From Ballots To Blockchain: Potential Changes To SEC Digital Asset Regulation – Fin Tech

With the 2024 US election in the rear-view mirror, the landscape
of American digital asset regulation is poised for significant
changes. This begins with the upcoming departure of the current
Chair of the US Securities and Exchange Commission (SEC), Gary
Gensler. On November 21, 2024, Gensler announced his resignation as
SEC Chair, effective January 20, 2025.¹ Gensler’s
tenure has been marked by the SEC’s oft-criticized
“regulation by enforcement” approach to digital asset
regulation.² As discussed below, critics argue that this
has created uncertainty and stifled innovation in the digital asset
industry.

Following Gensler’s resignation, Paul Atkins is currently
slated to become the next SEC Chair.³ Atkins, a former
SEC Commissioner, has extensive experience in financial services,
including working with banks, financial technology groups, and
crypto-related clients. Since 2017, he has also co-chaired the
crypto advocacy group, the “Digital Chamber’s Token
Alliance.”⁴ His nomination has been well-received
by many in the crypto industry.

Regardless of who assumes the role, the appointment of a new
Chair could lead to immediate shifts in the SEC’s regulatory
agenda as the Chair holds significant influence over the SEC’s
activities.⁵ Stakeholders in the digital assets
community have speculated about potential actions the new Chair
will undertake on digital asset regulation and the broader
implications of these actions on financial markets and innovation
within the digital asset sector. As such, the upcoming changes in
the SEC’s leadership and regulatory approach warrants close
attention, particularly for any Canadian-based digital assets
companies looking to enter the US market, and to monitor how
Canadian regulators react to changes in the US.

The SEC’s Previous Challenges in Regulating Digital
Assets

The digital asset industry has become increasingly frustrated
with the lack of clear regulatory guidance from the SEC. On
September 18, 2024, the US House Committee on Financial Services
convened a hearing titled “Dazed and Confused: Breaking Down
the SEC’s Politicized Approach to Digital Assets.” During
this hearing, Jennifer J. Schulp, Director of Financial Regulation
Studies at the Cato Institute, testified that while the SEC’s
enforcement-forward strategy might be effective where rules are
clear, “where the application of existing rules to digital
assets is uncertain or inappropriate, [the strategy] effectively
amounts to a ban on crypto activity within the
US.”⁶

Enforcement actions by the SEC are based on the assertion that
most digital assets are to be governed under traditional securities
legislation, including the Securities Act of
1933,⁷ the Securities Exchange Act of
1934,⁸ and the 1946 Howey
test.⁹ However, the approach of applying these
traditional laws to digital assets through individual court actions
has resulted in varied and inconsistent judicial outcomes. For
example, in the notable cases SEC v Ripple
Labs¹⁰ and SEC v Terraform
Labs,¹¹ both 2023 cases heard in the Southern
District of New York, judges had conflicting decisions on whether
digital assets should be considered securities. As Schulp noted in
her testimony, “[c]rypto projects aspire to upend [the
conventional corporate] model, [and] that creates significant
challenges to the traditional concept of an investment
contract.”¹²

This tension came to light earlier this year, when the SEC’s
enforcement campaign took a hit after the US District Court for the
District of Columbia partially granted Binance Holding
Limited’s motion to dismiss in SEC v Binance Holdings
Limited, et al.¹³ Before ruling that the SEC had
not established that digital assets were outright to be considered
securities subject to SEC oversight, the Court made a point of
observing that “the [SEC]’s decision to oversee this
billion dollar industry through litigation – case by case,
coin by coin, court after court – is probably not an
efficient way to proceed, and it risks inconsistent results that
may leave the relevant parties and their potential customers
without clear guidance.”¹⁴ In response, the SEC filed a motion to amend its original
complaint, causing further confusion by clarifying that its
prior blanket use of the phrase “crypto asset
securities,” when referring to digital assets, did not
necessarily mean that it was referring to the crypto asset itself
as the security. Instead, the SEC argued that the digital assets
were sold in a scheme that involved unregistered investment
contracts caught by the test provided in the seminal Howey
decision (therefore falling under the SEC’s jurisdiction), and
not that the digital assets themselves were necessarily
securities.¹⁵ Binance responded by filing a motion to
dismiss the amended complaint on November 6, 2024, arguing that the
SEC did not establish a clear legal foundation to distinguish
between assets involved in investment contracts, and the investment
contracts themselves.¹⁶ For more information on this
pertinent case, please see our Cassels Comment.

