SEC’s U-turn on crypto leaves key questions unanswered

The United States Securities and Exchange Commission is rapidly shifting its stance on cryptocurrency, dropping cases and investigations against major companies like Coinbase, OpenSea, Uniswap and Robinhood, among others.

President Donald Trump has further cemented the legitimacy of the industry with his announcements about a strategic Bitcoin and/or crypto reserve.

While the industry is celebrating these developments, there are plenty of unresolved questions. Does the SEC dropping its investigations into OpenSea and YugaLabs really mean that NFTs are not securities? Yuriy Brisov of Digital & Analogue Partners says it’s not that clear cut, pointing to the Ripple case as an example of how an asset’s classification depends on how it is sold.

Magazine spoke with a panel of legal experts to find out more about the ramifications of these moves: Brisov in Europe, co-chair of the Hong Kong Web3 Association Joshua Chu from Asia and Charly Ho of Rikka from US. This discussion has been edited for clarity and length.

Does the SEC’s withdrawal of charges and investigations against crypto firms set a precedent for crypto laws for the future?

Ho: Because the SEC is the plaintiffs suing the defendants, which would be the Ripples, the Coinbases, the OpenSeas of the world, they can certainly drop those cases — though from the Ripple case, Judge [Analisa] Torres wanted to be specifically involved so that one might be a little bit more complicated to just drop.

Whether that leaves the industry in a bit of a vacuum, in some respects, yes. But it’s also kind of what the industry asked for. The industry asked not to be regulated by enforcement action that was somewhat — in their words, using the formerly existing Chevron deference— arbitrary and capricious. So a lot of the responses from the Coinbases, the Ripples and OpenSeas of the world have similar language asserting that the SEC was extending beyond its legal jurisdiction and that it was basically acting in an arbitrary and capricious manner in violation of the Administrative Procedure Act.

It opens up: “Where do we go from here?” What the industry has asked for is moreclear regulatory guidancein the form of either a law passed by Congress or regulation and rules from the agency itself. So with the creation of the new crypto task force, I believe that their mission is specifically to fill that void. So case law is not the only way to get clarity.

Brisov: The good outcome of these investigations isn’t always a lawsuit. It could also result in an SEC report clarifying regulatory classifications — just as Ripple’s utility tokens were deemed securities in certain sales, the SEC might assert that NFTs and memecoins can also be securities under certain conditions, while DeFi platforms may be considered brokers or dealers under the Exchange Act of 1934.

Now, they just dropped charges and the crypto community is saying that NFTs cannot be securities. And the Uniswap case suggests that all DeFi platforms cannot be an exchange or broker dealer under the Exchange Act.

It’s the wrong message that the market receives: that they can do whatever. I don’t support this approach. It’s probably a good thing to let the new, innovative companies grow. But someone must, from time to time, investigate them and ask some questions, issue reports, and make recommendations.

Under Gary Gensler, the SEC was overdoing it. For instance, with Coinbase, they were strictly following all the KYC procedures. Coinbase actually invests a lot into following all the laws. So this battle with Coinbase, for me, was meaningless from the very beginning. But with OpenSea, with Uniswap, I wouldn’t say that it was meaningless but the results of these investigations, I cannot call them satisfactory at this point.

Given that US crypto laws influence other countries, are jurisdictions like Hong Kong, Singapore, and Dubai likely to see similar abrupt changes?

Chu: In places like Hong Kong, Singapore, and Dubai, such drastic regulatory U-turns are less likely. These jurisdictions have taken a more measured and structured approach to crypto regulation.

*Hong Kong’s latest crypto regulatory roadmap explores derivative trading. (SFC)*

For example, Hong Kong’s Securities and Futures Commission has been methodical in its approach. When the SFC first introduced its crypto regulatory framework, it excluded riskier products like options trading. Only after the initial framework had been in place for some time did the SFC announce it would explore allowing options and leveraged trading. This phased approach ensures that riskier aspects of the ecosystem are introduced only after participants have been vetted and deemed sufficiently sophisticated.

This steady, incremental approach contrasts sharply with the SEC’s abrupt shifts. It also highlights the importance of building a regulatory framework that evolves based on experience and judicial input, rather than the personal views of those in power. In Hong Kong, Singapore, and Dubai, the focus is on creating a predictable and trustworthy environment for innovation, which is something the US could learn from.

Can crypto firms sue regulators if they believe regulatory actions have harmed their business?

Ho: In the US, you can sue anyone for anything, even if you don’t have a meritorious claim.

