SEC Grants WisdomTree Exemptive Relief for 24/7 Tokenized Mutual Fund Trading: What It Means for Tokenized Securities

The Securities and Exchange Commission has reportedly granted exemptive relief to WisdomTree, permitting its tokenized Treasury money market fund to trade around the clock with instant blockchain-based settlement. If confirmed, this represents one of the most significant regulatory developments for tokenized securities to date—demonstrating that registered investment products can operate on blockchain rails while maintaining full compliance with federal securities law.

This article analyzes the regulatory framework implicated by such relief, what it signals about the SEC’s current posture toward tokenized securities, and what practitioners should consider as the tokenized fund market matures.

Key Takeaways

  • Regulatory milestone: The SEC has reportedly used its exemptive authority under the Investment Company Act of 1940 to permit continuous 24/7 trading of registered mutual fund shares—a first for blockchain-based fund distribution.
  • Instant settlement pathway: The relief enables atomic settlement on blockchain infrastructure, potentially eliminating T+1 settlement delays for qualifying transactions.
  • FINRA coordination required: Broker-dealers facilitating these trades needed concurrent FINRA approval to operate outside traditional equity trading hours.
  • Conditions likely imposed: Exemptive relief under the 1940 Act typically comes with specific conditions—practitioners should review the full order once available on SEC EDGAR.
  • Template for future applicants: This relief may establish an analytical framework for other asset managers seeking similar treatment for tokenized registered products.

Why This Matters: The Commercial Context

The tokenized Treasury market has grown substantially, with multiple issuers bringing blockchain-based Treasury products to market. Franklin Templeton’s BENJI fund, BlackRock’s BUIDL fund, and offerings from Ondo Finance and others have collectively attracted billions in assets under management. These products appeal to institutional and retail investors seeking:

  • Yield on stablecoin holdings without off-ramping to traditional finance
  • Transparent, on-chain proof of reserves for Treasury-backed assets
  • Programmable money market exposure for DeFi integration
  • 24/7 liquidity in a traditionally 9:30-4:00 market

However, most existing tokenized Treasury products have operated through offshore structures or novel legal arrangements that raise questions about regulatory status. WisdomTree’s approach—seeking explicit SEC exemptive relief for a registered mutual fund—represents a different strategy: bringing tokenization fully within the established regulatory framework rather than around it.

The Regulatory Framework for Registered Fund Tokenization

Registered investment companies operating under the Investment Company Act of 1940 (“1940 Act”) face structural constraints that were designed for a different technological era. Understanding these constraints is essential to appreciating the scope of the reported exemptive relief.

Redemption and Settlement Requirements

Section 22(e) of the 1940 Act (15 U.S.C. § 80a-22(e)) generally prohibits registered investment companies from suspending redemption rights or postponing payment for more than seven days, except in limited circumstances. This provision protects investor liquidity but was drafted assuming manual settlement processes.

Rule 22c-1 under the 1940 Act (17 C.F.R. § 270.22c-1) requires open-end funds to sell and redeem shares at the current net asset value (“NAV”). Traditional practice involves calculating NAV once daily at market close (typically 4:00 PM ET), creating an inherent tension with 24/7 trading.

For a tokenized fund trading continuously, questions arise: At what price do transactions execute at 2:00 AM on a Sunday? How frequently must NAV be calculated? The exemptive relief likely addresses these operational questions, though the specific solutions await review of the full order.

The SEC’s Exemptive Authority

Section 6(c) of the 1940 Act (15 U.S.C. § 80a-6(c)) grants the Commission broad exemptive authority:

“The Commission, by rules and regulations upon its own motion, or by order upon application, may conditionally or unconditionally exempt any person, security, or transaction… from any provision or provisions of this subchapter… if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this subchapter.”

This is the statutory basis for the reported WisdomTree relief. Importantly, exemptive orders require an individualized determination—they are not automatic and typically include conditions tailored to the applicant’s specific facts.

Liquidity Risk Management

Rule 22e-4 under the 1940 Act (17 C.F.R. § 270.22e-4) requires open-end funds to maintain liquidity risk management programs, including classification of portfolio holdings by liquidity. A money market fund investing primarily in U.S. Treasury securities holds among the most liquid instruments available, which likely supported the SEC’s comfort with continuous trading. Extension of similar relief to funds holding less liquid assets would present more challenging liquidity management questions.

Reported Scope of the Exemptive Relief

Based on available reporting, the WisdomTree exemptive relief reportedly permits:

  1. Continuous trading: Fund shares can trade 24 hours per day, 7 days per week, including weekends and federal holidays.
  2. Blockchain-based settlement: Transactions settle atomically on blockchain infrastructure rather than through traditional T+1 settlement cycles.
  3. Operation within registered fund structure: The product remains a registered investment company subject to 1940 Act investor protections.

FINRA’s reported concurrent approval addresses broker-dealer compliance, permitting member firms to facilitate continuous trading outside the hours traditionally permitted under FINRA’s equity trading rules (Rules 6200-6400 series).

Note: The specific conditions and limitations in the exemptive order are not yet available for review. Practitioners should obtain and analyze the full order from SEC EDGAR before relying on this relief as precedent.

Implications for the Tokenized Securities Ecosystem

For Asset Managers Considering Tokenization

The WisdomTree relief demonstrates that the SEC will entertain exemptive applications for tokenized registered products. Asset managers evaluating this pathway should consider:

Portfolio composition matters. A Treasury money market fund presents an ideal test case because the underlying assets are highly liquid and price continuously in global markets. Funds holding corporate bonds, equities, or alternative assets would raise additional liquidity and valuation questions.

Infrastructure requirements are substantial. Operating a 24/7 fund requires robust blockchain infrastructure, cybersecurity protocols, and operational capabilities that exceed traditional fund administration. The SEC likely scrutinized these capabilities closely.

Timeline and cost. Exemptive relief applications require detailed legal submissions and Commission review. This is not a quick or inexpensive process—budget accordingly.

For Broker-Dealers

Broker-dealers seeking to facilitate tokenized fund trading must address:

Customer protection rules. Rule 15c3-3 under the Securities Exchange Act of 1934 (17 C.F.R. § 240.15c3-3) governs custody of customer securities and funds. Holding tokenized fund shares on blockchain infrastructure raises questions about “possession or control” that broker-dealers must resolve.

Continuous supervision. 24/7 trading requires 24/7 compliance surveillance. Firms must evaluate staffing models and automated monitoring capabilities.

Best execution obligations. FINRA Rule 5310 requires broker-dealers to use reasonable diligence to obtain the best execution for customer orders. In a continuous trading environment, best execution analysis may differ from traditional market hours.

For Digital Asset Platforms

Crypto exchanges and digital asset platforms have long offered 24/7 trading for unregistered tokens. The WisdomTree relief demonstrates a pathway to offer similar trading hours for registered securities—potentially expanding the universe of assets these platforms can support while operating within regulatory frameworks.

Outstanding Questions

Several important questions remain that the full exemptive order may—or may not—address:

  • NAV methodology: How is NAV calculated for off-hours transactions? Is there a continuous NAV model, or do transactions execute at a stale price with subsequent adjustment?
  • Blockchain specification: Which blockchain infrastructure supports the fund? Are there requirements around decentralization, security, or permissioned access?
  • Cross-border considerations: Can non-U.S. investors access the fund through 24/7 trading, and how are eligibility requirements verified on-chain?
  • State law implications: Does tokenized fund share distribution implicate state money transmitter licensing requirements? (This remains an unresolved question for many tokenized products.)
  • Transfer agent functions: How are transfer agent obligations under Section 17A of the Exchange Act (15 U.S.C. § 78q-1) satisfied when blockchain serves as the share ownership ledger?

What to Watch

Practitioners should monitor several developments:

  1. SEC EDGAR filing: The full exemptive order, once posted, will contain the specific conditions and limitations that define the relief’s scope.
  2. Follow-on applications: Watch for other asset managers filing similar exemptive applications, which will indicate market appetite and SEC receptivity.
  3. Staff guidance: SEC Division of Investment Management staff may issue guidance interpreting the exemptive relief or establishing a framework for similar applications.
  4. Operational launch: How the fund actually operates—including any early issues or modifications—will inform expectations for future products.

Practical Implications

For Crypto Founders and Token Issuers

This relief does not directly affect unregistered token offerings, but it signals the SEC’s willingness to accommodate blockchain technology within existing frameworks. Projects considering registered offerings (e.g., under Regulation A+) may find a more receptive regulatory environment for blockchain-based distribution.

For In-House Counsel at Financial Institutions

If your institution is evaluating tokenized Treasury products, understand the distinction between registered products like this WisdomTree fund and offshore or unregistered alternatives. Registered products offer clearer regulatory status but may have different features, fees, or access restrictions.

For Compliance Officers

Review your AML/KYC frameworks for adequacy in 24/7 trading environments. Continuous trading means continuous monitoring obligations—ensure your transaction surveillance capabilities match your operational hours.

For Retail Investors

Tokenized mutual fund shares remain mutual fund shares, subject to the same investment risks as traditional funds. The “tokenization” does not change the underlying economics—it changes the operational wrapper. Understand what you’re buying, not just how you’re buying it.

Conclusion

The SEC’s reported exemptive relief for WisdomTree’s tokenized Treasury money market fund represents a meaningful step toward integrating blockchain infrastructure with the registered securities ecosystem. By permitting 24/7 trading and instant settlement within the 1940 Act framework, the Commission has demonstrated that technological innovation and investor protection need not be mutually exclusive.

For the tokenized securities industry, this relief is both validation and roadmap. It validates the proposition that blockchain-based securities can achieve regulatory compliance. It provides a roadmap—however preliminary—for other issuers seeking to follow.

CryptoLaw.blog will publish a follow-up analysis once the full exemptive order is available on SEC EDGAR, detailing the specific conditions imposed and their implications for practitioners.

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly — consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.

Form 1099-DA Complete Guide: Crypto Tax Reporting Requirements for 2025-2026

The era of anonymous cryptocurrency transactions with the IRS ended on January 1, 2025. With Form 1099-DA now in effect, brokers and exchanges must report your digital asset sales directly to the IRS—mirroring the reporting infrastructure that has existed for stocks and securities for decades.

This isn’t a future concern. If you sold, traded, or disposed of cryptocurrency on a US exchange in 2025, you will receive Form 1099-DA in January 2026. The IRS will receive an identical copy. Any mismatch between what you report and what your broker reports will trigger automated notices—or worse.

This guide breaks down exactly what changed, who must comply, and what steps you need to take for the 2025 tax year and beyond.

Key Takeaways

  • Form 1099-DA reporting began January 1, 2025 under Treasury regulations implementing the Infrastructure Investment and Jobs Act broker reporting requirements (26 U.S.C. § 6045, as amended by Pub. L. No. 117-58, § 80603).
  • Brokers must report gross proceeds from all digital asset sales; cost basis reporting phases in starting 2026 for assets acquired and sold at the same broker.
  • Wallet-by-wallet cost basis tracking is mandatory—you can no longer use “universal” FIFO or specific identification across all your accounts.
  • DeFi protocols have delayed compliance, but you remain legally required to self-report all taxable DeFi transactions—and the IRS can still trace them via blockchain analytics.
  • Your first 1099-DA arrives January 2026—discrepancies between your return and the broker’s report will trigger IRS matching notices.

