U.S. Crypto Law and Regulation Update: Checks, Balances, and Some Major Questions

By Daniel Bulaevsky, GC at Hack VC, and previously partner and GC at Klaros Group, attorney at Wachtell, Lipton, Rosen & Katz, consultant at Promontory Financial Group, and investment banker at J.P. Morgan.

If you’re the founder of a crypto company with some nexus to the U.S. in 2023, what do you do? Do you put your head down, build, and hope the regulatory environment in the U.S. improves? Do you go out and advocate for your company and the crypto industry? Do you follow SEC Chair Gary Gensler’s advice and “[go] in [and] register” with the SEC?

“I don’t know how to answer that question” SEC Commissioner Hester Peirce, one of Chairman Gensler’s four colleagues on the Commission, told me when I asked the same question at our firm’s hack.summit() conference earlier this year. “And that’s unfortunate,” she concluded. It is indeed.

As this article explains in more detail below, 2023 began with an onslaught of SEC activity across the crypto industry, as the SEC filed complaint after complaint after complaint against major crypto companies. But the tide began to turn, to some extent, midway through the year, as (on balance) positive legal and political developments materialized, with crypto defendants mounting strong defenses (and even scoring an early win!) in court and lawmakers pushing crypto bills to new heights in Congress. While these are still early developments, and much more progress is needed, they suggest that the U.S can still turn things around to provide crypto founders and other market participants with workable rules and certainty and reclaim its position as a leader in the crypto industry—and that would be a fortunate thing.

SEC Onslaught in H1 2023

The SEC turned up the heat in the first half of 2023. In that time, the SEC charged, among others:

In this flurry of H1 activity, the SEC made clear that it is committed to regulating the crypto industry by enforcement. That commitment is founded in Gensler’s (apparently evolved) view that the existing U.S. securities laws “cover most of the activity that’s happening in the crypto market.” The Commission has thus eschewed the standard rulemaking process, which could be used to work with relevant parties to create workable rules for consumers, the industry, and the SEC, in favor of the strict application of existing rules and, in turn, enforcement where those laws and the industry invariably diverge.


Existing Rules Don’t Work for Crypto

The SEC’s hardline approach would be a sensible one if existing U.S. securities laws worked for digital assets (and supported the important policy objectives of those laws with respect to them). But they don’t. That is:

The same outcomes have generally followed on the centralized side of the crypto world. Coinbase, like other crypto exchanges operating in the U.S., has taken great efforts to attempt to register with the SEC but has found that “there is no existing way for a crypto exchange to register” with the Commission. Coinbase also filed a petition for rulemaking and asked the SEC for guidance on several occasions with respect to registration and other securities laws matters, including its token listing process. Rather than work constructively with Coinbase, the SEC responded with a Wells notice (i.e., a formal notice notifying a recipient of the substantive charges the SEC intends to bring against them) and, soon after, it filed the complaint noted above.

A Better Solution

There’s a better solution here. Commissioner Peirce summarized it perfectly in response to the SEC’s reopening of the comment period and provision of supplemental information on proposed amendments under Exchange Act Rule 3b-16:

A Commission serious about regulating—and not destroying—this market would reflect on [a] near unblemished record of regulatory failure and do something about it. We would consider the possibility that our rules, which in the past have evolved to address the needs of, and the risks presented by, investors and firms in the traditional securities markets, might require some tweaking to permit firms to offer innovative ways of doing finance using novel technologies.

The SEC need only look abroad, in almost any direction, for examples of regulators and lawmakers doing just that. The EU, UK, Hong Kong, Dubai, among other jurisdictions, are quickly filling the void by proposing and in some cases implementing major crypto laws and regulatory frameworks that promote innovation in the digital assets space (and, with it, capital formation and healthy markets) while protecting consumers. The developments in Hong Kong, one of the largest financial centers in the world, are particularly exciting, as regulators have stated a commitment to growing crypto in Hong Kong and have shown it by implementing a new licensing regime for crypto trading companies, inviting crypto companies to register (in this case, sincerely), and signaling that other regulatory initiatives will follow.

The SEC could do the same. It could work with the industry to create a path to compliance in the U.S., including disclosures that protocols can actually provide and that matter to crypto users, ongoing compliance obligations that consider the decentralized nature of these registrants, and rules that allow exchanges to safely offer digital asset trading, and at the same time satisfy its own mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. There are myriad examples of the SEC working with other market participants to create rules that work where a regulatory gap or other inefficiencies exist. But the SEC has so far chosen not to do so.


Checks and Balances

This is a tough situation, but there are reasons to be hopeful. Underlying such hope is a core tenet of the U.S. government: our system of checks and balances, or the division of our government into three branches—Executive, Legislative, and Judicial—to ensure that no person obtains too much power. It’s a cornerstone of the U.S. Constitution and a fundamental protection against government/administrative overreach. In recent weeks, we have seen crypto push back on the SEC, an independent federal agency, through the judiciary (arguing and, in the case of Ripple, winning a court decision agreeing in part, that the SEC does not have unilateral jurisdiction over the entire crypto industry) and Congress (working across the aisle to attempt to create new laws for the industry).

