On Monday, September 20, CFA joined a group of investor protection advocates in sending a letter to Securities and Exchange Commission Chair Gary Gensler to urgently “review certain digital assets and related activities for compliance with the federal securities laws and related rules, and take all appropriate action to ensure compliance with the requirements for offers, trading, custody and other activities involving securities.”

The letter reiterates support for Gensler’s recent statement that “[i]t doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These products are subject to the securities laws and must work within our securities regime.” In further support, the letter points to the longstanding regulatory framework that has for decades guided issuers, practitioners, and investors on what is and is not a security, extolling the clear yet flexible tests that have been established by the U.S. Supreme Court. The letter urges the Commission to refrain from creating new carve-outs for digital asset offerings – a “well-intentioned, but ill-advised” effort that risks “undermine securities regulation and its investor protections” – and instead simply continue to apply this durable framework to digital assets.

Specifically, the letter outlines several particularly concerning digital asset trends, including that there are currently “many existing digital assets [that] meet the definition of a “security” under these longstanding Supreme Court standards” that “are offered without registration with the Commission.” Accordingly, additional regulatory attention should also be directed at the “brokers, custodians, exchanges, and [those] providing other products or services related to those securities [that] are not registering with the Commission,” stressing the potential risks to “the basic investor and consumer protections that are ensured by the federal securities regulatory regime.” The letter further details alarming aspects of two of the largest “stablecoins,” calls for further regulatory scrutiny of digital asset-linked “lending services,” and finally, raises further questions following “recent press reports and studies [that] have established that several foreign brokers, custodians, and exchanges for digital assets are permitting trading activity by US investors and customers, again without complying with the federal securities regulatory regime.”

The letter commends recent regulatory action taken by the Commission, but notes that significantly more must be done. The letter concludes that: “Without significant regulatory guidance, the digital asset marketplace has been born and grown into a Wild West. It is urgent for the Commission and other federal financial regulators to enforce the law to better protect investors and improve the integrity and stability of the digital asset markets.”