What Is Form 1099-DA?

Form 1099-DA (“Digital Assets”) is the IRS information return specifically designed for reporting cryptocurrency and digital asset transactions. Congress created this reporting requirement through Section 80603 of the Infrastructure Investment and Jobs Act of 2021 (Pub. L. No. 117-58), which expanded the definition of “broker” under Internal Revenue Code § 6045 to include persons who effectuate digital asset transfers on behalf of others.

The Treasury Department and IRS published final regulations implementing this requirement on June 28, 2024 (89 Fed. Reg. 53534). These regulations took effect for transactions occurring on or after January 1, 2025.

The form requires brokers to report:

  • Gross proceeds from each digital asset sale or disposition
  • Date and time of the transaction
  • The digital asset involved (name, symbol, and quantity)
  • Cost basis (beginning for certain 2026 transactions)
  • Whether gain or loss is short-term or long-term (once cost basis reporting is fully implemented)

What Changed: Before vs. After Form 1099-DA

Before January 1, 2025 After January 1, 2025
No standardized IRS reporting form for crypto Form 1099-DA required for all covered brokers
Inconsistent 1099-K or 1099-MISC from some exchanges Uniform transaction-level reporting to IRS
Cost basis tracking entirely taxpayer’s responsibility Brokers track and report cost basis (phasing in 2026)
IRS relied on summonses to obtain exchange data Automatic information sharing—IRS matching is immediate
Universal cost basis methods permitted Wallet-by-wallet basis tracking mandatory

Who Must File Form 1099-DA?

Under the final regulations at 26 C.F.R. § 1.6045-1 (as amended), the following entities qualify as “brokers” for digital asset reporting purposes:

Covered Brokers (Effective January 1, 2025)

  • Centralized exchanges—Coinbase, Kraken, Gemini, Binance.US, and similar platforms operating in the United States
  • Hosted wallet providers that effectuate sales on behalf of customers
  • Digital asset trading platforms offering custodial services
  • Payment processors that facilitate crypto-to-fiat conversions as a regular business
  • Digital asset kiosks (Bitcoin ATMs) operated by businesses in the trade of effectuating transfers

Entities With Delayed or No Reporting Requirements

  • Decentralized exchanges (DEXs) and DeFi front-ends: The Treasury issued proposed regulations in August 2024 that would classify certain DeFi “front-end” service providers as brokers, with reporting potentially beginning in 2027. These proposed rules remain subject to finalization and may be modified as the current SEC administration focuses on “regulatory clarity” over aggressive enforcement.
  • Non-custodial wallet providers: Pure software wallet providers (MetaMask, Ledger Live in self-custody mode) that do not effectuate transactions are not classified as brokers.
  • Miners and validators: Not brokers for transactions they process on behalf of the network, though they must report their own mining/staking income as ordinary income.

Critical point: Even if a platform does not file Form 1099-DA, you are still legally required to report all taxable transactions. The IRS has demonstrated it can trace blockchain transactions through analytics firms like Chainalysis. “No 1099” does not mean “no tax obligation.”

What Transactions Appear on Form 1099-DA?

Form 1099-DA covers “digital assets” as defined in 26 U.S.C. § 6045(g)(3)(D): any digital representation of value recorded on a cryptographically secured distributed ledger or similar technology. This includes:

  • Cryptocurrencies (Bitcoin, Ethereum, Solana, etc.)
  • Stablecoins (USDC, USDT—even 1:1 swaps are reportable)
  • Wrapped tokens and tokenized assets
  • Certain NFTs functioning as financial instruments

Reportable Events

  • Sales for fiat currency—selling BTC for USD
  • Crypto-to-crypto exchanges—trading ETH for SOL (yes, this is taxable)
  • Payments for goods or services using cryptocurrency
  • Liquidations and margin calls

Not Reported on Form 1099-DA

  • Wallet-to-wallet transfers of the same asset you own—moving your BTC from Coinbase to your Ledger is not a taxable event (but may appear as a withdrawal on exchange records)
  • Receipt of staking rewards, mining income, or airdrops—these are ordinary income at receipt, potentially reported on Form 1099-MISC or 1099-NEC, not 1099-DA
  • Gifts of cryptocurrency—though gift tax rules under 26 U.S.C. § 2503 may apply

The Wallet-by-Wallet Cost Basis Rule Explained

The most disruptive change for active traders is the new “wallet-by-wallet” (or “account-by-account”) cost basis tracking requirement under the final regulations.

Previously, many taxpayers used “universal” cost basis methods—aggregating all their Bitcoin holdings across all exchanges and wallets, then applying FIFO or specific identification globally. This is no longer permitted for assets held with brokers subject to reporting.

How It Works Now

Example: You purchased 1 BTC on Coinbase in 2021 for $30,000, and 1 BTC on Kraken in 2023 for $45,000. In 2025, you sell 1 BTC on Kraken for $60,000.

  • Old method (universal FIFO): Your cost basis would be $30,000 (the oldest lot), yielding a $30,000 gain.
  • New method (wallet-by-wallet): Your cost basis is $45,000 (the Kraken-held asset), yielding a $15,000 gain.

The result can work for or against you depending on your specific holdings—but you no longer have the flexibility to optimize across accounts.

What Happens When You Transfer Between Wallets?

This is where complexity multiplies. When you transfer cryptocurrency from Exchange A to Exchange B:

  1. Exchange A records an outgoing transfer (not a sale)
  2. Exchange B receives the asset but does not know your original cost basis
  3. You must provide cost basis information to Exchange B, or it may report the asset with a zero or unknown basis

Failure to properly track and communicate cost basis across transfers can result in dramatically overstated gains on your 1099-DA from the receiving exchange.

Cost Basis Reporting Timeline

  • 2025 transactions: Brokers report gross proceeds only; cost basis reporting is optional
  • 2026 onward: Brokers must report cost basis for digital assets acquired on or after January 1, 2025, if sold at the same broker where acquired
  • Pre-2025 acquisitions: Cost basis remains entirely your responsibility to document and substantiate

Common Mistakes to Avoid

Mistake 1: Assuming “No 1099” Means “No Tax”

DeFi swaps, foreign exchange transactions, and peer-to-peer sales are all taxable even without 1099-DA reporting. The IRS Form 1040 asks directly: “At any time during 2025, did you receive, sell, exchange, or otherwise dispose of any digital assets?” Answering “No” when you have unreported transactions is making a false statement under penalties of perjury.

Mistake 2: Treating All Transfers as Sales

Moving crypto between your own wallets is not a taxable event. However, some exchanges may report large outgoing transfers ambiguously. Keep records showing the destination wallet is yours.

Mistake 3: Using Universal Cost Basis Methods

If you’ve been using software configured for universal FIFO across all accounts, you must reconfigure it for wallet-by-wallet tracking before filing your 2025 return.

Mistake 4: Ignoring Stablecoin Trades

Swapping USDC for USDT, or using stablecoins to enter/exit positions, creates taxable events. The gain or loss may be minimal, but failure to report creates matching issues with your 1099-DA.

Mistake 5: Not Reconciling Before Filing

Your 1099-DA may contain errors—exchange pricing data may differ from actual execution prices, or transfers may be misclassified. Always reconcile against your own records before filing.

How Form 1099-DA Interacts With Other Tax Forms

Form 1099-DA is an information return to the IRS—it does not replace your own reporting obligations:

  • Form 8949: Sales and Other Dispositions of Capital Assets—you must list each transaction and calculate gain/loss
  • Schedule D (Form 1040): Summary of capital gains and losses from Form 8949
  • Schedule 1 (Form 1040): Report staking rewards, mining income, and airdrops as “Other Income”
  • Schedule C: If you’re mining or trading as a business

Foreign Account Reporting

If you held cryptocurrency on a foreign exchange (e.g., Binance global, KuCoin, or OKX) with aggregate value exceeding $10,000 at any point during the year, the conservative compliance position is to file an FBAR (FinCEN Form 114) under 31 U.S.C. § 5314. FinCEN proposed rules in 2020 that would explicitly require FBAR reporting for foreign crypto accounts, but these rules have not been finalized. Given the severe penalties for FBAR non-compliance ($10,000+ per violation, or greater for willful violations), many practitioners recommend filing until regulatory clarity emerges.

What to Do Now: Actionable Steps for 2025-2026

Step 1: Create a Complete Account Inventory

List every platform where you have ever held or transacted cryptocurrency:

  • US centralized exchanges
  • Foreign exchanges (note: FBAR implications)
  • DeFi protocols and DEXs you’ve used
  • Hardware wallets and software wallets
  • NFT marketplaces
  • Gaming platforms with crypto/NFT components

Step 2: Implement Wallet-by-Wallet Tracking Now

Configure your crypto tax software (CoinTracker, Koinly, TokenTax, CoinLedger, or similar) for wallet-by-wallet cost basis. Do this before year-end, not at tax time.

Step 3: Document All Pre-2025 Cost Basis

For assets acquired before January 1, 2025, gather every record you can:

  • Exchange purchase confirmations
  • Bank/credit card statements showing fiat deposits
  • Historical emails from exchanges
  • Blockchain transaction records with contemporaneous price data

Brokers will not report cost basis for pre-2025 acquisitions. You bear the burden of proof.

Step 4: Choose Your Accounting Method

Within each wallet/account, you may use:

  • FIFO (first-in, first-out): Default method if you don’t specify otherwise
  • Specific identification: You choose which lot to sell, but must adequately identify it at or before the time of sale

Document your method and apply it consistently.

Step 5: Review Your 1099-DA Carefully (January 2026)

When you receive Form 1099-DA:

  • Compare every line to your own transaction records
  • Check for transfers incorrectly reported as sales
  • Verify gross proceeds amounts match your execution records
  • Note any transactions your records show that are missing from the 1099-DA

If there are errors, contact the broker for a corrected form before filing.

Step 6: Engage a Qualified Tax Professional

If you have significant crypto holdings, high transaction volume, DeFi exposure, or foreign exchange accounts, this is not a DIY situation. Engage a CPA or tax attorney with specific cryptocurrency experience.

Practical Implications by User Type

Casual Holder (Buy and Hold on US Exchange)

Impact: Low complexity. Your exchange handles reporting. Focus on: (1) keeping records of your original purchases for cost basis, and (2) reconciling your 1099-DA when it arrives.

Active Trader

Impact: High complexity. Wallet-by-wallet rules significantly complicate cost basis tracking, especially if you move funds between exchanges. You need robust crypto tax software and should consider quarterly reconciliation.

DeFi User

Impact: Full self-reporting required. Every swap, LP deposit/withdrawal, yield harvest, and bridge transaction is potentially taxable. You get no 1099-DA for DeFi, but the IRS can trace everything on-chain. Track meticulously.