State-Level Regulatory Progress

While digital asset regulatory reform at the federal level has
been the focus of most of the digital asset sector’s attention,
most financial services activity in the US is also regulated at the
state level. State laws and regulators have played an important
role in many digital asset products and markets in the US,
including the use of digital assets, tokenization, and traditional
financial assets (such as stablecoins and other
“real-world” digital assets), as well as the broader use
of distributed ledger and blockchain technology to support
financial transactions. Many digital asset ventures and businesses
developing digital asset products and services must, therefore,
navigate state rules that apply to all financial services
businesses (such as money transmitters) and digital asset-specific
rules like New York’s ‘BitLicense’ and California’s
Digital Financial Assets Law (DFAL). The BitLicense requires any
businesses involved in virtual currency activities to be licensed
by the New York State Department of Financial
Services,¹⁷ while California’s DFAL mandates
licensing by the California Department of Financial Protection and
Innovation for companies engaging in digital asset
activities.¹⁸

Moreover, many companies that require a BitLicense in New York
also have either a money-services license or a trust license. These
licenses set baseline requirements for businesses dealing in
digital asset products and services in the state of New York.
However, “virtual currency activities” are broadly
defined and are intended to be applied to an extensive array of
activities. As such, BitLicense adds heightened general and digital
asset-specific requirements, and existing supervision or
registration with a federal authority generally will not exempt a
company from the requirement to obtain a BitLicense if it is
conducting virtual currency activities.

This complex regulatory landscape at the state level is further
complicated by the SEC’s asserted control over digital assets
regulation. On November 14, 2024, eighteen US states collectively
filed suit against the SEC, accusing the agency of overstepping its
bounds by classifying most digital asset transactions as securities
without explicit Congressional authorization. The complaint claims
that the SEC’s asserted authority could “swallow” the
jurisdiction of other agencies like the Commodity Futures Trading
Commission (CFTC). The states argue that “[t]he SEC’s
exaggerated understanding of its own authority […] leaves current
and potential industry participants struggling to discern what
legal obligations they may be undertaking. And even if not all SEC
enforcement actions may succeed, the threat alone chills the entire
industry.” The state lawsuit increases the pressure on the SEC
from both state governments and industry participants, which makes
the new Chair’s upcoming agenda all the more important in
restoring stakeholder confidence.

Potential Digital Asset Changes Under New SEC Leadership

There are several actions the new SEC Chair could take to shift
the agency’s approach to digital asset regulation to foster a
more welcoming environment for digital asset initial public
offerings (IPOs). The low-hanging fruit is to revisit the agenda of
the SEC’s Division of Enforcement, the primary investigative
and prosecutorial arm through which the “regulation by
enforcement” approach has been implemented. Commissioner
Hester Peirce and Commissioner Mark Uyeda have been publicly
critical of this enforcement approach and have argued that a new
regulatory framework is needed for the digital asset space. As
such, it is anticipated that new leadership will pursue an agenda
more similar to that adopted by former Chair Jay
Clayton,¹⁹ which would entail fewer enforcement actions
and a more pointed focus on plainly fraudulent conduct.

Similarly, the Chair could direct the SEC’s Division of
Corporation Finance, which is responsible for the review of
registration statements filed by companies planning to go public,
to take a streamlined approach in connection with IPOs of digital
assets companies. In particular, ensuring that digital asset
registration statements are reviewed by a single division, rather
than multiple SEC divisions, could help reduce delays.