Positive Developments in Crypto Cases

Several pivotal court battles are ongoing that could in time materially restrict the SEC’s authority in the crypto space (i.e., clarify that not all crypto tokens or crypto token transactions are securities and that crypto exchanges are not operating as unregistered exchanges, among other things), including the SEC’s lawsuits against Ripple, Terra, and Coinbase, cases that are distinct on the facts, but which have important commonalities across them. It’s still early in each case, but developments are on balance positive.

In the Ripple case, the SEC suffered a rebuke to its current approach when Obama-appointed U.S. District Judge Analisa Torres ruled on cross motions for summary judgment, among other things, that XRP (the native Ripple token) “as a digital token, is not in and of itself a ‘contract, transaction[,] or scheme’ that embodies the Howey requirements of an investment contract” and that Ripple did not violate federal securities laws by selling XRP in blind bid/ask transactions on public exchanges or by compensating employees and service providers with XRP (but that it did by selling XRP to institutional investors). Put simply, the ruling found that XRP tokens, like the orange groves in the famous Howey case, are extricable from any investment contracts as part of which they might be sold (such as primary sales to institutional investors) and are not themselves securities. Context matters. This is a big deal, because, as is obvious, assets and transactions that are not securities or securities transactions (as well as relevant market participants) are not subject to securities laws or SEC oversight.

It should be noted that this decision is convoluted and results in a perverse outcome in terms of consumer protection (or, really, a lack thereof). That is, the decision, which follows existing law, gives institutional investors the protections of the U.S. securities laws but leaves retail investors without such protections. That is not to say that the court got it wrong; rather, the court (with some difficulty) reasonably applied existing law, and that application gives an answer that is inadequate from a public policy perspective. That suggests the laws need to change to ensure consumers of digital assets receive adequate protections without quashing the benefits of the new technology. Such protections are critical for further adoption.

Nevertheless, this ruling could have several positive effects, including strengthening the defense postures of other industry players (e.g., Coinbase), incentivizing members of Congress to pass new laws (as this ruling makes clear the existence of the real, wide regulatory gap noted above; it’s a great opportunity for Democrats in Congress who generally love the idea of more financial regulation) and, with some luck, changing some hearts at the Commission, though I’m not holding my breath for that. It is important to note that this decision is specific to the facts of the case and is that of a sole district judge and thus not binding on other judges, meaning that much can still change (including an SEC interlocutory appeal or a future appeal after a final judgment on the balance of the case, adverse opinions in other districts or from other judges in the same district, which we have already seen in part in the recent Terra decision, etc.). But this opinion is undoubtedly an important win for the crypto industry in the U.S. for now.

In the Terra case, though headlines surrounding the recent motion to dismiss decision are certainly gloomy (most read as some version of “Terra Court Rejects Ripple Decision”), the opinion, though definitely a mixed bag, must be understood within the context of that case and the motion itself:


The Coinbase case is in the earliest stage of the three cases. Last week, Coinbase filed a motion for judgment on the pleadings asking the court to dismiss the SEC’s complaint against the U.S.-based exchange in its entirety. A motion for judgment on the pleadings, which typically occurs before discovery, is similar to a motion to dismiss challenging the legal sufficiency of the pleadings and carries the same legal standards on review. The key difference between the motions is that, if a court grants a motion to dismiss, a plaintiff can amend a complaint, but if a court grants a motion for judgment on the pleadings, the relevant claims are dismissed. Coinbase’s legal strategy, in filing a comprehensive answer followed by this less-used and possibly dispositive motion, which can cite its own answer, is brilliant (necessary disclaimer: I was previously an attorney at the firm leading Coinbase’s defense, Wachtell, Lipton, Rosen & Katz).

In its motion, Coinbase makes four primary claims: (1) the SEC’s complaint does not plead “securities” transactions (i.e., that transactions in digital assets through Coinbase and Coinbase Prime, as well as its staking services, are not investment contacts under Howey), (2) the regulation of secondary markets for digital assets “qualifies as extraordinary” and the digital assets industry is sufficiently significant to implicate the major questions doctrine, which would separately compel rejection of the SEC’s incorrect construction of an investment contract, (3) Coinbase did not act as an unregistered broker through Coinbase Wallet, and (4) Coinbase’s staking services do not constitute unregistered securities. As noted, if the court grants the motion, it would dismiss all or parts of the SEC’s complaint against Coinbase, and the surviving claims, if any, would continue to discovery.

A few interesting points to note from the motion:

Coinbase’s arguments are persuasive, but this is a difficult motion to win, and it’s unlikely that a district judge will be keen to take too many risks in a decision here, so it won’t be a surprise if at least some part of the complaint survives (for now).

