SEC Crypto Asset Proposal Leaves Legal Uncertainty, Davis Polk Partner Says

Davis Polk & Wardwell partner Joseph Hall wrote in Bloomberg Law that the U.S. Securities and Exchange Commission's August 18 crypto asset regulation proposal creates a tailored framework for crypto issuers but still relies on the 1946 Supreme Court Howey case's broad concept of an investment contract, leaving the legal uncertainty it aims to address unresolved. According to Foresight News, Hall said the SEC has shown it can define crypto asset categories precisely and could instead set rules directly based on objective conditions. Hall used oranges from the Howey case to argue that the Supreme Court found the investment contract to be a security, not the land, trees, or oranges themselves. Once oranges enter circulation, distributors do not need to trace whether they came from the Howey orchard. He said the SEC's proposal works differently: until an issuer completes or permanently abandons key managerial efforts and submits certification, secondary-market trading of crypto assets would still be treated as securities trading. Hall said this could give tokens on the same blockchain different legal characteristics depending on how they were minted or distributed. He added that blockchains do not record the legal theory applied to each original distribution, leaving trading platforms and intermediaries unable to determine the status of the assets.