The Chair could also push to withdraw Staff Accounting
Bulletin No. 121 (SAB 121),²⁰ which mandates that
institutions holding digital assets must record them as liabilities
on their balance sheets. Critics argue that the SEC overstepped in
this mandate, as the country’s accounting standard-setter is
the Financial Accounting Standards Board, which employs a thorough,
public process for policy changes. Recently, the current
administration vetoed a resolution aimed at overturning SAB 121,
despite bipartisan support for its repeal in both the House and
Senate.²¹ This sparked considerable backlash from the
industry. By withdrawing SAB 121, the new SEC Chair could address
these concerns and ease the regulatory burden on digital asset
innovation.

Looking Ahead

The SEC’s short-term actions might ease immediate regulatory
concerns, but in order for there to be long-term stability in the
digital asset industry, Congress will need to pass legislation. A
key development was the House of Representatives’ passage of
the Financial Innovation and Technology for the
21st Century Act (FIT21)²² in May despite the
opposition of the SEC and Gensler. FIT21 aims to assign the CFTC
new authority over digital commodities and clarify the SEC’s
role over digital assets in investment contracts, although the bill
has not progressed in the Senate and faces opposition from the
current administration.

While laws like FIT21 aim to create a clear federal regulatory
framework for digital assets, state law issues that affect the
digital asset sector—such as laws related to property
ownership and legal liabilities—will not be addressed by such
changes. For example, the warning phrase, “not your keys, not
your crypto,” highlights the risks of centralized custody and
the lack of recourse if access is lost due to hacks or insolvency.
This legal uncertainty will likely persist despite federal changes.
In addition, the legal status of decentralized autonomous
organizations (DAOs) in the US remains unclear and is the subject
of ongoing litigation. Despite DAO-specific laws being passed in
states such as Wyoming and Delaware, most DAOs have declined to
create formal legal entities under these laws. As a result, DAO
members—token holders who participate in governance—can
potentially be exposed to broad liability for the DAO’s
actions. For example, courts have found DAOs to be general
partnerships under state law, with each member in the DAO deemed to
be a general partner and, therefore, fully liable for its
actions.

The work to modernize state law to address some of this
uncertainty has begun apart from, and unrelated to, federal
regulatory regimes. For example, the 2022 amendments to the Uniform
Commercial Code added Article 12 to address both blockchain and
distributed ledger technologies more broadly. The Article 12
amendments are designed to provide consistent legal treatment for
digital assets and blockchain records by, for instance,
establishing definitions and rules around “control” of
electronic records (i.e., cryptographic keys) and
“transfer” of interests. So far, Article 12 has been
enacted by 25 states, with bill introductions in five further state
legislatures. This development could inspire similar legislative
changes in Canada, where no province currently has a framework for
the regulation of digital assets in secured transactions. In this
context, the recent registration of Balance Trust Company as an
Alberta-based trust corporation under the Loan and Trust
Corporations Act²³ is particularly relevant.
Alberta’s government issued the company its certificate of
registration, making it the second registered digital asset
custodian to be able to offer services to investors in Alberta and
other authorized jurisdictions. This initiative mirrors the intent
behind the UCC amendments to provide a clear legal framework for
the management and transfer of digital assets. As such, while FIT21
seeks to unify federal regulations, the ongoing evolution of state
laws will continue to shape the digital asset landscape and
potentially influence the Canadian regulatory approach. Lenders to
companies with digital assets are encouraged to contact our Banking & Specialty Finance Group for
tailored advice and support.

Next Steps

The ambiguity regarding digital asset regulation in the US has
been challenging for Canadian-based digital asset companies looking
to break into the US market. While the US regulatory landscape
remains fragmented, with ongoing conflicts between federal and
state authorities, Canada has taken a more proactive approach to
digital asset regulation. Of note, Canada has established a
registration scheme for digital asset trading platforms, which has
been adopted harmoniously across its provinces. The contrasting
regulatory approaches between the jurisdictions have led to
confusion among industry participants seeking to operate in both
countries. The upcoming changes in SEC leadership could either
heighten these regulatory asymmetries or lead to a more unified and
predictable regulatory environment in North America. For these
reasons, US, Canadian, and global digital asset industries will be
closely monitoring how the new administration approaches the
digital assets sector.

