On April 27, Sen. Elizabeth Warren (D-MA) and Sen. Chris Van Hollen (D-MD) announced that they had sent a letter to the SEC chairman raising concerns about recent SEC interpretive guidance that the senators contend would broadly exempt significant portions of the crypto market from federal securities laws. The senators argued that the interpretive guidance would undermine investor protections and appeared “designed to benefit the crypto industry.” As previously covered by this Orrick Insight, the guidance segments crypto assets into five categories: (i) digital commodities; (ii) digital collectibles; (iii) digital tools; (iv) stablecoins; and (v) digital securities, and concludes that the first three categories fall outside the definition of securities, while stablecoins are evaluated based on specific characteristics. The letter argues that these provisions conflict with the Supreme Court’s Howey test, which evaluates whether a particular instrument constitutes an investment contract, and could allow crypto issuers to circumvent securities regulation by exploiting perceived “loopholes.”

The letter also points to additional exemptions outlined by the SEC chairman, including a “startup exemption” and a “fundraising exemption,” which the senators argue could allow some crypto companies to raise substantial funds without SEC registration. The letter highlights concerns from the financial industry that broad exemptions sought by the crypto industry could introduce cybersecurity risks, enable illicit protocols that harm investors, and contribute to severe market volatility. The senators urged Congress to address what they view as gaps that could allow market participants to bypass securities laws using crypto assets. They also requested that the SEC preserve and provide records and communications with the White House, the Trump family, and crypto industry stakeholders related to the guidance, and asked whether the agency considered subjecting the release to a formal notice-and-comment rulemaking process. The senators requested responses by May 8.