Crypto Business Operator

Impact: Multiple compliance layers. Beyond 1099-DA, consider employer withholding for crypto compensation, 1099-NEC for contractor payments in crypto, and potential sales tax implications for accepting crypto as payment.

Penalties for Non-Compliance

With Form 1099-DA enabling automated IRS matching, the risk of detection for unreported crypto income has increased substantially. Applicable penalties include:

  • Accuracy-related penalty: 20% of underpayment (26 U.S.C. § 6662)
  • Fraud penalty: 75% of underpayment (26 U.S.C. § 6663)
  • Failure to file penalty: 5% of unpaid taxes per month, up to 25% (26 U.S.C. § 6651)
  • Criminal tax evasion: Up to 5 years imprisonment and $250,000 fine (26 U.S.C. § 7201)

The IRS Criminal Investigation division has identified cryptocurrency as a continuing enforcement priority. The combination of 1099-DA reporting and blockchain analytics makes crypto tax evasion increasingly detectable.

Looking Ahead: 2026 and Beyond

The 2025 tax year is transitional. Key developments to monitor:

  • Full cost basis reporting (2026): Brokers will report cost basis for assets acquired and sold at the same broker after January 1, 2025.
  • DeFi broker rules (uncertain timeline): Treasury’s August 2024 proposed regulations remain subject to finalization. Under the current administration’s focus on regulatory clarity, these rules may be modified or delayed.
  • FBAR clarity: FinCEN may finalize rules explicitly addressing foreign crypto account reporting requirements.
  • Stablecoin developments: The GENIUS Act’s 1:1 backing requirements for payment stablecoins may prompt additional IRS guidance on stablecoin tax treatment.

Conclusion

Form 1099-DA represents the most significant expansion of cryptocurrency tax reporting since the IRS first classified cryptocurrency as property in Notice 2014-21. For the 2025 tax year and beyond, US crypto users must adapt to a new reality: the IRS now receives your transaction data directly from exchanges.

Compliance has become both easier and harder. Easier because brokers now provide standardized reports. Harder because the wallet-by-wallet cost basis rules create tracking complexity, especially for users who move assets between platforms.

The time to prepare is now—before your first 1099-DA arrives in January 2026. Audit your accounts, implement proper tracking, preserve your historical records, and consult with a qualified tax professional.

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly—consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.

OCC Crypto Custody Rules in 2026: How Banks Can Now Hold Your Digital Assets

For years, cryptocurrency holders faced a frustrating paradox: traditional banks—the most heavily regulated and insured financial institutions—refused to touch digital assets. Crypto custody meant choosing between self-custody (with its technical risks) or specialized crypto custodians (with their regulatory uncertainties and, as events like the FTX collapse demonstrated, significant counterparty risks).

That changed in 2025 when the Office of the Comptroller of the Currency (OCC) issued Interpretive Letter 1183 (March 2025) and Interpretive Letter 1184 (May 2025), confirming that national banks and federal savings associations may provide cryptocurrency custody services. This regulatory clarity—combined with the broader shift toward “regulatory clarity over enforcement” under SEC Chairman Atkins—has opened the door for traditional banking institutions to enter the digital asset custody market.

This article examines what the OCC guidance authorizes, what limitations apply, and what market participants should consider as bank crypto custody services become available.

Key Takeaways

  • OCC Interpretive Letter 1183 (March 2025) confirmed that national banks may provide cryptocurrency custody services as a permissible banking activity under the National Bank Act’s incidental powers clause (12 U.S.C. § 24(Seventh))
  • OCC Interpretive Letter 1184 (May 2025) withdrew the prior supervisory non-objection requirement, allowing qualifying banks to offer crypto custody without seeking advance OCC approval
  • FDIC insurance does NOT cover cryptocurrency—digital assets in bank custody are not deposits and are not federally insured, regardless of where they are held
  • Banks must implement comprehensive risk management frameworks addressing cybersecurity, key management, BSA/AML compliance, and third-party vendor oversight
  • Securities law questions remain unresolved—banks must carefully evaluate which digital assets they can custody without triggering broker-dealer registration requirements

What Changed: Before and After the 2025 OCC Guidance

The Pre-2025 Landscape

The OCC first addressed cryptocurrency custody in Interpretive Letter 1170 (July 22, 2020), which concluded that national banks could provide cryptocurrency custody services as a modern form of traditional safekeeping. However, the practical impact was limited by subsequent regulatory developments.

In November 2021, the OCC issued Interpretive Letter 1179, requiring banks to obtain a “supervisory non-objection” from the OCC before engaging in certain crypto-related activities, including custody. This effectively created a prior-approval requirement that chilled bank participation. Additionally, federal banking regulators issued a Joint Statement on Crypto-Asset Risks (January 3, 2023) expressing “significant safety and soundness concerns” about bank crypto exposures.

The result: institutional crypto custody remained dominated by specialized firms (Coinbase Custody, BitGo, Anchorage Digital, Gemini Custody), while traditional banks stayed on the sidelines despite theoretical legal authority.

The 2025 Regulatory Shift

Two OCC interpretive letters fundamentally changed the landscape:

Interpretive Letter 1183 (March 2025) reaffirmed and expanded the analysis from IL 1170, confirming that cryptocurrency custody is permissible under the National Bank Act. The letter emphasized that “the essential banking function of safekeeping—holding valuable property for customers—applies equally to digital assets secured by cryptographic keys.”

Interpretive Letter 1184 (May 2025) withdrew the supervisory non-objection requirement from IL 1179 for banks that demonstrate adequate risk management capabilities. Banks meeting standard safety and soundness requirements may now offer crypto custody services through normal supervisory channels rather than seeking advance approval.

This shift aligned with broader regulatory developments in 2025, including the SEC’s reduced enforcement posture (enforcement actions down 27%, total settlements down 45% to $808 million) and the launch of the SEC Crypto Task Force in January 2025.

What Legal Authority Allows Banks to Custody Crypto?

The OCC’s authorization rests on established statutory and regulatory foundations:

The Incidental Powers Clause

Under 12 U.S.C. § 24(Seventh), national banks may exercise “all such incidental powers as shall be necessary to carry on the business of banking.” Courts and regulators have long interpreted this provision to authorize activities that are “convenient or useful” in connection with banking powers, even if not explicitly enumerated in statute. See NationsBank of N.C., N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251, 258 n.2 (1995).

Safekeeping services—holding valuable property for customers—are a traditional banking function with roots predating the National Bank Act. The OCC’s interpretive letters conclude that safekeeping cryptographic private keys is a modern extension of this established power, not a new activity requiring additional statutory authorization.

OCC Regulations

Banks providing custody in a fiduciary capacity must comply with 12 C.F.R. Part 9 (governing fiduciary activities of national banks). Non-fiduciary custody arrangements are governed by general safety and soundness standards under 12 C.F.R. Part 30 and the Interagency Guidelines Establishing Standards for Safety and Soundness (12 C.F.R. Part 30, Appendix A).

Bank Secrecy Act Requirements

Banks offering crypto custody remain fully subject to the Bank Secrecy Act (31 U.S.C. § 5311 et seq.) and FinCEN’s implementing regulations (31 C.F.R. Chapter X). This includes:

  • Customer Identification Program (CIP) requirements under 31 C.F.R. § 1020.220
  • Customer Due Diligence (CDD) and beneficial ownership requirements under 31 C.F.R. § 1020.230
  • Suspicious Activity Report (SAR) filing obligations under 31 C.F.R. § 1020.320
  • Travel Rule compliance for transfers of $3,000 or more under 31 C.F.R. § 1010.410(f)

What Services Can Banks Provide Under the OCC Guidance?

Authorized Activities

Private Key Custody: Banks may hold cryptographic private keys on behalf of customers using secure key management systems, including hardware security modules (HSMs), multi-party computation (MPC) arrangements, or cold storage solutions.

Transaction Facilitation: IL 1184 clarifies that banks may initiate blockchain transactions at customer direction—meaning banks can offer active custody services rather than cold-storage-only arrangements.

Stablecoin Reserve Custody: Following the GENIUS Act (signed July 2025), which requires stablecoin issuers to maintain 1:1 reserve backing in qualifying assets, banks are positioned to serve as reserve custodians. Cash and short-term Treasury holdings backing stablecoins can be maintained in bank accounts, while banks may separately custody the stablecoin tokens themselves.

Institutional Services: Banks may provide custody infrastructure for institutional clients including investment advisers, hedge funds, family offices, and corporate treasury functions.

What Remains Outside the Guidance

The OCC interpretive letters do not authorize banks to:

  • Trade cryptocurrency for their own accounts (principal trading)
  • Issue proprietary cryptocurrency tokens or stablecoins (separate regulatory analysis required)
  • Provide custody for digital assets that constitute securities without addressing broker-dealer requirements
  • Extend unsecured credit based solely on cryptocurrency collateral (standard credit underwriting applies)

What About FDIC Insurance—Are My Crypto Holdings Protected?

No. FDIC insurance does not cover cryptocurrency held at banks.

The Federal Deposit Insurance Act defines “deposit” as “the unpaid balance of money or its equivalent received or held by a bank” (12 U.S.C. § 1813(l)(1)). Cryptocurrency does not satisfy this definition. The FDIC has consistently stated that crypto-assets are not deposits and are not insured by the FDIC.

Banks offering crypto custody must provide clear, prominent disclosure to customers that:

  1. Cryptocurrency held in custody is not an insured deposit
  2. Cryptocurrency is not insured by the FDIC or any other federal government agency
  3. Cryptocurrency is not guaranteed by the bank or any government agency
  4. Cryptocurrency may lose value

These disclosure requirements parallel longstanding requirements for bank sales of non-deposit investment products. See Interagency Statement on Retail Sales of Nondeposit Investment Products (OCC, Federal Reserve, FDIC, OTS, February 15, 1994, as updated).

While FDIC insurance does not apply, banks may offer private insurance coverage for custodied crypto assets. Institutional-grade crypto insurance is available from specialized markets (Lloyd’s syndicates, Bermuda carriers), though coverage limits and premiums vary significantly based on custody architecture and security controls.

What Risk Management Requirements Apply?

The OCC guidance emphasizes that crypto custody must comply with existing safety and soundness standards. Banks should address:

Cybersecurity Controls

Banks must maintain information security programs consistent with the Interagency Guidelines Establishing Information Security Standards (12 C.F.R. Part 30, Appendix B). For cryptocurrency custody, this includes:

  • Secure cryptographic key generation using certified random number generators
  • Multi-signature or MPC-based transaction authorization requiring multiple approvals
  • Air-gapped cold storage for assets not required for immediate liquidity
  • Regular penetration testing and independent security audits
  • Incident response procedures specific to blockchain-related security events

Business Continuity and Key Recovery

Unlike traditional assets, lost cryptographic keys mean permanently inaccessible assets. IL 1183 emphasizes that banks must “implement robust backup and recovery procedures for cryptographic keys” integrated with broader business continuity planning. This includes geographically distributed key backups, succession procedures, and regular recovery testing.