Congress In Action

Congress has been hard at work on new proposed crypto rules, which is positive for the industry both from a checks and balances perspective (as protection against overreach) and substantively (the draft bills are pretty good!). At the time of this article, two major crypto bills, among several more specific crypto bills, are in process in Congress:

The bills are quite different, and each needs some fine-tuning, but both propose new rules for the crypto industry that would, as a general matter, reduce the role of the SEC and promote certainty and greater confidence for crypto market participants, reduce attendant risks, and protect consumers. The House bill is the more likely of the two to move to the other chamber, as it has already passed two House committees with bipartisan support. But both bills face long odds of turning into law in the short term given the sentiment in the Democrat-controlled Senate and across the Biden Administration.

Other, more specific proposed bills, including the Clarity for Payment Stablecoins Act of 2023, which aims to provide a clear regulatory framework for the issuance of payment stablecoin, are also making the rounds, and it’s quite possible that some of those bills receive greater support compared to their more comprehensive and thus harder-to-pass counterparts. The Clarity for Payment Stablecoins Act of 2023 bill, along with other smaller bills, is also headed to the House floor for a vote.

The checks have provided some balance in the courts and in Congress for the crypto industry. Both are key spaces to watch in H2 2023 and beyond, as real clarity must come from one or the other (and ideally the latter).


TradFi Making Crypto Moves

Lastly, in recent weeks, TradFi renewed its push into crypto, as several of the world’s largest asset managers filed applications for spot Bitcoin ETFs with the SEC, including BlackRock, Fidelity Investments, and other large asset managers, as well as for Ethereum Futures ETFs. Elsewhere, PayPal announced that it will launch a new dollar-backed stablecoin, PYUSD, in partnership with Paxos.

While a spot Bitcoin ETF approval by the SEC is anything but certain at this point, BlackRock has a pretty good track record on its ETF applications—of the 576 applications it has filed, the SEC has approved 575 of them. Shortly following its ETF filing, Blackrock CEO Larry Fink, a one-time crypto skeptic, stated in an interview on Fox Business that if we “can create more tokenization of assets and securities—that’s what bitcoin is—it could revolutionize finance.”

Where This Leaves Us

Despite all the regulatory developments, not much has changed on the ground level. None of the court cases have created binding precedent, though we did at least receive some support for the current approach to crypto company institutional financings (i.e., initial sales under Regulations D or S, etc.), and none of the proposed bills have become laws, and it’s unlikely that any of that will happen anytime soon, other than some of the more specific crypto bills. That means that uncertainty in the U.S. will persist for the time being. As always, crypto founders and other market participants are advised to work closely with their counsel to ensure their activities fall within applicable rules and regulations.

Ultimately, while the SEC’s current approach poses challenges for the crypto industry in the U.S., it is no death knell for crypto globally. Crypto is a global technology that does not depend on the SEC or the U.S. But all is not lost at home. These recent developments suggest that the U.S. can still turn things around to provide crypto founders and other market participants with workable rules and certainty and reclaim its position as a leader in the crypto industry—and that would be a fortunate thing.

The information herein is for general information purposes only and does not, and is not intended to, constitute investment advice and should not be used in the evaluation of any investment decision. Such information should not be relied upon for accounting, legal, tax, business, investment or other relevant advice. You should consult your own advisers, including your own counsel, for accounting, legal, tax, business, investment or other relevant advice, including with respect to anything discussed herein.

This post reflects the current opinions of the author(s) and is not made on behalf of Hack VC or its affiliates, including any funds managed by Hack VC, and does not necessarily reflect the opinions of Hack VC, its affiliates, including its general partner affiliates, or any other individuals associated with Hack VC. Certain information contained herein has been obtained from published sources and/or prepared by third parties and in certain cases has not been updated through the date hereof. While such sources are believed to be reliable, neither Hack VC, its affiliates, including its general partner affiliates, or any other individuals associated with Hack VC are making representations as to their accuracy or completeness, and they should not be relied on as such or be the basis for an accounting, legal, tax, business, investment or other decision. The information herein does not purport to be complete and is subject to change and Hack VC does not have any obligation to update such information or make any notification if such information becomes inaccurate.

Lastly, almost everything in the world of crypto law and regulation remains in a state of constant flux, so matters covered in this article may well be stale by the time you read it.


  1. Or did the Terra court mean that if one contract, transaction, or scheme involving a given asset is an investment contract, that all other contracts, transactions, or schemes concerning the same asset, even with different facts and different types of purchasers, are necessarily investment contracts? Or that a “reasonable individual” is a person that receives the same information and that has the same understandings and expectations as all other types of purchasers in all other contracts, transactions, or schemes concerning the same asset, even with different facts? Had the allegations in Terra provided that one type of purchaser did not see or receive any information from Terra or its executives whatsoever, would the Terra court have held differently?