Nothing stops you from launching a lawsuit. This is why, in my line of work, what we do is we often have indemnification clauses that if a party were to be sued as a result of the other party’s actions, regardless if that suit has merit or not, that party that is sued still incurs legal costs simply just to make this go away or defend themselves. So the answer to the question is, they can absolutely sue. Whether or not they’re going to win is obviously a whole other thing.

*Gemini co-founder Tyler Winklevoss demands SEC reimburse legal fees. (Tyler Winklevoss)*

Has the SEC’s approach to NFTs and its decision to drop the OpenSea investigation created more legal uncertainty around crypto laws?

Brisov: Now, there is a general understanding for the market that NFTs cannot be securities. I don’t think that is a very good outcome of this investigation because NFTs obviously can be securities, and they can create certain risks regarding securities. Actually, the fact that the SEC was investigating OpenSea could have created this understanding, as we have with Ripple. Before the Ripple case, we didn’t know how to approach utility tokens. Now, we know that there are two types of tokens, those that are sold on exchanges and those that are sold to institutional investors. And the same token can be either a security or not.

Without legal precedents, do existing copyright laws still apply to blockchain-based content such as AI-generated NFTs or tokens?

Ho: In general, copyright infringement in generative AI is rife right now with various litigations. There have been few that actually resulted in a judgment. The Thomson Reuters case, at least in the US, was one of the, if not the first, cases where there was an actual judgment from the court that gave some clarity.

The way that generative AI takes data and trains on it, a lot of times there are several sources of data that you get for training. One is to scrape the internet. Data scraping can be a violation of copyright because even though something is public, it doesn’t mean that it’s not protected by my intellectual property. It doesn’t mean I don’t have a copyright. But it’s not so simple because there are affirmative defenses in US law, namely the Fair Use doctrine.

On the output side, because the AI basically takes all this training data, learns from it and produces an output, that output itself may be infringing because it may be derived from one of the main rights of copyright (which) is to create derivative works.

So if the AI is creating derivative works of somebody else’s work product that they have a copyright in, essentially that’s a violation of the original copyright holder’s copyright. This gets really, really complicated because there’s very little case law right now.

The US has announced plans for a Bitcoin and crypto reserve. What are the implications of other nations following suit?

Chu: Unlike traditional reserve assets like gold (which has physical tangibility) or oil (which has utility), Bitcoin’s value is entirely speculative, and its position as a reserve asset would make it a prime target for adversarial nations. For example, if quantum computing becomes a reality, it could break Bitcoin’s cryptographic security, rendering it worthless overnight. What happens if adversarial nations like China or Russia develop quantum computing capabilities and decide to target Bitcoin? The US could find its reserves wiped out, with no way to recover the lost value.

Trump pardoned Silk Road founder Ross Ulbricht, and a recent prisoner swap between the US and Russia also involved a key crypto figure. What does this tell us about crypto’s growing significance?

Brisov: After Russia invaded Ukraine, they traded for arms dealer Viktor Bout. Now, Russia has BTC-e operator Alexander Vinnik, or as he is called, “Mr. Bitcoin.” It’s just a part of the trend that we see now that nations are realizing that crypto is serious.

Pirate sea — *Silk Road founder Ross Ulbricht walks free after receiving a pardon from President Trump. (Free_Ross)*

For instance, Donald Trump, one of his first actions was to pardon Ross Ulbricht, the guy who created a website for illicit trading, Silk Road.

That is also a sign that the US needs crypto people to support and develop the infrastructure. The second move was to stop the investigations against crypto.

In Russia, as sanctions and SWIFT operations are less available to Russia, they are moving toward crypto, and now they need crypto guys who know how to infiltrate the legal barriers to operate globally with crypto.

The EU also, on a certain level, recognizes the seriousness of crypto and finally enacted sanctions against Guarantex, the biggest Russian crypto exchange.

It’s funny, though, that the US Office of Foreign Assets Control included Guarantex on its list of sanctions in 2022. However, the EU only did it this February.

They were just ignoring the possibility that crypto can be a serious threat. We can now see that all the global regulators, whatever they do, whether creating laws or enacting sanctions, are starting to consider crypto in all their actions.

Share Share Share Share

Yohan Yun

Yohan Yun is a multimedia journalist covering blockchain since 2017. He has contributed to crypto media outlet Forkast as an editor and has covered Asian tech stories as an assistant reporter for Bloomberg BNA and Forbes. He spends his free time cooking, and experimenting with new recipes.