Third-Party Risk Management

Banks partnering with technology vendors for custody infrastructure must comply with OCC Bulletin 2023-17 (Third-Party Relationships: Risk Management Guidance). Key requirements include:

  • Due diligence before engagement (financial condition, security practices, regulatory compliance)
  • Written contracts addressing security requirements, audit rights, and business continuity
  • Ongoing monitoring of vendor performance and risk profile
  • Contingency planning for vendor failure or termination

BSA/AML Program Integration

Crypto custody must integrate with the bank’s BSA/AML compliance program:

  • Blockchain analytics tools for transaction monitoring and risk scoring
  • OFAC sanctions screening for wallet addresses (using tools like Chainalysis, Elliptic, or TRM Labs)
  • Enhanced due diligence procedures for high-risk customers (privacy coin users, mixing service exposure)
  • Staff training on cryptocurrency-specific money laundering typologies

What Securities Law Considerations Apply?

While the OCC has addressed banking law authority, securities law questions create significant complexity for bank crypto custody:

Token Classification Uncertainty

Under the test established in SEC v. W.J. Howey Co., 328 U.S. 293 (1946), an asset constitutes an “investment contract” (and thus a security under 15 U.S.C. § 77b(a)(1)) if it involves: (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) derived from the efforts of others.

The SEC has consistently stated that Bitcoin is not a security. The classification of other digital assets remains unsettled, though the SEC’s dismissal of cases against major exchanges in 2025 and the ongoing work of the SEC Crypto Task Force suggest potential regulatory evolution. Banks must carefully evaluate which assets they are willing to custody pending further clarity.

Broker-Dealer Considerations

If a bank custodies digital assets that constitute securities, it may trigger registration requirements under the Securities Exchange Act of 1934 (15 U.S.C. § 78o). Banks have an exception from broker-dealer registration for certain activities (15 U.S.C. § 78c(a)(4)(B)), but the scope of this exception for digital asset custody remains unclear. Banks should consult with securities counsel before custodying assets with arguable securities characteristics.

Qualified Custodian Status

Investment advisers registered with the SEC must maintain client assets with “qualified custodians” under the Custody Rule (17 C.F.R. § 275.206(4)-2). Banks generally satisfy qualified custodian requirements, which may make bank crypto custody attractive for advisers seeking compliant custody solutions. However, the SEC has not issued definitive guidance on how the custody rule applies to digital asset private keys, and advisers should document their analysis.

SAB 121 Accounting Treatment

SEC Staff Accounting Bulletin 121 (March 2022) requires entities custodying crypto assets for others to recognize both an asset and a corresponding liability on their balance sheets, measured at fair value. This treatment differs from traditional custody and has capital implications for banks. The status of SAB 121 has been subject to ongoing debate, and banks should confirm current accounting requirements with their auditors before launch.

Which Banks Are Entering the Market?

As of February 2026, several institutions have announced crypto custody initiatives:

BNY Mellon: Launched institutional digital asset custody in late 2025, initially supporting Bitcoin and Ethereum with plans to expand asset coverage.

US Bank: Announced a crypto custody partnership with institutional infrastructure providers, with services expected in 2026.

State Street: Has indicated plans to offer digital asset custody services through its institutional servicing platform.

Several regional banks are also exploring custody offerings, often through partnerships with established crypto custody technology providers rather than building proprietary infrastructure.

Note: Specific bank offerings, timelines, and supported assets are subject to change. Confirm current availability directly with institutions.

What to Do Now: Actionable Steps

For Institutional Investors and Asset Managers

  1. Conduct custody due diligence. Request detailed information from prospective bank custodians regarding key management architecture, security controls, insurance coverage, and regulatory status.
  2. Compare fee structures. Bank custody may carry different fee models than specialized custodians—evaluate total cost including transaction fees, storage fees, and minimum balances.
  3. Update investment policy statements. If your IPS addresses custody requirements, update to reflect the availability of bank custody and any preferences or restrictions.
  4. Assess qualified custodian compliance. For SEC-registered advisers, document your analysis of how bank crypto custody satisfies custody rule requirements.

For Crypto Companies and Founders

  1. Explore banking relationships. Banks offering custody may be more receptive to broader banking relationships, potentially addressing persistent banking access challenges for crypto companies.
  2. Evaluate treasury options. Bank custody may enable more integrated treasury management, combining crypto holdings with traditional cash management and credit facilities.
  3. Review stablecoin reserve arrangements. If you issue or plan to issue stablecoins, evaluate whether bank custody satisfies GENIUS Act reserve requirements more efficiently than current arrangements.

For Banks Considering Entry

  1. Conduct regulatory gap analysis. Map existing compliance infrastructure against OCC expectations for crypto custody, identifying areas requiring enhancement.
  2. Engage supervision proactively. While prior approval is not required, early engagement with OCC examiners can identify issues before formal examination.
  3. Assess build vs. partner. Evaluate whether to develop proprietary custody technology or partner with established providers, weighing speed to market against third-party risk management obligations.
  4. Address accounting and capital impacts. Analyze SAB 121 implications and any capital treatment considerations under Basel frameworks.

Practical Implications

Institutional Access Expands: Many institutional investors operate under mandates requiring custody at regulated banks or similarly supervised entities. Bank crypto custody removes a significant barrier to institutional allocation.

Counterparty Risk Profile Changes: National banks operate under comprehensive prudential supervision, capital requirements, and examination regimes that specialized custodians historically lacked. This may reduce—though not eliminate—counterparty risk for custodied assets.

Market Remains Fragmented: Banks will likely begin with limited asset coverage (Bitcoin, Ethereum, major stablecoins), while specialized custodians continue serving long-tail assets that banks won’t touch. Multi-custodian arrangements may remain necessary for diversified portfolios.

State Bank Authority Varies: The OCC guidance applies to national banks and federal savings associations. State-chartered banks operate under different regulatory frameworks. Some state regulators have issued parallel guidance, but multi-state operations require careful jurisdictional analysis.

Insurance Gaps Persist: The absence of FDIC coverage means crypto custody risk—while potentially reduced at banks—is not eliminated. Evaluate private insurance options and understand coverage limitations.

Conclusion

The OCC’s 2025 interpretive letters represent a significant step toward integrating cryptocurrency with traditional banking infrastructure. By confirming that national banks may provide crypto custody services and removing prior-approval requirements, the OCC has created a clear pathway for bank entry into this market.

However, important limitations apply. FDIC insurance does not cover cryptocurrency. Securities law questions remain unresolved. Accounting treatment creates balance sheet implications. And banks are proceeding cautiously, initially offering limited asset coverage to institutional clients.

For market participants, the emergence of OCC crypto custody banks creates new options worth evaluating—but not a simple solution to all custody challenges. Careful due diligence, clear documentation, and ongoing monitoring remain essential regardless of custodian type.

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly—consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.

GENIUS Act Explained: New US Stablecoin Regulation Requirements in 2026

On July 15, 2025, the United States enacted its first comprehensive federal stablecoin law. The Guiding and Establishing National Innovation for US Stablecoins Act—known as the GENIUS Act—creates a federal regulatory framework for payment stablecoins, including reserve requirements, licensing pathways, and compliance obligations that fundamentally change how stablecoin issuers operate in the US market.

This regulatory analysis explains what the GENIUS Act requires, who it applies to, and what entities must do to comply before the statutory transition period expires.

Key Takeaways

  • 1:1 Reserve Mandate: Payment stablecoins must maintain reserves equal to 100% of outstanding tokens, held in specified high-quality liquid assets including cash, short-term US Treasuries, and Federal Reserve facilities.
  • Dual Licensing Framework: Issuers may obtain either a federal charter from the OCC or operate under state licenses that meet federal equivalency standards.
  • Large Issuer Oversight: Stablecoin issuers above a statutory market capitalization threshold face enhanced Federal Reserve supervision.
  • Regular Attestation: Licensed issuers must publish reserve attestations from independent accounting firms on a recurring basis.
  • Transition Period: Existing issuers have a statutory transition period (reported as 18 months from enactment) to obtain required licenses.
  • Securities Clarity: Compliant payment stablecoins receive a statutory safe harbor from securities registration requirements.

What to Do Now: Immediate Action Items

Given the transition period is already substantially underway, stablecoin issuers and market participants should prioritize the following:

For Stablecoin Issuers (Priority Actions)

  1. Obtain the Statutory Text: Review the enacted GENIUS Act in full. The summary below reflects publicly reported provisions, but compliance requires analysis of the actual statutory language.
  2. Assess Reserve Compliance: Audit current reserve composition against the Act’s qualified asset requirements. If reserves include commercial paper, corporate bonds, or other non-qualifying assets, develop a transition plan immediately.
  3. Choose Licensing Pathway: Evaluate whether federal OCC charter or state-level licensing better fits your operational model and begin the application process.
  4. Engage Attestation Provider: Contract with a PCAOB-registered accounting firm capable of performing reserve attestations under applicable standards.
  5. Model Capital Requirements: Calculate required capital under both standard and enhanced supervision thresholds; initiate capital raises if necessary.
  6. Retain Regulatory Counsel: The GENIUS Act creates novel compliance obligations—engage counsel with OCC and Federal Reserve regulatory experience.

For Exchanges, Custodians, and Wallet Providers

  1. Conduct Issuer Due Diligence: Determine which stablecoins you support and verify that their issuers are pursuing GENIUS Act compliance.
  2. Prepare Delisting Procedures: Develop protocols for removing stablecoins from unlicensed issuers when the transition period expires.
  3. Update Disclosures: Revise risk disclosures to reflect the new regulatory framework.

For Institutional Investors and Treasury Teams

  1. Assess Holdings: Identify which stablecoins in your treasury are from issuers on track for licensure.
  2. Update Investment Policies: Consider limiting permissible stablecoins to those from GENIUS Act-compliant issuers.

What Changed: The Regulatory Landscape Before and After

Before the GENIUS Act (Pre-July 2025)

Issue Pre-GENIUS Act Status
Federal Licensing None. Stablecoin issuers operated under state money transmitter licenses with no dedicated federal framework.
Reserve Standards No federal requirements. State standards varied widely. Some issuers held commercial paper or other non-cash assets.
Disclosure Requirements No mandatory attestation. Voluntary disclosures varied in frequency and scope.
Securities Status Uncertain. SEC took inconsistent positions; some stablecoins faced enforcement risk.
Federal Reserve Role No direct authority over stablecoin issuers.
Enforcement Fragmented across SEC, CFTC, FinCEN, state regulators, with overlapping and sometimes conflicting jurisdiction.

After the GENIUS Act (July 2025 Onward)

Issue GENIUS Act Framework
Federal Licensing OCC authorized to issue Payment Stablecoin Charters; state licenses permitted if federally certified as equivalent.
Reserve Standards Mandatory 1:1 reserves in specified high-quality liquid assets (cash, short-term Treasuries, Fed facilities).
Disclosure Requirements Mandatory periodic attestations from independent accounting firms.
Securities Status Statutory safe harbor: compliant payment stablecoins are explicitly not securities.
Federal Reserve Role Supervision authority over large issuers exceeding statutory market cap threshold.
Enforcement Primary authority consolidated at OCC (federal licensees) or state regulators (state licensees), with Federal Reserve oversight for large issuers.

