Securities Law and Cryptocurrency: Regulatory Uncertainty

By: Cael Willner, Class of 2027

Introduction

Cryptocurrency and blockchain technologies have seen significant adoption by institutions and investors in recent years. In 2024, the SEC approved spot Bitcoin and Ethereum ETFs, and the market capitalization of the industry peaked at 3.8 trillion USD.[1] However, there is regulatory uncertainty in the industry. The SEC has adopted the strategy of “regulation by enforcement,” where case-by-case legal actions are taken against companies to create regulatory policy in lieu of rulemaking.[2] Both the SEC and the CFTC have asserted their jurisdiction over cryptocurrencies, and federal courts have issued conflicting rulings regarding how securities laws apply to this asset class.[3]

The classification of cryptocurrencies as securities or commodities has important legal implications.[4] Securities are subject to SEC regulation under the Securities Act of 1933, whereas commodities are governed by the CFTC under the Commodity Exchange Act.[5] The classification as a security or commodity determines compliance obligations, enforcement strategies, and whether there will be a unitary policy in regulation.[6]

Regulatory Agency Divide

In 1946, the Supreme Court created the Howey test to classify which assets are considered securities under the Securities Act of 1933.[7] To qualify as a security, an asset must involve (1) an investment of money, (2) in a common enterprise, and (3) an expectation of profit solely through the efforts of others.[8]

The SEC and CFTC have adopted different positions regarding the classification of cryptocurrencies under the Howey test. Both agencies agree that Bitcoin is a commodity due to its decentralized nature.[9] For years, both the SEC and the CFTC have asserted jurisdiction over Ethereum.[10] In 2024, after extensive enforcement action, the SEC changed its position, indicating that Ethereum was a commodity.[11] In other enforcement actions, the SEC has claimed Solana, Polygon, and other cryptocurrencies as securities.[12] With no definite standard between the two agencies, the classification and regulatory requirements for many tokens are uncertain.

Discord in District Courts

Federal courts have reached conflicting conclusions on cryptocurrency classification as well. In 2020, the SEC initiated an enforcement action against Ripple Labs, accusing it of violating the Securities Act of 1933 by engaging in unregistered sales of its token, XRP.[13] Ripple contended that XRP was a commodity due to its role as an on-demand liquidity utility token.[14] Additionally, XRP can be bought and sold on decentralized exchanges where Ripple is not directly involved.[15]

Judge Analisa Torres of the Southern District of New York ruled that institutional sales to sophisticated investors met all the prongs of the Howey test and constituted securities.[16] However, programmatic sales on public exchanges did not meet the Howey test because buyers were unaware of Ripple’s participation.[17] The distinction emphasizes that the status of a token is determined by how it is sold, specifically, where and to whom it is sold.[18]

A few weeks later, in a case stemming from another SEC enforcement action, U.S. District Judge Jed Rakoff expressly declined to follow Judge Torres’ Ripple decision, declaring,  “the Court rejects the approach recently adopted by another judge of this District in a similar case.”[19] Rakoff held that the Howey Test does not draw distinctions based on the institutional or programmatic method of sale.[20] Instead, he ruled that the design and marketing of the tokens, which promised to earn benefits, rendered them securities regardless of how they were sold.[21] The disagreement underscores the complexity of securities law applied to cryptocurrency, and it is unclear which view will prevail until higher courts rule on the issue.[22]

Coinbase’s Petition for Rulemaking

In 2022, Coinbase petitioned the SEC to initiate rulemaking in the wake of a series of enforcement actions against the company.[23] Up until this point, the SEC had been regulating by enforcement.[24] Coinbase sought a rulemaking approach that entailed the SEC making prospective rules so that companies can comply with securities law.[25] In 2023, the SEC denied this petition on the basis of more pressing agenda items and a preference for incremental regulation through enforcement.[26] Coinbase appealed this denial to the Third Circuit.[27] The Third Circuit found the SEC’s denial was “insufficiently reasoned” and that the SEC needed to explain why it preferred enforcement action.[28] The Court declined to instruct the SEC to initiate rulemaking.[29] The decision reflected the court’s deference to agency discretion while also putting pressure on the SEC to clarify its regulatory strategy.[30]

Towards a Rulemaking Approach

With a new chairman heading the SEC, the agency has shifted away from regulation by enforcement and toward rulemaking.[31] The SEC formed a crypto task force that is directed to create a comprehensive and clear regulatory framework for cryptocurrencies.[32] Furthermore, the agency has denounced its previous approach of using “enforcement actions to regulate crypto retroactively and reactively.” [33] Currently, the SEC is welcoming public input regarding its regulatory framework.[34] The SEC’s transition toward rulemaking is an essential step in reducing legal uncertainties, protecting consumers, and promoting fair and efficient cryptocurrency markets.

