Digital assets or crypto currency – frequently a coin with defined characteristics tied to a blockchain ledger – have risen to prominence in recent years. Certain forms of these assets are regularly traded on platforms, typically exhibiting volatile returns. In contrast, some instances offerings of these assets are little more than the latest fraudulent scam in which fraudsters seek quick profits at the expense of unsophisticated investors.

Over their short life, crypto assets have significantly evolved. While these assets originated with an “off the grid” message that sought to escape the scrutiny of regulators, recently the focus seems to have changed. Now there are ads claiming that the “revolution needs rules” and announcing that a particular iteration of crypto is regulated – i.e. a safer investment. At the same time those favoring the use of crypto assets continue to struggle in defining the role of the assets in the market place. Some continue to dismiss these assets as little more than nonsense.

Regardless of one’s view of the assets, one point is clear: Federal regulators continue to try and fit the new assets into traditional regulatory structures which varying results. This phenomenon is well illustrated by the recent Joint Release issued by the Financial Crimes Enforcement Network or FinCEN and the CFTC and SEC (collectively the “regulators”) (Oct. 11, 2019) (here).

The Joint Release

The regulators’ Joint Release focused on the currency type attributes of digital assets. It was designed to “remind persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act.” Those obligations apply to entities that the BSA defines as “financial institutions.” That definition includes “futures commission merchants and introducing brokers, obligated to register with the CFTC, money services businesses as defined by FinCEN, and broker-dealers and mutual funds obligated to register with the SEC,” according to the Joint Release. The obligations of those in this space include the requirement to establish an effective AML and record keeping program which includes suspicious activity reporting or SAR requirements.

The announcement was specifically targeted at “digital assets.” As the Joint Release states: “For the purposes of this joint statement, ‘digital assets’ include security-or commodity-based instruments such as futures or swaps.” While market participants use a variety of labels and terms to identify such instruments, the critical question is the substance involved, not the label.

Rather, as the Joint Release states, it is “[t]he nature of the Digital asset-related activities a person engages in [that is] a key factor in determining whether and how that person must register with the CFTC, FinCEN, or the SEC.”

If the person engages in certain “commodity” related activities, for example, registration may be required with the CFTC. In that instance its AML/CFT activities will be overseen by the CFTC, FinCEN and the National Futures Association. If the person or activities fall within the definition of a financial institution or a money-changer, its AML/CFT activities will be overseen by FinCEN and perhaps others. If the person or activities fall within the definition of certain security regulated activities its AM/CFT activities will be regulated by the SEC, FinCEN, and perhaps the Financial Industry Regulatory Authority or others, according to the release. The key is the nature of the activities.


The release makes it clear that certain digital or crypto assets may well be subject to supervision by multiple regulators and/or self-regulatory associations. Key is not the terms used or the even the definition of the terms used but the nature of the activities. Stated differently, it is the substance of the activities not their form which will determine regulation.

The Joint Release makes it clear that efforts to be “off-the-grid” by structuring around regulation will in all likelihood fail. While some in the crypto space seem to have reached this conclusion, others clearly have not. It is thus likely that many involved with crypto assets will continue to face government enforcement actions centered on the key jurisdictional issues tied to the nature of the activity – commodity, banking and money changing and securities. The crypto/digital asset revolution will, in all likelihood, face significant difficulties being “off-the-grid” in the future.