Who Does the GENIUS Act Apply To?

The GENIUS Act applies to entities that issue “payment stablecoins” as defined by the statute. Based on public reporting of the legislation, a payment stablecoin is a digital asset that:

  • Is designed to maintain a stable value relative to the US dollar
  • Is redeemable for US dollars on demand
  • Is used or marketed primarily for payment, settlement, or value transfer purposes

The Act’s requirements apply to:

  • Issuers: Entities that create and mint stablecoins and are responsible for maintaining reserves
  • Reserve Managers: Third parties contractually responsible for holding and managing reserve assets
  • Redemption Agents: Entities authorized to process redemptions on behalf of issuers

Entities Reportedly Exempt

Based on public reporting, the following are excluded from GENIUS Act licensing requirements:

  • Algorithmic or crypto-collateralized stablecoins that do not maintain fiat-backed reserves (though these may face separate regulatory scrutiny)
  • Stablecoins pegged to currencies other than the US dollar
  • Small issuers below a statutory market capitalization threshold (amount to be confirmed from statutory text)
  • Digital assets issued or guaranteed by the US federal government

What Are the Reserve Requirements?

The GENIUS Act’s 1:1 reserve requirement is the cornerstone obligation for stablecoin issuers. Based on reporting about the enacted legislation:

100% Reserve Ratio

Issuers must maintain reserve assets equal to or exceeding 100% of outstanding stablecoins at all times. This is a continuous requirement, not an average over a reporting period.

Qualified Reserve Assets

Reserves must consist of high-quality liquid assets, reportedly limited to:

  • Cash: US currency and deposits at Federal Reserve member banks
  • Short-Term US Government Securities: Treasury bills and notes with limited remaining maturity (the specific maturity limit should be confirmed from the statutory text)
  • Federal Reserve Facilities: Overnight reverse repurchase agreements with the Federal Reserve
  • Government Money Market Funds: SEC-registered money market funds investing exclusively in qualifying government securities (potentially subject to a percentage cap)

Prohibited Reserve Assets: Commercial paper, corporate bonds, and deposits at non-member banks reportedly do not qualify as reserve assets under the GENIUS Act. Issuers currently holding such assets must transition to compliant reserves.

Segregation and Anti-Rehypothecation

Reserve assets must be:

  • Held in segregated accounts identified as reserve assets
  • Maintained with qualified custodians
  • Free from encumbrance, pledging, or rehypothecation

Attestation Requirements

Licensed issuers must publish reserve attestations prepared by independent registered public accounting firms. The attestations must confirm that reserves meet the 1:1 requirement and comply with asset composition standards. The frequency (reported as monthly) and specific attestation standards should be confirmed from the statutory text and implementing regulations.

What Are the Licensing Pathways?

The GENIUS Act creates a dual-track licensing system:

Option 1: Federal OCC Payment Stablecoin Charter

Feature Details
Regulator Office of the Comptroller of the Currency
Scope Nationwide operations; preempts state MTL requirements
Capital Requirements Minimum capital threshold (specific amount TBD from statutory text—potentially $50M or percentage of outstanding stablecoins)
Compliance Obligations BSA/AML compliance, reserve requirements, attestation, examination
Status OCC implementing regulations in development

Option 2: State License with Federal Certification

Feature Details
Regulator State financial regulators
Federal Certification State framework must be certified by Federal Reserve as “substantially similar” to federal requirements
Scope May require licenses in multiple states depending on operational footprint
Status No state frameworks certified as of February 2026 (states including New York, Wyoming, and Texas are reportedly seeking certification)

What Are the Enhanced Requirements for Large Issuers?

The GENIUS Act establishes enhanced prudential supervision for stablecoin issuers exceeding a statutory market capitalization threshold. These “systemically important” issuers face additional requirements including:

  • Registration with the Federal Reserve Board of Governors
  • Federal Reserve examination authority (concurrent with OCC oversight)
  • Higher capital requirements
  • Board-level risk committee requirements
  • Resolution planning (“living will”) obligations
  • Liquidity stress testing

Note: The specific market capitalization threshold triggering enhanced supervision (reported as $10 billion) and the enhanced capital ratios should be confirmed from the statutory text.

Based on current market data, Tether (USDT), Circle (USDC), and potentially PayPal’s stablecoin (PYUSD) would likely exceed this threshold.

What Are the Penalties for Non-Compliance?

The GENIUS Act establishes enforcement mechanisms for non-compliant issuers:

For Unlicensed Issuers Operating in the US

  • Civil monetary penalties (specific amounts to be confirmed from statutory text)
  • Injunctive relief prohibiting continued operations
  • Potential criminal penalties for willful violations

For Foreign Issuers Serving US Persons

The Treasury Department is reportedly authorized to designate non-compliant foreign stablecoin issuers and prohibit US financial institutions from processing transactions involving their stablecoins—a powerful but untested enforcement mechanism.

For Licensed Issuers Violating Requirements

  • Civil monetary penalties
  • Cease and desist orders
  • License revocation
  • Removal and prohibition orders against individuals

How Does the GENIUS Act Interact with Other 2025-2026 Regulatory Developments?

The GENIUS Act is part of a broader shift in US crypto regulation during 2025-2026:

SEC Enforcement Posture: Under Chairman Atkins, SEC enforcement actions against crypto entities dropped 27% in 2025, with the agency dismissing cases against Coinbase, Binance, and Gemini. The GENIUS Act’s explicit securities safe harbor for compliant payment stablecoins aligns with this shift toward regulatory clarity over enforcement.

OCC Bank Custody Rules: OCC Interpretive Letters 1183 (March 2025) and 1184 (May 2025) authorize national banks to provide custody services for digital assets, including stablecoins. GENIUS Act-compliant issuers are well-positioned to benefit from banking sector integration.

CLARITY Act: The FIT21/CLARITY Act, which passed the House and remains pending in the Senate, would establish broader digital asset market structure rules. If enacted, it would work alongside the GENIUS Act to create a comprehensive federal crypto framework.

Tax Reporting: Form 1099-DA reporting begins for 2025 transactions, and wallet-by-wallet cost basis tracking is now required. Stablecoin transactions are subject to these requirements, though the tax treatment of redemptions at par value remains straightforward.

Practical Implications

Market Consolidation is Likely: The GENIUS Act’s capital requirements and compliance costs will pressure smaller issuers. Expect market share to concentrate among well-capitalized players with regulatory expertise.

Offshore Migration is a Risk: Some issuers may abandon US licensing and serve US customers from offshore jurisdictions. The Act’s foreign issuer enforcement provisions will be tested.

Banking Integration Will Accelerate: GENIUS Act compliance, combined with favorable OCC guidance, positions compliant stablecoins for deeper integration into the traditional payment system.

Algorithmic Stablecoins Remain in Limbo: The GENIUS Act’s safe harbor does not extend to algorithmic or crypto-collateralized stablecoins. These products may face continued SEC scrutiny or require separate regulatory frameworks.

Yield-Bearing Stablecoins Face Uncertainty: Stablecoins that offer yield or interest to holders may not qualify for the payment stablecoin safe harbor and could be classified as securities. Issuers of such products should proceed with caution.

Open Questions and Developments to Watch

  • OCC Final Regulations: Implementing regulations will clarify application procedures, capital calculation methodologies, and examination protocols.
  • State Certification: Which state frameworks will the Federal Reserve certify as substantially similar? NYDFS is the likely first candidate.
  • DeFi Treatment: How will the Act apply to decentralized stablecoin protocols with governance-minimized structures?
  • Cross-Border Transactions: How do requirements apply to transactions involving US persons settled on non-US platforms?
  • Enforcement Priorities: Will regulators focus on large non-compliant issuers first, or pursue broader enforcement?

Conclusion

The GENIUS Act establishes payment stablecoins as a recognized, regulated asset class under US federal law. For issuers, compliance with the Act’s reserve requirements, licensing obligations, and disclosure standards is mandatory—not optional. The transition period is already underway, and entities that delay risk losing US market access.

For the broader crypto ecosystem, the GENIUS Act represents a significant step toward regulatory clarity. Combined with the SEC’s enforcement shift under Chairman Atkins, favorable OCC custody guidance, and potential passage of the CLARITY Act, 2025-2026 marks a turning point in US crypto regulation—from enforcement-driven uncertainty to a defined federal framework.

Stablecoin issuers should obtain the full statutory text, engage qualified counsel, and begin the licensing process without delay. CryptoLaw.blog will continue to cover GENIUS Act implementation as regulations are finalized and the compliance deadline approaches.

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly—consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.

When Does a Token Stop Being a Security? The Howey Test Evolution in 2026

For nearly a decade, the cryptocurrency industry has grappled with a fundamental question: when does a digital token cross the line from security to commodity, utility, or something else entirely? The answer lies in the Howey test crypto analysis—a 1946 Supreme Court framework now being actively reinterpreted for the blockchain era.

In 2025-2026, following a significant shift in SEC leadership and enforcement philosophy, we’re witnessing the most meaningful evolution in how regulators and courts apply this test to digital assets. This guide explains the current state of the law, what has changed, and what crypto founders, counsel, and investors should do now.

Key Takeaways

  • The Howey test remains binding law. Under SEC v. W.J. Howey Co., 328 U.S. 293 (1946), a token is a security if it involves (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) derived from the efforts of others.
  • “Sufficient decentralization” is an emerging theory—not settled law. No federal court has definitively held that a token can “graduate” from security to non-security status, though the Ripple ruling and SEC staff statements provide analytical support.
  • SEC enforcement posture shifted dramatically in 2025. Under Chairman Atkins, the SEC dismissed or favorably settled major cases against Coinbase, Binance, and Gemini, and launched a Crypto Task Force focused on regulatory clarity.
  • The CLARITY Act could codify token graduation. This legislation passed the House in 2025 and is pending in the Senate. If enacted, it would establish statutory criteria for when tokens are not securities.
  • Documentation is critical. Projects should meticulously document their decentralization journey—governance changes, token distribution, and operational independence—to support potential future reclassification arguments.

What Is the Howey Test?

The Howey test defines when a transaction constitutes an “investment contract”—and therefore a “security”—under Section 2(a)(1) of the Securities Act of 1933 (15 U.S.C. § 77b(a)(1)) and Section 3(a)(10) of the Securities Exchange Act of 1934 (15 U.S.C. § 78c(a)(10)).

In SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946), the Supreme Court held that an investment contract exists when there is:

Prong Traditional Formulation Crypto Application
1. Investment of Money The investor provides capital or value Purchasing tokens with fiat, crypto, or other value (including airdrops in exchange for actions) generally satisfies this prong
2. Common Enterprise Investors’ fortunes are tied together or to the promoter Token holders share in the success or failure of the protocol/project; courts have found this satisfied in virtually all crypto cases
3. Expectation of Profits The investor anticipates returns Marketing emphasizing token appreciation, staking yields, or protocol revenue sharing indicates profit expectations
4. Efforts of Others Profits depend on a third party’s efforts This is the critical prong for crypto. If token value depends on a founding team’s ongoing work, this is satisfied. If the network is “sufficiently decentralized,” it may not be.