[1] Chair Gary Gensler, Statement on Spot Bitcoin Exchange-Traded Products, U.S. Sec. & Exch. Comm’n (Jan. 10, 2023), https://www.sec.gov/newsroom/speeches-statements/gensler-statement-spot-bitcoin-011023; Kyle Torpey, SEC Approves Spot Ether ETFs, Investopedia (July 23, 2024), https://www.investopedia.com/sec-approves-spot-ether-etfs-8678873; Crypto Market Overview, CoinMarketCap, https://coinmarketcap.com/charts/.

[2] Regulating Blockchain and Crypto Technology via Enforcement, George Washington University Regulatory Studies Ctr. (June 18, 2024), https://regulatorystudies.columbian.gwu.edu/regulating-blockchain-and-crypto-technology-enforcement.

[3] SEC v. Ripple Labs, Inc., 682 F. Supp. 3d 308 (S.D.N.Y. 2023); SEC v. Terraform Labs Pte. Ltd., 684 F. Supp. 3d 170 (S.D.N.Y. 2023); David Shepardson, U.S. SEC Official Says Ether Not a Security, Price Surges, Reuters (June 14, 2018), https://www.reuters.com/article/technology/us-sec-official-says-ether-not-a-security-price-surges-idUSKBN1JA30P/.

[4] Coindesk, Securities vs. Commodities: Why It Matters for Crypto, https://www.coindesk.com/learn/securities-vs-commodities-why-it-matters-for-crypto (last visited Mar. 17, 2025).

[5] Legal Info. Inst., Securities Exchange Act of 1934, https://www.law.cornell.edu/wex/securities_exchange_act_of_1934 (last visited Mar. 17, 2025); U.S. Commodity Futures Trading Comm’n, Commodity Exchange Act & Regulations, https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm (last visited Mar. 17, 2025).

[6] Investopedia, Commodity vs. Security: What’s the Difference?, https://www.investopedia.com/commodity-vs-security-7509422 (last visited Mar. 17, 2025).

[7] SEC v. W. J. Howey Co., 328 U.S. 293 (1946).

[8] Id.

[9] CFTC vs. SEC: Navigating Regulatory Overlap in the Crypto Market, Merkle Science (Feb. 6, 2024), https://www.merklescience.com/blog/cftc-vs-sec-navigating-regulatory-overlap-in-the-crypto-market.

[10] Id.; Shepardson, supra note 3

[11] Id.

[12] SEC v. Coinbase, Inc., 726 F. Supp. 3d 260, 292 (S.D.N.Y. 2024).

[13] Ripple Labs, 682 F. Supp. 3d at 316 (S.D.N.Y. 2023)

[14] Id. at 317

[15] Id.

[16] Id. at 335

[17] Id. at 329

[18] Id. at 331

[19] Terraform Labs, 684 F. Supp. 3d at 197

[20] Id.

[21] Id. at 191

[22] Douglas Pepe, Two sides of the same coin: Analyzing recent Ripple and Terraform decisions, Reuters (Aug. 31, 2023), https://www.reuters.com/legal/legalindustry/two-sides-same-coin-analyzing-recent-ripple-terraform-decisions-2023-08-31/.

[23] Petition for Rulemaking to Amend Rules Governing Security-Based Swaps, Petition No. 4-789 (Sec. & Exch. Comm’n, filed Aug. 8, 2022), https://www.sec.gov/files/rules/petitions/2022/petn4-789.pdf.

[24] Regulating Blockchain, supra note 2

[25] Petition for Rulemaking, supra note 23

[26] Third Circuit Coinbase Decision Pressures SEC on Crypto Rulemaking, Ropes & Gray LLP (Jan. 2025), https://www.ropesgray.com/en/insights/alerts/2025/01/third-circuit-coinbase-decision-pressures-sec-on-crypto-rulemaking.

[27] Id.

[28] Id.

[29] Id.

[30] Id.

[31] Press Release, U.S. Sec. & Exch. Comm'n, SEC Charges Investment Adviser with Fraud (Mar. 12, 2025), https://www.sec.gov/newsroom/press-releases/2025-30.

[32] Id.

[33] Id.

[34] Id.