Footnotes

1. US Securities and Exchange Commission, “SEC Chair
Gary Gensler to Step Down in January 2025” (21 November 2024),
online: [sec.gov/newsroom/press-releases/2024-182].

2. For more information on the SEC’s “regulation
by enforcement” approach to digital asset regulation, please
see our Cassels Comment on the SEC’s Amended Proceedings Against
Binance.

3. CNN, “Trump taps crypto enthusiast Paul Atkins to
lead the SEC and Gail Slater as the new tech antitrust cop” (4
December 2024), online:
[

4. Ibid.

5. See Reorganization Plan No. 10 of 1950, 15 FR
3175, 64 Stat. 1265, which provides that the Chair has authority
with respect to the appointment and supervision of personnel, the
distribution of business among staff and administrative units, and
the use and expenditure of funds.

6. US Congress, Dazed and Confused: Breaking Down the
SEC’s Politicized Approach to Digital Assets Hearing
Before the Subcommittee on Digital Assets, Financial Technology and
Inclusion of the Committee on Financial Services, 118th Cong.,
2024 (Jennifer J. Schulp) [Schulp Testimony].

7. 15 U.S.C. § 77a et seq.

8. 15 U.S.C. § 78a et seq.

9. See SEC v Howey Co., 328 U.S. 293 (1946)
(Howey). Howey provides that a “contract,
transaction, or scheme” is an investment contract where there
is: (1) an investment of money (2) in a common enterprise,
(3) with an expectation of profits from the efforts of
others.

10. SEC v Ripple Labs, Inc, Bradley Garlinghouse and
Christian A. Larsen, 20 Civ. 10832 (AT).

11. SEC v Terraform Labs Pte. Ltd., 2023 WL
8944860.

12. Schulp Testimony, supra note 4.

13. SEC v Binance Holdings Limited et al., No.
1:23-cv-01599 (D.D.C.).

14. Ibid at 21.

15. Securities and Exchange Commission v Binance
Holdings Limited et al, Plaintiff SEC’s Memorandum of Law
in Support of Motion for Leave to Amend the Complaint, (DC Cir
2024).

16. Securities and Exchange Commission v Binance
Holdings Limited et al, Joint Motion to Dismiss Amended
Complaint Against Defendants, (DC Cir 2024).

17. New York State Department of Financial Services,
“Virtual Currency Businesses – Licensing and
Resources” (2024), online:
[dfs.ny.gov/virtual_currency_businesses].

18. California Department of Financial Protection and
Innovation, “Digital Financial Assets” (2024), online:
[dfpi.ca.gov/regulated-industries/digital-financial-assets/].

19. Interestingly, Jay Clayton has been nominated by the
President-elect to serve as US Attorney for the Southern District
of New York where high-profile SEC cases, including against Ripple
Labs and Terraform Labs, have been tried.

20. US Securities and Exchange Commission, Staff
Accounting Bulletin No. 121 (31 March 2022), online:
[sec.gov/regulation/staff-interpretations/accounting-bulletins/old/staff-accounting-bulletin-121].

21. See Joseph R Biden Jr, “Message to the House of
Representatives on the President’s Veto of H.J.Res. 109″
(31 May 2024), online:
[whitehouse.gov/briefing-room/presidential-actions/2024/05/31/a-message-to-the-house-of-representatives-on-the-presidents-veto-of-h-j-res-109/].

22. US Congress, Bill H.R.4763, Financial Innovation
and Technology for the 21st Century Act, 118th Cong., 2024,
online:
[congress.gov/bill/118th-congress/house-bill/4763].

23. RSA 2000, c L-20.