Dear Dr. Murphy:



Thank you for taking the time to contact me about United States Securities and Exchange Commission (SEC) and digital assets. I appreciate hearing from you about this issue.



U.S. capital markets are the deepest, most complex, and most liquid in the world. Market trends shift regularly as new commercial and technological advancements change how our markets operate. The SEC is the federal agency responsible for overseeing these markets, protecting investors from fraud, helping businesses access capital on the market, and ensuring the appropriate regulation of the U.S. securities market. As a part of its charge to protect investors and maintain fair, orderly, and efficient markets, the SEC requires the registration of entities operating in capital market and the registration of securities being offered for public sale. The SEC also requires the disclosure of important market-related information on securities to prevent fraud and allow investors to make informed decisions. The SEC's Division of Trading and Markets is responsible for the day-to-day oversight of major securities market participants. This division of the SEC is also tasked with reviewing proposed regulations.



Securities are regulated differently than other financial instruments and it is the job of the SEC to determine the regulatory status of new financial technologies, including distributed ledger technologies. Distributed ledger technology includes blockchain, a decentralized system that can be used to issue and transfer digital assets that may be securities. Under the Howey test, the courts and the SEC have determined that a digital asset is a security when there is the "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others." The SEC has issued detailed guidance on how to interpret the Howey test when deciding if a digital asset is a security or not. Applying this framework, digital assets like Bitcoin and Etherium do not qualify as securities as they are decentralized with no one person or company in control of them. Bitcoin and Etherium are not issued by a dealer, instead they are "mined" or created over time.



The SEC has explicitly stated and demonstrated via enforcement action that a platform which offers trading of digital asset securities and operates as an exchange must register with the SEC as a national securities exchange. Similarly, the SEC has asserted that any entity that issues a digital asset security in an initial coin offering or secondary trading may be acting as a dealer or broker and is thereby subject to legal and regulatory requirements that govern securities markets. Such entities should register with the Commission accordingly. The SEC, on multiple occasions, has demonstrated through enforcement action on unregistered initial coin offerings that there is a path to compliance with the federal securities laws, even where issuers have conducted an illegal unregistered offering of digital asset securities.



In the ongoing case between the SEC and Ripple Labs, Inc., the SEC alleges that the defendants are in violation of federal securities laws by failing to register a digital asset called XRP with the Commission. XRP was created and sold exclusively by Ripple. Ripple owns the majority of the 100 billion units they have created and is in the process of releasing units in scheduled allotments to raise funds for its own company. The SEC asserts that XRP, because of its close association with Ripple, is a security and therefore Ripple has failed to take the appropriate steps to comply with federal securities laws. The case, brought by the SEC in December 2021, has yet to reach a conclusion. When it does, the outcome may further clarify how the SEC and federal courts determine what characteristics of digital assets qualify them as securities.



On multiple occasions now, we have witnessed abuse and misconduct in the crypto market, at times leading to the wholesale collapse of digital assets. When the Luna crypto network, which hosted an algorithmic "stablecoin" called TerraUSD (UST), collapsed it erased $60 billion worth of digital assets leading to a liquidity crunch for investors and the digital asset market that resulted in a $300 billion loss market-wide. After the value of Luna and UST catapulted, attracting many investors, the network's mechanism ensuring the value of these coins quickly collapsed. Luna lost nearly all of its value, falling from $82 to less than one cent in about a week. In the case of crypto exchange FTX, severe financial mismanagement and misconduct resulted in an $8 billion gap in funds and the ultimate the collapse of the growing platform. FTX was found to be using customer funds from their trading platform to satisfy the financial obligations of an associated company. Details are still unfolding in the case of FTX. But one thing is clear, without protection, American consumers are paying the price when large investors and crypto moguls play it fast and loose with their money.



Modernizing the rules and regulations that govern U.S. capital markets to keep pace with new technologies and trends, leaving no opportunities for exploitation of working people, is vitally important. I will continue to monitor developments in digital asset regulation with your thoughts in mind.



Again, thank you for sharing your thoughts with me. Please do not hesitate to contact me in the future about this or any other matter of importance to you.



For more information on this or other issues, I encourage you to visit my website, https://casey.senate.gov. I hope you will find this online office a comprehensive resource to stay up-to-date on my work in Washington, request assistance from my office, or share with me your thoughts on the issues that matter most to you and to Pennsylvania.



Sincerely,
Bob Casey
United States Senator