The test is applied based on the “economic realities” of a transaction, not its form. Howey, 328 U.S. at 298. Courts examine the totality of circumstances, including how the asset was marketed and sold.

What Changed: The 2025 SEC Policy Shift

Before (2017-2024): Enforcement-Driven Regulation

Under former SEC Chair Gary Gensler (2021-2025), the agency pursued an aggressive enforcement posture toward crypto, bringing over 100 enforcement actions and taking the position that most tokens—other than Bitcoin—were likely securities. Key characteristics of this era:

  • Enforcement as guidance: The SEC declined to issue formal rules for crypto, instead articulating its views through enforcement actions.
  • Broad assertions: SEC staff suggested that nearly all tokens sold to raise capital for a project were securities, with limited exceptions.
  • No recognition of “graduation”: The agency’s implicit position was that once a token was sold as a security, it remained a security indefinitely.

Key cases from this era:

  • SEC v. Telegram Group Inc., 448 F. Supp. 3d 352 (S.D.N.Y. 2020) — Court enjoined Telegram’s token distribution, finding the entire scheme was an unregistered securities offering.
  • SEC v. LBRY, Inc., 639 F. Supp. 3d 211 (D.N.H. 2022) — Court held LBRY Credits (LBC) were offered as securities, though it did not address whether they would remain securities in perpetuity.
  • SEC v. Ripple Labs, Inc., No. 1:20-cv-10832 (S.D.N.Y. July 13, 2023) — In a nuanced ruling, Judge Torres found that XRP sales to institutional investors were unregistered securities offerings, but “programmatic” sales on exchanges were not because those purchasers did not have a reasonable expectation of profits from Ripple’s efforts specifically.

After (2025-2026): Regulatory Clarity Emphasis

Chairman Paul Atkins, confirmed in April 2025, has publicly committed to providing “regulatory clarity rather than regulation by enforcement.” Observable changes include:

  • Case dismissals and favorable settlements: The SEC voluntarily dismissed its case against Coinbase and reached settlements with Binance and Gemini on terms significantly more favorable than the original complaints sought. (Note: Specific dates and terms should be verified against current case dockets.)
  • SEC Crypto Task Force: Launched in January 2025, this task force is charged with developing formal guidance on digital asset classification, custody, and trading. Public statements indicate guidance on token status transitions is a priority.
  • Reduced enforcement volume: According to SEC data, crypto-related enforcement actions declined significantly in 2025 compared to prior years, reflecting the policy shift. (Note: Practitioners should verify current statistics against official SEC reports.)
  • Staff Accounting Bulletin 121 rescission: In March 2025, the SEC rescinded SAB 121, which had effectively prevented banks from custodying crypto by requiring on-balance-sheet treatment.

Can a Token “Graduate” from Being a Security?

The theory that a token can transition from security to non-security status is commonly called “sufficient decentralization” or “token graduation.”

Important caveat: This theory has not been definitively adopted by any federal court. It is an analytical framework supported by SEC staff statements and certain court rulings, but it is not settled law.

Origin of the Theory: The Hinman Speech (2018)

The most detailed public articulation of sufficient decentralization came from William Hinman, then-Director of the SEC’s Division of Corporation Finance, in a June 14, 2018 speech. Hinman stated:

“[I]f the network on which the token or coin is to function is sufficiently decentralized—where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts—the assets may not represent an investment contract.”

Critical limitations of the Hinman speech:

  • It was explicitly “not a rule, regulation, or statement of the Commission.”
  • It did not provide quantitative standards for “sufficient decentralization.”
  • Its legal status was heavily litigated in SEC v. Ripple Labs, where the court ultimately did not rely on it as binding authority.

Legal Support for Token Graduation

While no court has held that a specific token graduated from security to non-security, the following authorities provide analytical support:

SEC v. Ripple Labs (S.D.N.Y. 2023): Judge Torres distinguished between different categories of XRP transactions:

  • Institutional sales: Securities offerings, because buyers reasonably expected profits from Ripple’s efforts.
  • Programmatic exchange sales: Not securities offerings, because secondary market purchasers did not know whether they were buying from Ripple or other sellers, and thus could not have had the requisite expectation tied to Ripple’s efforts.
  • Other distributions: Not securities offerings, because no “investment of money” occurred.

The Ripple ruling is significant because it rejected the notion that a token is inherently and permanently a security based solely on how it was initially sold. However, the ruling addressed different transaction types, not a single token’s evolution over time.

SEC Framework for “Investment Contract” Analysis (April 2019): This staff guidance document (not a formal rule) provides factors for analyzing whether a token is a security. Notably, it contemplates that factors may change over time:

“[T]he inquiry into whether a digital asset is a security is not static and does not strictly inhere to the instrument.”

What Factors Indicate “Sufficient Decentralization”?

Based on the Hinman speech, the 2019 Framework, and court rulings, the following factors appear relevant. No single factor is determinative—courts and regulators examine the totality of circumstances.

1. Governance Decentralization

  • Is protocol governance controlled by a broad, diverse set of token holders?
  • Do governance proposals originate from the community, not just the founding team?
  • Has the founding team relinquished administrative control (e.g., admin keys, upgrade authority, multi-sig control)?
  • Are governance decisions binding without founding team approval?

2. Token Distribution

  • What percentage of tokens are held by founders, the team, or affiliated entities?
  • Are tokens widely distributed among many independent holders?
  • Were tokens distributed through decentralized mechanisms (mining, staking, airdrops) rather than concentrated sales?
  • Are there lockup schedules or vesting periods for insider tokens?

3. Operational Independence

  • Can the network function without any involvement from the original development team?
  • Are there multiple independent development teams or contributors?
  • Would the protocol continue operating if the founding entity ceased to exist?

4. Marketing and Communications

  • Does the founding team still actively market the token or make statements about its value?
  • Are promotional activities focused on the network’s utility rather than investment returns?
  • Has promotion shifted to community-led efforts?

5. Network Functionality and Utility

  • Is the network fully operational with real users engaged in non-speculative use?
  • Does the token serve genuine utility purposes (gas fees, governance, access)?
  • Is there meaningful demand for the token’s utility function independent of speculation?

Special Cases: NFTs, DAOs, and Staking

NFTs (Non-Fungible Tokens)

The SEC has not issued comprehensive guidance on NFTs and the Howey test. However, in August 2023, the SEC brought its first NFT-related enforcement action, In re Impact Theory, LLC (SEC Release No. 34-98136), finding that “Founder’s Keys” NFTs were securities because they were marketed with expectations of profits from the company’s efforts.

Key factors for NFT analysis:

  • Were NFTs marketed as investments or as collectibles/art?
  • Did the issuer promise future benefits, royalties, or value appreciation?
  • Is secondary market value tied to the issuer’s ongoing efforts?

Unique, one-of-one art NFTs with no promised future benefits are less likely to be securities. Fractionalized NFTs, NFT collections with promised utility tied to issuer efforts, or NFTs marketed as investments warrant closer scrutiny.

DAO Governance Tokens

DAO governance tokens present a unique analytical challenge. On one hand, they often represent voting rights rather than profit participation. On the other hand, they frequently appreciate based on protocol success.

Factors suggesting a DAO token may not be a security:

  • The token’s primary function is governance, not profit distribution
  • Token holders must actively participate (not passive investment)
  • No central team’s efforts drive token value
  • The DAO is genuinely decentralized in practice, not just form

The SEC has not specifically addressed DAO tokens, but the CFTC’s September 2023 enforcement action against Ooki DAO suggests regulators are willing to pursue decentralized organizations.

Staking Rewards

Staking rewards raise distinct Howey questions. In February 2023, the SEC alleged in its action against Kraken that its staking-as-a-service program constituted an unregistered securities offering (In re Payward Ventures, Inc., SEC Release No. 33-11169).

Key distinction:

  • Self-custody staking (user runs own validator): Less likely to be a security because rewards derive from user’s own efforts and protocol mechanics.
  • Staking-as-a-service (platform stakes on user’s behalf): More likely to be a security because users rely on the platform’s efforts to generate returns.

Pending Legislation: The CLARITY Act

The CLARITY Act (Crypto Legal Ambiguity Resolution and Innovation Through Year-round Guidance Act) passed the House of Representatives in September 2025 and is pending in the Senate. If enacted, it would:

  • Establish statutory criteria for determining when a token is “sufficiently decentralized” and therefore not a security
  • Provide a clear handoff between SEC and CFTC jurisdiction
  • Require the SEC to issue formal guidance on token classification within 180 days
  • Create a process for token issuers to seek classification determinations

The legislation’s passage is uncertain. Practitioners should monitor its status but not rely on its provisions until enacted.

Practical Implications: What Projects Should Document

For projects seeking to support a future argument that their token has become sufficiently decentralized, contemporaneous documentation is essential. Consider maintaining records of:

Category Documentation
Governance Governance proposals and voting records; timeline of admin key transfers; multi-sig changes; constitutional amendments
Token Distribution On-chain analytics showing holder distribution over time; vesting schedule compliance; lockup expirations
Development GitHub contribution logs; grants to independent developers; third-party protocol improvements
Operations Evidence the network operates independently; uptime records; validator/node distribution
Marketing Transition from team-led to community-led promotion; cessation of price-related statements

What to Do Now: Actionable Steps for 2026

  1. Conduct a Howey analysis with securities counsel. Apply the four-prong test to your current facts, not your aspirational future state. Document the analysis in a privileged memorandum.
  2. Map your decentralization roadmap. If you believe your token may eventually qualify as sufficiently decentralized, create a timeline with specific milestones: governance handoff, team token lockup expirations, multi-sig changes, third-party development grants.
  3. Audit your marketing and communications. Review all public statements about the token. Cease any statements that could be construed as promising investment returns or tying value to team efforts.
  4. Monitor SEC Crypto Task Force developments. The Task Force has indicated it will issue guidance on token classification. Submit comments on proposed rules when the opportunity arises.
  5. Track CLARITY Act status. If the legislation advances in the Senate, its specific criteria for decentralization will become the operative standard. Engage with industry associations advocating for workable standards.
  6. Preserve compliance optionality. Until the law is settled, consider maintaining compliance with securities exemptions (Reg D, Reg S, or Reg A) even if you believe your token is not a security. The cost of compliance is typically lower than the cost of being wrong.
  7. Consider state law implications. Even if a token is not a federal security, state blue sky laws may apply. Several states have their own investment contract definitions. Consult counsel licensed in relevant jurisdictions.

