Regulation
Navigating the Evolving Landscape of Digital Asset Regulation in the United States: 2024 Update
We recently released our second edition of the annual “Who’s Who Guide” for 2024, a comprehensive report aimed at mapping the entire real-world asset tokenization ecosystem. The 2024 edition lists all key categories of industry players while taking note of the recent trend of institutional adoption. Additionally, the report includes various articles covering important topics in the space and we would like to share them with you. You can view the full report and download your free copy here.
The United States has been a melting pot of regulatory activity in the digital assets space, with 2024 marking a year of significant developments. This article aims to shed light and provide an in-depth review of the latest regulatory initiatives related to digital assets, cryptocurrencies and asset tokenization, offering insight into their potential impact.
An effort for clarity and innovation
In February 2024, the Office of the Comptroller of the Currency (“OCC”) hosted a symposium focused on the tokenization of real-world assets and liabilities. The symposium, held in Washington, DC, included 5 panels that covered the following topics: the legal foundations of digital asset tokens, a review of academic articles on tokenization, a discussion with various federal regulators, a discussion on a tokenization use case and a roundtable discussion on risk management and controls. Key takeaways from the symposium include:
1. Define Tokenization: Tokenization is the process of digitally representing an asset, property, or liability on a programmable platform. It has historical roots but is now enabled by new technologies such as blockchain and DLT.
2. Benefits of Tokenization: Key benefits include faster settlement, reduced counterparty risk, and increased efficiency and liquidity for certain asset classes. However, the technology is still maturing and many use cases are in their early stages.
3. Legal foundations: Clarification of ownership rights of tokenized assets and other legal foundations remains essential. Recent UCC amendments provide some legal clarity in the United States, but internationally the landscape varies.
4. Regulatory oversight: Regulatory agencies closely monitor developments, assess risks and benefits, and provide advice where possible. Key considerations include interoperability, governance, operational risk and consumer protection.
5. Asset Classes: Popular asset classes for tokenization include securities, real estate, supply chain finance, and cross-border payments. However, not all assets are equally suitable for tokenization.
6. Risk management and controls: Although tokenization can reduce some risks, it can introduce new operational and technological risks that must be considered and managed carefully. Industry standards continue to evolve.
7. Intermediaries: It is likely that intermediaries will still play an important role in many tokenized ecosystems, although these roles are likely to evolve.
8. Follow the “North Star”: Delivering real economic improvements should be the “North Star” that guides tokenization efforts, not speculation or hype around the technologies themselves. Targeted innovation with appropriate safeguards is needed. A link to a recording of the symposium can be found here: OCC Symposium on Tokenizing Real-World Assets and Liabilities.
Legal battles
Uniswap hit with Wells notice
On April 10, 2024, Uniswap Labs, one of the world’s largest decentralized cryptocurrency exchanges headquartered in New York, was notified by the Securities and Exchange Commission (“SEC”) of a possible enforcement action against the company. In a company blog post, Uniswap executives outlined their belief that tokens offered on the platform are not securities and said the SEC declined to create a way for companies to record which tokens could be considered securities.
Additionally, the blog goes on to assert that the SEC does not have the authority to regulate certain digital assets and the Uniswap protocol, based on the following points:
1. The SEC only has jurisdiction over securities, and recent court decisions such as SEC v. Ripple and Risley v. Uniswap Labs have indicated that secondary market transactions in digital assets generally do not constitute securities contracts. investment, which are a type of security under the law. American law.
2. Even though the court rulings do not preclude the SEC’s arguments, the Uniswap protocol, application and wallet do not meet the legal definitions of a securities exchange or broker-dealer, as demonstrated by the SEC decision against Coinbase.
3. The UNI token does not meet the definition of an investment contract as established by the Howey test. Specifically, the blog states that there is no contract or promise between Uniswap and the token holders and that there is no joint venture on which the value of the token depends. Additionally, the blog claims that the Uniswap ecosystem is sufficiently decentralized, like the Bitcoin and Ethereum networks.
