindesk.com/policy/2021/10/19/kill-the-bitlicense/.
339 Id.; for comparison, an SEC registration for an ICO will usually cost between US$ 1 and 3 Million. Of
course, the SEC registration is also valid for all 50 States.
United States Cryptocurrency Law Page 89 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), the
IRS and the Department of Justice (DOJ).340
Last but not least, Adelman and Strobel are asking why New York clings to the BitLicense in
spite of clear evidence that it has pushed many startups either into more welcoming States like
Wyoming or entirely offshore, with the result that the intended protections of consumers and
business partners are not achieved, and high value jobs and dynamic growth opportunities are
lost for New York. In their opinion, the fact that the primary source of revenue of the New York
Department of Financial Services are the established financial service providers and institutional
banks may have something to do with that. “[O]ne can easily see why the department would beat
back companies disrupting traditional finance.”341
5. Wyoming Law
After this analysis of a highly restrictive legal regime, we shall now look into the other direction
and explore the much more welcoming regulatory environment in Wyoming. Long-dominated by
mining and agriculture, Wyoming was looking for opportunities to grow and diversify its
economy and found them in the crypto space. Already in 2016, Wyoming declared digital
currencies to be permissible investments (HB 0026) and explicitly exempted “the transmission of
monetary value and digital currency from the Wyoming Money Transmitter Act licensure
requirements” (HB 0062). In 2018, Wyoming made it clear that “a developer or seller of an open
blockchain token shall not be deemed the issuer of a security”, i.e., “a person who develops, sells
or facilitates the exchange of an open blockchain token is not subject to specified securities and
money transmission laws”, as long at the token is for consumptive purposes – i.e. a utility token
– and not marketed as an investment (HB 0070). Going further, Wyoming also exempted virtual
currencies from State property taxes (SF 0111).342 In 2019, Wyoming clarified that digital assets
are property for the purposes of the UCC and provided a welcoming framework for custodial
services for digital assets (SF 0125).343 Issuers of utility tokens can do so in Wyoming by filing a
“notice of intent”. The fees for the notice amount to US$ 1,000 (HB 0062). In 2020, the State
further clarified how UCC Article 9 would apply to virtual currencies used as collateral in
secured transactions (SF 0047). In many ways, Wyoming already did what the ULC Joint Study
Committee on the Uniform Commercial Code and Emerging Technologies yet has to do, namely
to define “control” and “possession” for purposes of perfecting a security interest and deter-
mining priority among several perfected interests.344 The Wyoming State budget for 2021
allocated US$ 4 Million
to the University of Wyoming to operate and maintain nodes and staking pools for
not less than three (3) publicly tradeable cryptocurrencies. [...] The university
340 Id.
341 Id.
342 The State anyways does not have State income taxes.
343 For a high level summary see https://wyoleg.gov/2019/Summaries/SF0125.pdf.
344 https://wyoleg.gov/2020/Summaries/SF0047.pdf. See also HB 0043.
