There has been movement forward on the Clarity Act, and the SEC and CFTC have anticipated its passage by pre-emptively completing a “memorandum of understanding” that would be required by the Act, and by beginning the “rulemaking” process with a joint interpretive release distinguishing between “investment contract assets” regulated by the SEC and “digital commodities”  regulated by the CFTC.  The legislation will also require that both agencies write rules, but they cannot publish proposals until the Act actually becomes law. 

The Clarity Act is expected to become law this year, but of course there is no absolute assurance (see our prior post discussing the proposed SEC–CFTC regulatory split and recent legislative momentum ).

The Clarity Act

As a reminder, the House passed the Clarity Act last Summer and it awaits Senate approval.   The legislation did not pass last month principally due to one contested issue:  The ability to pay rewards on passive stablecoin balances as traditional banks reportedly feared it would result in deposit outflows into accounts held at non-banks. 

There are reports that the issue on the payment of rewards has been resolved, and the legislation is now moving forward, slowed somewhat by other matters, but expected to become law.  The reported resolution of the “rewards on stablecoins” issue is as follows:  Rewards on passive stablecoin balances will be prohibited, but activity-based rewards tied to payments, transfers, and platform-use will be allowed.   Although expected to proceed toward passage, if the legislation is not approved by May, there reportedly is significant risk it will be paused for several months pending the mid-term Congressional elections. 

The Clarity Act will provide the overarching structure within which the SEC and/or CFTC will regulate crypto-related assets, with the SEC regulating digital securities and the CFTC regulating digital commodities.  Among other things, the Act as currently drafted would provide a conditional exemption for the issuance of digital assets associated with mature blockchains even if they involve “investment contracts” at inception.  It would mandate coordinate regulation of hybrid instruments that have elements of both digital commodities and securities.  There would also be coordinated regulation of brokers and other intermediaries, as well as of trading markets, when both securities and commodities are involved.  It would broaden the custodians qualified to hold digital assets, including for example non-depositary trust companies affiliated with crypto trading platforms. 

The SEC’s traditional jurisdiction remains intact.  Even in the form of digital assets, ownership interests in business enterprises, and a larger variety of “investment contracts,” remain fully regulated by the SEC. 

The SEC Gets Ahead of the Game: Its New Interpretation

Last week, the SEC issued a new interpretation – joined by the CFTC — that anticipates the passage of the Clarity Act by aligning the agency’s position with the underlying logic of the legislation.  That logic is that digital assets which are securities can also have components that are not securities – digital commodities in the Act’s lingo – and that the securities and commodity components of such hybrid instruments can over time evolve into solely digital commodities that are no longer regulated by the Securities Act or Exchange Act.  The existence of such a transformation appears to be a factual question, and we would speculate that the bright-line relief if eventually provided by the Clarity Act will be more practical than the SEC’s interpretive approach.  Nonetheless, the recent interpretive release confirms a fundamental shift.  According to the new SEC release, the Commission under the last Administration deemed  a digital asset that was at any time associated with a security (or investment contract) to be entirely and forever a security regulated by the SEC.  In other words, it’s association with an investment contact could not fall away. 

The SEC’s new interpretation addresses airdrops of digital commodity assets that recipients receive for free, indicated that they generally will be unregulated under the Securities Act or Exchange Act.  The interpretation also addresses protocol staking and protocol mining in a manner generally consistent with the agency’s prior public positions. 

The interpretation can operate independently of the Clarity Act if the latter is delayed or fails to pass. 

Proskauer’s Experience With Crypto Assets

Proskauer has many years of experience with public and private offerings, including cross-border offerings, as well as with a variety of other types of commercial transactions, and we look forward to answering questions and providing guidance on these new developments. 

Posted in Capital Markets, Private Funds, Registered Funds
Tags: CFTC, Clarity Act, Cryptocurrency, Digital Assets, SEC
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Photo of Frank Zarb Frank Zarb

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies…

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies, hedge funds and family offices, and market intermediaries and other financial institutions on a wide range of transactional and securities regulatory compliance matters including:

  • Equity investments and dispositions in public and private companies
  • Public company registration, disclosures and preparation of periodic reports
  • Tender offers, equity lines, proxy contests, SPACs, and other highly regulated transactions
  • Regulation M, Regulation SHO, Forms 13F and 13H, insider trading and other trading issues
  • Corporate governance and stock exchange listing standards
  • Federal and state proxy requirements as well as shareholder proposals and communications
  • Regulation of financial intermediaries, including trading of public and private equity, and complex and novel trading structures
  • Advocating with the SEC on behalf of a market intermediary related to back-office processing matters.

Frank’s practice is both domestic and international, beginning with his experience in senior positions with the Securities and Exchange Commission. As a member of the staff of the SEC’s Office of International Corporate Finance, Frank advised U.S. companies seeking to do business in the EU, Asia and the Middle East, as well as companies from those regions doing business in the U.S., or otherwise seeking to comply with the U.S. securities laws.  In the Office of Chief Counsel, he focused on federal proxy rules, and supervised a team of staff members that provided guidance in the course of proxy season.

Prior to joining the Firm, Frank was deputy general counsel/chief securities counsel for Bristol Myers Squibb Co. in a new position required by the SEC. Prior to joining Bristol-Myers, Frank was a corporate partner with Morgan, Lewis & Brockius.

Social Responsibility

Frank is a Trustee of the Gerald R. Ford Presidential Foundation, and he provides significant pro bono assistance to non-profit social service institutions in the Washington, D.C. area.

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Photo of Louis Rambo Louis Rambo

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and…

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and shareholder activism. Drawing on his previous tenure with the Securities and Exchange Commission in the Division of Corporation Finance, Louis partners with clients on capital raising, including underwritten equity transactions, at-the-market offerings and high-yield and investment grade debt offerings, as well as on structuring M&A transactions, spin-offs, tender offers and going private transactions. He advises public companies on developing governance and disclosure matters, including director independence, compensation, insider trading issues, shareholder proposals and stockholder meetings, and advises on shareholder activism and takeover defense.

Louis also regularly advises hedge funds, private equity funds, family offices, private companies and other financial institutions on a wide range of transactional and securities regulatory compliance matters, including capital raising, PIPEs and secondary transactions, novel and complex beneficial ownership issues arising under the federal securities laws, derivative transactions, insider trading issues and policies and compliance programs.

Louis previously served as an attorney with the SEC in the Division of Corporation Finance. While at the SEC, Louis worked on a number of transactional and securities compliance matters.

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