initial coin offering (ICO)

A threshold question in many cryptocurrency inquiries is whether the digital assets qualify as securities under the federal securities laws. If so, then they are subject to a full suite of federal securities regulations. If not, they still may be subject to AML and other DOJ regulations regarding currencies, as well as the Commodity Futures Trading Commission’s (CFTC) authority to prosecute manipulation in the spot market for commodities. Without uniform legislation providing guidance on this question, regulators and courts have generally applied the Howey test to determine whether the digital assets at issue are investment contracts and therefore securities. Rulings in litigated matters this year may serve as catalysts to drive legislative action providing further guidance to the industry.

Late last year, the SEC filed a litigated action in the U.S. District Court for the Southern District of New York against Ripple Labs Inc. and two of its executive officers (collectively, “Ripple”), alleging that Ripple raised over $1.3 billion in unregistered offerings of the digital asset known as XRP. Ripple opted not to file a motion to dismiss the complaint, and based on recent filings it appears that the parties do not believe a pre-trial settlement is likely.