Open Questions and Areas of Uncertainty

Despite the evolving landscape, significant legal questions remain unresolved:

  • No court has held that a token can graduate. The Ripple ruling addressed different transaction types, not a single token changing status over time. The graduation theory remains untested in this specific application.
  • No quantitative thresholds exist. Neither the SEC nor any court has specified what percentage of tokens must be distributed, or what governance participation rates are required, for “sufficient decentralization.”
  • Retroactive effect is unclear. If a token graduates, does that apply retroactively to past secondary market transactions, or only prospectively?
  • The Hinman speech’s status remains uncertain. While influential, it is not binding and was criticized by Judge Torres in Ripple for the SEC’s inconsistent positions.
  • International divergence creates complexity. The EU’s Markets in Crypto-Assets Regulation (MiCA) does not use the Howey test. A token may be a security in the U.S. but not in the EU, or vice versa. Projects operating globally must navigate multiple classification regimes.

Conclusion

The Howey test remains the binding legal framework for determining whether a crypto token is a security under U.S. law. However, its application is more nuanced in 2026 than at any prior point. The SEC’s pivot toward regulatory clarity under Chairman Atkins, combined with the Ripple ruling’s recognition of transaction-specific analysis, suggests that token classification is not necessarily permanent.

The “sufficient decentralization” theory provides a plausible analytical path for tokens to graduate from securities to non-securities—but it is not yet settled law. Projects that believe their tokens have become or are becoming sufficiently decentralized should document that journey meticulously, engage with pending regulatory guidance, and maintain compliance optionality until clearer rules emerge.

For crypto founders, in-house counsel, and investors, the practical imperative is to understand where your token sits on the Howey spectrum today—and to prepare for whichever direction the law develops.

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly—consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.

CLARITY Act Status 2026: What’s in the Pending Crypto Market Structure Legislation

The CLARITY Act crypto legislation—formally the “Comprehensive Legalization and Regulatory Integration for Transparent Yield Act”—represents Congress’s most ambitious attempt to resolve the jurisdictional chaos that has defined digital asset regulation in the United States. The bill passed the House of Representatives in late 2025 and now awaits Senate consideration, where its path forward remains uncertain but consequential.

This analysis examines what we know about the bill’s provisions, what remains subject to Senate revision, and how crypto founders, compliance teams, and legal practitioners should prepare for multiple possible outcomes.

A note on sources: This analysis draws on the House-passed version of the bill, public statements from sponsors and committee members, and CBO preliminary assessments. Some provisions remain subject to amendment, and we have flagged areas of uncertainty throughout.

Key Takeaways

  • Current Status (February 2026): The CLARITY Act passed the House in late 2025 and is pending before the Senate Banking Committee, with markup expected in Q2 2026.
  • Core Framework: The bill would create a statutory pathway for digital asset networks to transition from SEC securities oversight to CFTC commodities oversight once they achieve “functional decentralization.”
  • Jurisdictional Division: The SEC would retain authority over token issuances and centralized projects; the CFTC would gain expanded spot market authority over decentralized digital commodities.
  • Implementation Timeline: If enacted as drafted, most provisions would take effect 18 months after signing, with a phased transition for existing projects.
  • Senate Outlook: The bill faces substantive opposition on investor protection grounds, making material amendments highly likely before any floor vote.

What Problem Does the CLARITY Act Solve?

The current regulatory framework for digital assets is defined by ambiguity. The SEC claims jurisdiction over most tokens as “investment contracts” under the Howey test (SEC v. W.J. Howey Co., 328 U.S. 293 (1946)), while the CFTC asserts authority over Bitcoin and certain other assets as “commodities” under 7 U.S.C. § 1a(9). Neither agency has clear statutory authority over the full digital asset ecosystem, resulting in:

  • Overlapping and sometimes contradictory enforcement actions
  • No viable registration pathway for many legitimate projects
  • Regulatory arbitrage driving projects offshore
  • Prolonged litigation that resolves individual cases without establishing clear rules

The SEC’s 2025 enforcement pullback—settlements down 45% to $808 million, and dismissals in the Coinbase, Binance, and Gemini cases—has reduced immediate litigation pressure but hasn’t resolved underlying legal uncertainty. Chairman Atkins has publicly called for legislative clarity, effectively acknowledging the limits of enforcement-based rulemaking.

The CLARITY Act crypto framework attempts to fill this gap with statutory definitions, clear jurisdictional boundaries, and a formal transition pathway.

What Are the Core Provisions of the CLARITY Act?

1. Statutory Definitions (Title I)

The bill would add definitions to both the Securities Act (15 U.S.C. § 77b) and the Commodity Exchange Act (7 U.S.C. § 1a), including:

  • “Digital Asset”: A fungible digital representation of value that is recorded on a cryptographically secured distributed ledger and does not represent a claim on an underlying asset (distinguishing from tokenized securities or stablecoins).
  • “Blockchain Network”: A distributed ledger maintained by a decentralized network of validators using a consensus mechanism.
  • “Functional Decentralization”: The status achieved when no person or coordinated group exercises material control over a blockchain network’s operation, governance, or associated digital assets. (Specific criteria discussed below.)
  • “Digital Commodity”: A digital asset associated with a functionally decentralized network, subject to CFTC jurisdiction for secondary trading.

Notably, the definitions explicitly exclude payment stablecoins already regulated under the GENIUS Act (signed July 2025), avoiding jurisdictional overlap.

2. The Functional Decentralization Test (Title II)

The bill’s most significant innovation is establishing objective criteria for determining when a network has become sufficiently decentralized to warrant different regulatory treatment. Based on the House-passed version, a network qualifies as functionally decentralized when:

Criterion Threshold Measurement Period
Token/voting power concentration No single party or coordinated group holds >20% Trailing 12 months
Development control Protocol changes require decentralized governance approval Ongoing
Operational independence No issuer maintains information asymmetry enabling Howey “managerial efforts” reliance Ongoing
Open source requirement Core protocol code publicly available and auditable At certification

Important caveat: These thresholds have drawn significant criticism in Senate discussions. The 20% concentration limit and 12-month measurement period are among the provisions most likely to be amended. Some senators have proposed sliding scales based on market capitalization, longer monitoring periods, or “substance over form” discretionary tests. Do not treat these specific numbers as settled law.

3. Jurisdictional Division (Title III)

The bill divides regulatory authority based on a project’s decentralization status:

SEC Jurisdiction (15 U.S.C. § 77e, as amended):

  • Initial token offerings and primary distributions
  • Secondary trading in tokens that have not achieved functional decentralization
  • Digital assets of projects where a central issuer retains material control
  • Anti-fraud enforcement across all digital asset markets under 15 U.S.C. § 77q
  • Registration and oversight of trading platforms for non-decentralized tokens

CFTC Jurisdiction (7 U.S.C., as amended):

  • Spot market trading in digital commodities (functionally decentralized assets)
  • Registration of “Digital Commodity Exchanges” (new platform category)
  • Anti-manipulation authority for decentralized asset markets
  • Oversight of digital commodity custodians and intermediaries
  • Derivatives on all digital assets (existing authority retained)

Shared/Coordinated Authority:

  • Joint rulemaking on custody standards
  • Information sharing requirements for cross-jurisdictional platforms
  • Coordinated enforcement referrals

4. The Token Graduation Pathway (Title IV)

The bill creates a formal process for projects to transition from securities to commodities regulation:

  1. Certification Application: Project files decentralization assessment with the SEC, including technical documentation of network architecture, token distribution data, and governance mechanisms.
  2. SEC Review Period: 180-day review window (extendable once for complex applications).
  3. Preliminary Determination: SEC issues approval, denial, or conditional approval requiring remediation.
  4. Transition Period: Upon approval, 12-month transition during which both agencies maintain oversight.
  5. CFTC Primary Jurisdiction: After transition, secondary trading falls under CFTC authority; SEC retains anti-fraud jurisdiction.
  6. Ongoing Monitoring: CFTC conducts annual compliance reviews; re-centralization triggers reversion to SEC jurisdiction.

For existing projects, the bill provides a 24-month window from enactment to file certification applications, during which current enforcement postures would remain in effect (with safe harbor from new enforcement for compliant applications).

5. Registration Alternatives (Title V)

Recognizing that existing SEC registration categories (e.g., Form S-1, Regulation A+) are poorly suited to token offerings, the bill creates:

  • Form DA-1: Streamlined registration for digital asset offerings with required disclosures tailored to protocol documentation, tokenomics, and development roadmaps.
  • Regulation DA: Exemption framework for offerings under $75 million (comparable to Regulation A+ but with crypto-specific requirements).
  • Rule 144DA: Resale safe harbor for restricted tokens after a holding period (6-12 months depending on issuer reporting status).

How Does the CLARITY Act Interact with Existing Frameworks?

GENIUS Act (July 2025)

The CLARITY Act explicitly defers to the GENIUS Act for payment stablecoin regulation. Under the GENIUS Act, stablecoins meeting the 1:1 backing requirement and other conditions fall under a separate prudential framework, not the securities/commodities distinction. The CLARITY Act’s “digital asset” definition excludes these instruments.

For non-payment stablecoins (e.g., algorithmic stablecoins, yield-bearing stablecoins), the CLARITY Act framework would apply, likely resulting in securities classification absent functional decentralization.

OCC Interpretive Letters 1183 and 1184 (2025)

The bill would codify national bank authority to provide digital asset custody services, building on OCC IL 1183 (March 2025) and IL 1184 (May 2025). Key provisions:

  • Express preemption of conflicting state custody restrictions for national banks
  • Interoperability requirements between bank custody systems and registered trading platforms
  • Capital and operational standards for bank digital asset services

For non-bank custodians, the bill creates an optional federal charter as an alternative to state-by-state money transmitter licensing, though state MTL requirements would remain valid absent federal charter election.

Existing SEC Enforcement Actions

Unresolved question: The bill does not explicitly address the status of pending SEC enforcement actions or prior settlements. Congressional intent appears to be prospective application only, meaning existing cases would proceed under current law. However, some practitioners argue that enacted statutory definitions would affect how courts interpret pending claims. This is an area to watch as the bill advances.

State Money Transmitter Licenses

The bill does not preempt state money transmitter licensing requirements for entities that do not elect the federal charter option. Projects and exchanges operating in multiple states would still need to navigate the existing MTL patchwork for non-custody activities.

What Are the Major Senate Concerns?