A victory for Coinbase
Coinbase, a global leader in the digital economy, emerged victorious in a recent legal battle. The U.S. Court of Appeals for the Second Circuit recently determined that Coinbase’s secondary sale of digital assets did not violate the Securities Exchange Act of 1934.
During the proceedings, Coinbase argued that securities laws were not applicable to their case, claiming that the secondary sale of cryptocurrencies did not meet the criteria for securities transactions. The court, after evaluating various aspects of the case, decided to overturn certain decisions of the lower court while upholding other aspects. The court recognized that under Section 12(a)(1) of the Securities Act of 1933, Coinbase could be held liable for the sale of unregistered securities. However, it dismissed the plaintiff’s Exchange Act claims for lack of sufficient evidence of transaction-specific contracts that would have permitted rescission under Section 29.
Second Circuit ruling favors Ripple in ongoing legal battle
The Second Circuit Court of Appeals recently declined to reconsider its decision in SEC v. Govil, according to which if a buyer does not suffer any financial loss, the SEC is not entitled to restitution from the seller. Although not directly related to the Ripple case, the decision will certainly have a ripple effect that will impact the Ripple case.
Specifically, the SEC is seeking restitution of $2 billion in the Ripple case, which is also being handled by the Second Circuit. Importantly, Ripple is required to submit its objection to the remedies to the SEC’s opening brief by April 22, in which they are likely to cite the SEC v. Govil decision.
Legislative progress
Regulatory divergence at the state level
The National Conference of State Legislatures reported that 35 states, along with Puerto Rico and the District of Columbia, have introduced or are in the process of introducing legislation regarding cryptocurrencies or digital assets. These regulations aim to cover everything from licensing requirements to tax rules for digital assets. A common topic among proposed state bills is the issue of central bank digital currencies (“CBDCs”). For example, Nebraska enacted a law stating that the UCC shall not be construed as supporting, endorsing, creating, or implementing a national digital currency. Similarly, South Dakota passed a resolution opposing the adoption and development of a CBDC.
BlackRock launches tokenized fund
BlackRock, the largest US asset manager, has launched a tokenized fund called BlackRock USD Institutional Digital Liquidity Fund (Buidl) on Ethereum. network. The fund, launched in partnership with SecuritizeCoinbase, and backed by a consortium of companies, aims to offer US dollar returns through asset tokenization, marking a notable step in the integration of traditional finance with blockchain technology.
The fund has already attracted around $288 million from just 10 holders, with real-time data from Arkham Intel suggesting that Buidl’s Ethereum address has a balance in excess of $100 million, made up primarily of USDC which launched the fund. The launch of Buidl is seen as an important development that could bring widespread adoption of asset tokenization.
Circle, the transmitter of USDCrecently announced a new smart contract feature that allows Buidl holders to transfer their shares to Circle for USDC.
This development provides Buidl investors with near-instant, 24/7 exit, leveraging the key benefits of tokenized assets. Additionally, the smart contract functionality enables the frictionless transfer of Buidl shares for USDC in the secondary market, providing a reliable and transparent method for users looking to sell their Buidl shares while remaining holders of digital dollars.
The fund also addresses issues with digital cash, or stablecoins, by allowing investors to earn a yield unlike traditional stablecoins, and has safeguards such as stopping redemptions to comply with laws. Potential uses of tokenized funds include investing in tokenized securities and using tokens as collateral for bilateral OTC transactions, which could make crypto trading more efficient by providing high-quality yield-generating collateral .
While the actual adoption and impact of tokenized funds remains to be seen, BlackRock’s involvement lends credibility to the space. The launch of Buidl and Circle’s smart contract functionality marks an important step towards the tokenization of financial markets, with further developments to come.
Conclusion
Ultimately, 2024 is shaping up to be a pivotal year for digital assets and the Web3 economy as a whole in the United States. As government and regulators play an increasing role in providing a more comprehensive and clear legal framework, the future of digital assets and asset tokenization appears to be on a path of greater innovation and growth. responsible. As these regulatory initiatives unfold, it will be crucial for all stakeholders in the digital asset ecosystem to stay informed and understand their implications.
Read other stories: Industry Overview: Navigate the asset tokenization landscape with The Tokenizer’s Who’s Who 2024 guide