United States Cryptocurrency Law Page 90 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
shall provide public access to the staking pools and nodes and facilitate operation
of the blockchains. [...] All fees and revenues generated in excess of the costs of
operation and administration shall be deposited in the strategic investments and
projects account up to four million dollars ($4,000,000.00) and thereafter shall be
expended to support blockchain programs and activities at the university and
community colleges throughout the state.345
With its open-for-crypto-businesses attitude, Wyoming not only attracted unicorns like the
crypto exchange Kraken, the Blockchain platform Cardano, and the payment protocol company
Ripple Labs to move to the State capital Cheyenne. Thousands of DLT startups have incorpo-
rated in the State. In 2020, Wyoming created the Special Purpose Depository Institution Bank
Charter (SPDI), specifically for banks seeking to deal both in fiat and cryptocurrencies.346 Since
then, Kraken Bank,347 as well as Caitlin Long’s Avanti Bank and Trust348 have obtain crypto
banking charters. Most recently, the State went another step further. In July 2021, the Wyoming
Decentralized Autonomous Organization Supplement entered into force creating “a supplement
to the Wyoming Limited Liability Company Act to provide law controlling the creation and
management of a DAO.”349 The bill explains that “[a] decentralized autonomous organization
(DAO) is a limited liability company with special provisions allowing the company to be
algorithmically run or managed (in whole or in part) through smart contracts executed by com-
puters.”350 As the high level summary explains, the bill also “establishes baseline requirements
for member managed or algorithmically managed DAO’s and provides definitions and regula-
tions for DAO formation, articles of organization, operating agreements, smart contracts,
management, standards of conduct, membership interests, voting rights, the withdrawal of
members and dissolution.”351 With this new law, Wyoming has absolutely broken new ground. It
not only makes it the first jurisdiction anywhere in the world explicitly providing a legal basis
for a DAO; it also provides the details that make the operation of such an organization
predictable and transparent. Although it is too soon to tell how many DAOs will be created in
Wyoming on the basis of this legislation, in particular since SEC and CFTC regulations are also
still applicable, a quick online search brings up dozens of law firms offering their services for the
incorporation of such an organization, and we may safely assume that some very interesting
experimentation is already ongoing.
345 HB 0001, §340; https://wyoleg.gov/2021/Enroll/HB0001.pdf, at 71.
346 https://wyomingbankingdivision.wyo.gov/banks-and-trust-companies/special-purpose-depository-institu-
tions.
347 https://www.kraken.com/en-us/bank.
348 https://fortune.com/2021/07/29/caitlin-long-wyoming-crypto/.
349 SF0038, https://wyoleg.gov/2021/Enroll/SF0038.pdf.
350 https://wyoleg.gov/2021/Summaries/SF0038.pdf.
351 Id.
United States Cryptocurrency Law Page 91 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
IV. CONCLUSIONS ON THE CURRENT LEGAL REGIME PROVIDED FOR CRYPTOCURRENCIES
IN THE U.S. AND OPPORTUNITIES FOR FUTURE IMPROVEMENT
The expression that too many cooks spoil the broth can be traced back to at least the year
1575.352 However, the regulation of cryptocurrencies by at least a dozen legislative and
regulatory agencies at the U.S. Federal level, plus hundreds of legislative and regulatory
authorities at the level of the Several States, gives an entirely new meaning to the idea.
American public authorities have simultaneously called cryptocurrencies (digital) assets, money,
not money, currency, not currency or at least not legal tender, commodities, securities, not
securities,353 property, and a couple of other more or less clearly defined categories. Transactions
with cryptocurrencies are being taxed, not taxed, allowed, and not allowed, unless previously
authorized on the basis of complicated registration and licensing procedures. The more intricate
legal consequences of those transactions are being recognized or not recognized, depending on
which authority you ask. Permissions by some authorities have been overruled or at least
questioned by others. Furthermore, the assessments have changed over time and pretty much
every authority has reserved the right to change its assessment again in the future. The folks who
were trying to build the Tower of Babel had a valid excuse for the failure of their endeavor.
However, in the U.S. legal system everybody is supposedly using English and should be able to
communicate with everybody else. Hence, there is simply no valid excuse for the near complete
chaos we find when it comes to the regulation of cryptocurrencies and to giving guidance to
developers, investors, promotors, users, and other interested parties. The state of affairs is simply
disgraceful and casts a very negative light on a country and legal system that used to take pride
in safeguarding individual freedoms, rule of law, and due process.
While it is true that there are differences between different kind of cryptocurrencies that may
justify differences in analysis, for example the difference between investment coins, utility
tokens, non-fungible tokens (NFTs), and stablecoins, the authorities have not really relied on
these differences to justify their different assessments, at least not consistently. In the end, the
statement, as used by the SEC when deciding on the legality of almost any crypto activity, that
“it depends” and requires a “case-by-case analysis”, comes closest to the truth for all our
regulators and regulatory agencies. Unfortunately, few have even tried to explain unambiguously
what it depends upon.
If we return to our original premise, namely that new technologies, in particular those with
disruptive potential, need regulatory guidance, preferably of the clear and understandable kind,
and need stability in the regulatory environment to make investment decisions that will not bear
352 See the American Heritage Idioms Dictionary,
https://www.dictionary.com/browse/too-many-cooks-spoil-the-broth#:~:text=Other%20Idioms%20and%20
Phrases%20with%20Too%20many%20cooks%20spoil%20the%20broth&text=This%20expression%20allu
des%20to%20each,Care).
353 Even the securities regulators don’t see eye-to-eye. It is at least possible for the SEC to decide, on the basis
of the Howey Test, that a particular crypto sale is not an investment contract, hence not a security, while a
State regulator applying the Risk Capital Test comes to the opposite conclusion. For further discussion see
Steinberg, supra note 154, at 42-43.
United States Cryptocurrency Law Page 92 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
fruit for years to come, the grade that I have to give as a law professor to U.S. regulators can
only be “F” for fail.
This entire report is full of examples of conflicting answers and unduly burdensome
requirements imposed by different regulators. Others have already suggested that the New York
Department of Financial Services is beholden to conventional Wall Street financial institutions
and unlikely to enable technology startups with the express mission of disrupting precisely those
financial institutions.354 I will add my own suspicion that a similar approach can be found at the
SEC. This agency has 4,500 employees and a very substantial operating budget. Why does it not
seem to be able to provide clearer guidance on how to file registrations using Form S-1, let alone
registrations under Regulation A+, to bring down the cost of those registrations? Why does it not
even provide straightforward links on its website to all those regulations?355 Honi soit quit mal y
pense and suggests a level of collusion between high level regulators and high powered law
firms, happily connected by revolving doors, and even more happily profiting from keeping their
specialized knowledge of the process from the rest of the world...
I will close with three questions and some food for thought about the way they should be
answered.
First, what would be the ideal regulatory environment for Blockchain and DLT technology that
encourages the development of legitimate use cases of the technology while providing a high
level of protection for investors, developers, users, consumers, and the environment?
Blockchain and DLT is governed by code and markets. The very consensus mechanisms
encrypted for the confirmation of transactions removes the technology from traditional and
centralized authorities. By definition, this makes the technology international. Anyone with
access to the internet can participate as a user, miner, developer, or even issuer of digital assets.
The only truly sensible level for regulation of this technology, therefore, is the international
level. Ideally, we should have one single international convention, developed by an agency such
as the United Nations Commission on International Trade Law (UNCITRAL), and ratified and
applied by the large majority of nation states around the world. Such a convention should
provide a list of requirements to be met by anyone wanting to issue coins or tokens, wanting to
provide a marketplace for trading them, or wanting to develop business solutions for investors,
commercial transactions, or consumer contracts. The convention should also provide for a
variety of oversight mechanisms calibrated to the potential risks created by the different uses of
the technology, as well as one centralized agency per country with meaningful resources and
investigative powers. Importantly, the convention should provide a passport system, namely that
a crypto business lawfully operating in one signatory state can lawfully enter the markets in all
other signatory states. The latter should only be allowed to interfere if they can show that a
particular actor either obtained its licenses fraudulently from the home country or, for reasons
354 Supra note 338 and corresponding text.
355 The collection by Thomas Hazen, Securities Regulation – Selected Statutes, Rules, and Forms, West
Academic 2021, has 1900 pages of documents. Hazen’s Treatise on the Law of Securities Regulation, in its
7th ed. of 2016, is a seven volume collection for practitioners and costs over US$ 1,000.
United States Cryptocurrency Law Page 93 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
that may be specific to the host country, poses a real and substantial danger to non-economic or
public interests of the host country – e.g. the health and safety of its people, the protection of
consumer financial interests, or the environment – and that those interests cannot be adequately
protected by less severe restrictions or measures. Last but not least, the convention should
provide for a dispute settlement system that is accessible for the crypto businesses and effective,
ideally along the lines of investor-state-dispute settlement via international arbitration.
Second, as long we don’t have a widely recognized and applied global convention, what can the
U.S. do to provide the best possible solution to the goals outlined in the first question at the
national level?
Drafting international conventions with the participation of delegations from some 200 countries
with very diverse economies and political preferences is always a difficult and lengthy effort.
Even if it succeeds and produces a convention that seems to address all important aspects and
provides answers for all important issues, it is not at all a given that it will be ratified reasonably
swiftly by the most important countries where the technology is being developed and/or widely
used. The process should be infinitely easier and faster at the national level where it would take
only one single legislature, the United States Congress, on the basis of the powers conferred to
the Federal government via the interstate commerce clause, to produce a single, elegant, and
effective solution to the problem. However, we live in an age where too many of our lawmakers
are too busy with self-preservation and political posturing and don’t have time for actual law
making. Academics, attorneys, and other legal professionals in the U.S. have a hard time
remembering the last time that our Congress did adopt any “single, elegant, and effective
solution” to any problem facing the nation. Instead, we are limping along with executive orders
from one President that are likely going to be repealed by the next President, and with a diverse
and at least partly contradictory mess of decisions, rules, and regulations of more or less
independent Federal agencies. This does not have to be the case, however. The challenges
presented by Blockchain and DLT are not partisan issues. As the responses by the Federal
agencies and their administrators, and even more so the responses by the Several States can
show, the approach to be taken in the interest of our economy, citizens, and environment is not
determined by political affiliations or ideologies. Although the welcoming approach taken by
Wyoming has been labeled “libertarian-leaning”, one of the most high profile promoters is
Wyoming State Senator Chris Rothfuss, a Democrat. Another is U.S. Senator Cynthia Lummins,
a Wyoming Republican. Therefore, I would like to call on any and all lawmakers in Washington
who actually want to see the United States at the forefront of technological development and
economic growth, while also being serious about the protection of investors, developers, users,
consumers, and the environment, to launch a bi-partisan effort, defy the naysayers, and come up
with a single, elegant, and effective piece of legislation that clears the air and provides a one-
stop-shop for all crypto businesses in the U.S.356 Beyond the domestic impacts, high quality
356 In the preparation of such an act, more attention should be given to the American Bar Association (ABA)
Derivatives and Futures Law Committee’s White Paper on Digital and Digitized Assets: Federal and State
Jurisdictional Issues (https://www.americanbar.org/content/dam/aba/administrative/busi-
ness_law/idpps_whitepaper.pdf), and a similar study by The Law Society of England and Wales
United States Cryptocurrency Law Page 94 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
regulation could very well set the global standard that others are waiting to follow. The
alternative, continuing failure to provide good regulatory guidance, mainly drives DLT
businesses elsewhere, depriving the United States not only of technological development and
economic growth but also of effective oversight.
Third, while we are waiting for this clear legislative guidance from the Congress of the United
States, i.e. in our current real-world situation, what can and what should the different actors do,
i.e. the Federal agencies with direct powers, and the governments of the Several States?
In the present regulatory environment, doing business above board in the crypto markets is
simply a nightmare. For example, the large and until recently very well-reputed crypto trading
platform FTX US was registered by FinCEN as a Money Services Business. It had successfully
received a US GAAP financial audit. It continuously relied on the services of a specialized law
firm, Fenwick & West, for its various documentation and compliance assessment and reports. Its
derivatives unit was a Federally regulated and licensed commodity derivatives exchange and
clearinghouse and held three licenses with the CFTC. It was audited annually by Grant Thorton
LLP, and used various outside vendors to conduct annual or even more frequent cyber security
tests and simulations. Internal decision-making and supervisory procedures were audited by
Friedman LLP (SOC I Type II Audits, and a SANS CSC Top 20 audit). System safeguards,
market surveillance and/or financial controls were examined annually by the CFTC. Although
this was already a lot, FTX US also sought and obtained Money Transmitter licenses at the State
level from Alabama, Alaska, Arizona, Arkansas, the District of Columbia, Florida, Georgia,
Illinois, Iowa, Maine, Maryland, Michigan, Mississippi, Missouri, New Hampshire, New
Mexico, Oregon, Pennsylvania, Puerto Rico, South Dakota, Washington, and West Virginia.357
Does anybody seriously want to argue that all of these licenses and registrations were really
necessary and provide any actual nutritional benefit for investors or consumers? That they were
not just creating barriers to entry against disruptive technology companies? And provide fat
benefits for an army of lawyers that is needed to get and maintain all these registrations and
licenses? What happened to the idea at the foundation of the full-faith-and-credit clause in the
United States Constitution, i.e. that the authorities in one State have to respect “public acts,
records, and judicial proceedings of every other state.”?358 After all, I can drive with my Indiana
driver’s license all across the nation and do not need to pass yet another test for the same driving
skills every time I cross a State border. Most importantly, all these licenses and registrations, all
the auditing, compliance, and market surveillance turned out to be perfectly useless when FTX
(https://www.lawsociety.org.uk/topics/research/blockchain-legal-and-regulatory-guidance-second-edition),
than to the rules and decisions adopted to date by the SEC, the House draft FIT act, and the Senate draft
RFIA, let alone the bulky and already outdated regulations of the EU.
357 https://help.ftx.us/hc/en-us/articles/360046877253-Regulation-and-Licensure-Information.
358 Article IV, Sec. 1. For further analysis see, for example, James Sumner, The Full-Faith-and-Credit Clause
– Its History and Purpose, 34 Or. L. Rev. 224 (1954-1955). Of course, the U.S. Supreme Court has seen it
fit to decide that in spite of the full faith and credit clause, each State can apply its own laws and regula-
tions, as long as that State has “a significant contact or significant aggregation of contacts, creating state
interests, such that choice of its law is neither arbitrary nor fundamentally unfair”; Allstate Ins. Co. v.
Hague, 449 U.S. 302 (1981), at 313; see also Phillips Petroleum Co. v. Shutts, 472 U.S. 797 (1985), at 818.
United States Cryptocurrency Law Page 95 of 95 Prof. Dr. Frank Emmert, LL.M., FCIArb
collapsed within a couple of days in November 2022 and took several billion US-dollars in
investor funds with it.359
Even in the messy environment we have in the absence of clear legislative guidance from the
U.S. Congress, the different actors could coordinate their efforts, talk to each other, maybe in a
kind of joint task force, and come up with some mutually acceptable standards for the different
commercial activities (issuers of digital assets, trading places and exchanges, commercial users,
etc.). Most importantly, if our Federal- and State-level authorities really care about the interests
of the nation, the economy, and the people, they will have to get rid of the current inefficiencies
and agree that any registration or license obtained from any one authority, and following those
mutually acceptable standards, shall be good enough for all authorities and jurisdictions in the
United States.360 As a wise human once said,
You may say I’m a dreamer
But I’m not the only one
I hope someday you’ll join us
And the world will be as one
John Lennon, Imagine
359 See Dalia Ramirez, FTX Crash: Timeline, Fallout and What Investors Should Know, Nerdwallet, 10
January 2023, https://www.nerdwallet.com/article/inves-
ting/ftx-crash#:~:text=FTX%20and%20FTX.US%20crashed,9.
360 The SEC recently did just the opposite, when it responded to Wyoming’s determination that a particular
Wyoming-chartered public trust company qualified as a custodian under the Investment Advisers Act. In a
public staff letter, the SEC declared that it was not bound by Wyoming’s determination, making sure that
legal uncertainty prevails. See Public Statement, SEC, Div. of Inv. Mgmt. Staff in Consultation with
FinHub Staff, Staff Statement on WY Division of Banking’s “NAL on Custody of Digital Assets and
Qualified Custodian Status”, 9 November 2020, https://www.sec.gov/news/public-statement/state-
ment-im-finhub-wyoming-nal-custody-digital-assets.