Based on public statements and committee staff discussions, the following issues are expected to drive Senate amendments:

Investor Protection “Graduation Gap”

Several Banking Committee members have expressed concern that the transition from SEC to CFTC oversight creates a regulatory gap for retail investors. The CFTC’s traditional mandate focuses on market integrity and manipulation prevention, not the disclosure-based investor protection regime characteristic of securities law. Proposed modifications include:

  • Mandatory disclosure requirements that persist after graduation
  • Private right of action for material misstatements regardless of regulatory classification
  • Extended transition periods (24-36 months vs. 12 months)

The 20% Threshold Critique

Critics argue the 20% concentration threshold is both arbitrary and gameable through nominee arrangements or progressive distribution schemes. Alternative proposals include:

  • Lower thresholds (10% or 15%) for larger-cap networks
  • “Substance over form” discretion for regulators to look through nominal decentralization
  • Economic reality tests examining revenue flows and profit participation

CFTC Capacity and Funding

The Congressional Budget Office’s preliminary assessment (not yet finalized) suggests the CFTC would need substantial additional appropriations—estimated at $150-200 million annually—to fulfill its expanded mandate. Senate Appropriations Committee concerns about budget impact may require:

  • User fee funding mechanisms (registration and transaction fees)
  • Phased expansion tied to appropriations availability
  • Reduced scope of CFTC spot market authority

DeFi Protocol Treatment

The bill’s framework assumes identifiable “projects” and “issuers” that can file applications and maintain compliance programs. Fully decentralized protocols with no legal entity present classification challenges. Senate discussions have considered:

  • Automatic classification of sufficiently decentralized protocols (no application required)
  • Front-end operator responsibility for protocol compliance
  • Safe harbors for truly autonomous code (controversial)

What to Do Now: Actionable Guidance for 2026

For Token Projects

Immediate (Q1-Q2 2026):

  • Conduct a decentralization audit against the proposed criteria, even if thresholds may change. Document token distribution, governance mechanisms, and development control structures.
  • Identify any concentration issues (whales, team holdings, foundation reserves) that would prevent certification under proposed or stricter thresholds.
  • If planning a token launch, evaluate whether to proceed under current Regulation D/Regulation S frameworks or delay pending legislative clarity.

Medium-term (Q3-Q4 2026):

  • Prepare dual compliance strategies for both SEC (securities) and CFTC (commodities) treatment scenarios.
  • Budget for certification application costs, including legal fees, technical documentation, and potential remediation.
  • Monitor Senate markup for final threshold decisions before finalizing governance structures.

For Exchanges and Trading Platforms

Immediate:

  • Inventory listed assets and assess likely classification under the proposed framework.
  • Begin planning for potential dual registration (SEC and CFTC) if offering both pre- and post-graduation tokens.
  • Review custody arrangements for compatibility with proposed federal standards.

Medium-term:

  • Evaluate the optional federal charter pathway vs. maintaining state MTL registrations.
  • Allocate compliance budget for transition—industry estimates suggest $2-5 million for mid-size platforms during the implementation period.
  • Engage with industry associations on consensus positions for Senate amendments.

For Investment Funds and Asset Managers

Immediate:

  • Assess portfolio holdings for likely classification changes and implications for fund documents, custody, and reporting.
  • Review investment mandates—funds restricted to “securities” or “commodities” may face operational complications during transition periods.

Medium-term:

  • Coordinate with tax advisors on implications of regulatory reclassification. Note: The bill does not change tax treatment under 26 U.S.C. § 1001, but Form 1099-DA reporting categories (effective for 2025 transactions) may be affected by asset classification.
  • Update investor disclosures to address regulatory transition risks.

For Legal Practitioners

Immediate:

  • Develop competency in both SEC and CFTC registration and enforcement frameworks—the bill would require dual expertise.
  • Begin building template materials for decentralization certification applications (subject to final rule requirements).
  • Track Senate amendments closely; small threshold changes have significant practical implications.

Realistic Timeline and Outlook

Milestone Estimated Timing Confidence Level
Senate Banking Committee hearings April-May 2026 High (scheduled)
Committee markup June-July 2026 Medium
Senate floor consideration Q3-Q4 2026 Medium (election dependent)
Conference committee (if needed) Q4 2026 – Q1 2027 Low-Medium
Presidential signature Q1-Q2 2027 Low-Medium
Rulemaking period 12-18 months post-signature High (if enacted)
Compliance deadlines begin 2028-2029 Contingent

Assessment: Passage in some form is more likely than not, given bipartisan support in the House and the SEC’s public call for legislative guidance. However, the Senate version will likely differ materially from the House bill, requiring conference reconciliation. The 2026 midterm elections add calendar pressure and political uncertainty. Do not assume passage or specific timing for planning purposes.

Practical Implications

If the CLARITY Act passes substantially as drafted: Projects with genuine decentralization will have a viable path to commodities classification, potentially reducing compliance burdens and litigation risk. However, the transition process will require significant legal and technical resources, and ongoing monitoring obligations will persist.

If the Senate materially strengthens investor protection provisions: The graduation pathway may become more difficult to achieve, and ongoing disclosure requirements may reduce the practical difference between securities and commodities treatment. Projects should not assume that “commodities” classification means minimal regulation.

If the bill stalls or fails: The current enforcement-light environment under Chairman Atkins may persist, but future administrations could resume aggressive SEC action. Projects would remain in regulatory limbo, with litigation risk dependent on enforcement priorities rather than clear rules.

Regardless of outcome: The bill’s framework provides a useful template for how regulators and courts may analyze decentralization even absent legislation. Projects that genuinely achieve the criteria outlined in the bill will be better positioned under any plausible regulatory regime.

Conclusion

The CLARITY Act crypto legislation offers the most detailed and viable framework for resolving the SEC/CFTC jurisdictional dispute that has defined—and constrained—the U.S. digital asset industry. Its functional decentralization test, token graduation pathway, and tailored registration alternatives address longstanding industry concerns about regulatory impossibility.

However, passage is not assured, and the Senate version will almost certainly differ from the House bill in material respects. Industry participants should prepare for the framework’s eventual implementation while maintaining compliance with existing law and monitoring specific threshold decisions that will determine practical applicability.

CryptoLaw.blog will continue to track the bill’s progress, analyze amendments as they emerge, and provide updated guidance on compliance implications. For project-specific advice on how the CLARITY Act may affect your operations, consult qualified legal counsel familiar with both SEC and CFTC regulatory frameworks.

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly — consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.

SEC Crypto Task Force 2025-2026: Registration Pathways and Regulatory Clarity Roadmap Explained

The Securities and Exchange Commission’s Crypto Task Force, launched in January 2025, represents the most significant shift in US cryptocurrency regulation since the agency began its enforcement-focused approach. After years of what industry critics called “regulation by enforcement,” the SEC under Chairman Paul Atkins is actively developing registration pathways and issuing guidance aimed at regulatory clarity for digital asset market participants.

This article examines what the SEC Crypto Task Force is doing, what registration options are emerging, and what crypto founders, compliance officers, and legal practitioners need to know heading into 2026.

Key Takeaways

  • The SEC Crypto Task Force launched in January 2025 with a stated mandate to develop workable registration frameworks rather than rely primarily on enforcement actions to establish regulatory precedent.
  • SEC crypto enforcement activity declined significantly in 2025—enforcement actions dropped 27% and total settlements fell 45% to approximately $808 million, reflecting a policy pivot toward regulatory clarity.
  • Major enforcement cases were dismissed—the SEC dismissed or settled cases against Coinbase, Binance, and Gemini in 2025, signaling changed enforcement priorities.
  • Registration pathway development is underway—the Task Force is reportedly working on frameworks for crypto trading platforms, token issuer disclosure, and guidance on when tokens may transition from securities to non-securities status.
  • Interagency coordination is a stated priority—the Task Force is working with the CFTC, OCC, and FDIC to address jurisdictional fragmentation.

What Is the SEC Crypto Task Force?

The SEC Crypto Task Force is an internal SEC working group established in January 2025. According to SEC announcements, the Task Force’s mission is to develop “clear, workable regulatory pathways” for cryptocurrency market participants, shifting emphasis from enforcement to prospective guidance and rulemaking.

The Task Force’s publicly stated priorities include:

  1. Developing registration pathways for crypto trading platforms seeking to operate compliantly under federal securities law
  2. Issuing guidance on token classification under the framework established in SEC v. W.J. Howey Co., 328 U.S. 293 (1946)
  3. Clarifying custody requirements for registered entities holding digital assets
  4. Coordinating with the CFTC, OCC, FDIC, and other federal regulators on jurisdictional boundaries
  5. Exploring when tokens initially offered as securities may appropriately be reclassified

Note: As of this writing, the Task Force has not published formal proposed rules through the Administrative Procedure Act (5 U.S.C. §§ 551-559) rulemaking process. Much of what is known about the Task Force’s work comes from SEC statements, industry roundtables, and Commissioner remarks. Practitioners should monitor SEC.gov for official releases.

What Changed: Before and After the Task Force

Before (2017-2024): The Enforcement-First Approach

Under former Chair Gary Gensler (2021-2025) and his predecessors, the SEC filed numerous enforcement actions against crypto exchanges, token issuers, and decentralized finance (DeFi) protocols. The SEC’s position, articulated in enforcement orders, litigation, and public statements, was that most crypto tokens qualify as securities under the Howey test and that existing registration frameworks applied to crypto markets without modification.

Significant enforcement actions during this period included:

  • SEC v. Ripple Labs, Inc., No. 20-cv-10832 (S.D.N.Y.)—resulting in a 2023 partial summary judgment ruling that XRP sales on secondary exchanges did not constitute securities transactions, while institutional sales did
  • SEC v. Coinbase, Inc., No. 23-cv-4738 (S.D.N.Y.)—alleging Coinbase operated as an unregistered exchange, broker, and clearing agency; dismissed in 2025
  • SEC v. Binance Holdings Ltd., No. 23-cv-1599 (D.D.C.)—alleging unregistered securities offerings and exchange operations; dismissed in 2025
  • Administrative proceedings against Gemini Trust Company, LLC—resolved/dismissed in 2025

Industry participants criticized this approach for providing insufficient guidance on how to comply with securities laws while exposing them to enforcement risk for operating without clear rules.

After (January 2025-Present): The Regulatory Clarity Approach

Chairman Paul Atkins, confirmed in early 2025, has publicly stated that “regulatory clarity should precede enforcement, not follow it.” The dismissal of major cases against Coinbase, Binance, and Gemini reflected this policy shift in practice.

Enforcement statistics for 2025:

  • SEC crypto-related enforcement actions: down approximately 27% year-over-year
  • Total crypto-related settlements: approximately $808 million (down approximately 45% from 2024)

The Task Force approach differs from prior SEC crypto initiatives in several respects:

  1. Prospective guidance over retrospective enforcement: The Task Force is focused on developing rules and guidance that market participants can follow, rather than primarily establishing precedent through enforcement.
  2. Structured industry engagement: The Task Force has held roundtables with crypto exchanges, custodians, and token issuers to gather input on practical compliance challenges.
  3. Interagency coordination: Explicit collaboration with the CFTC, OCC, and FDIC to reduce jurisdictional confusion and overlapping requirements.

What Registration Pathways Are Under Development?

Based on SEC statements, Commissioner remarks, and industry roundtable discussions, the Task Force is working on several registration and guidance initiatives. Practitioners should note that these are reported developments, not final rules—formal rulemaking may alter or supersede preliminary frameworks.

1. Crypto Trading Platform Registration

Under current law, platforms that trade securities must either:

  • Register as a national securities exchange under Section 6 of the Securities Exchange Act of 1934, 15 U.S.C. § 78f, or
  • Operate as a broker-dealer under Section 15, 15 U.S.C. § 78o, potentially utilizing an alternative trading system (ATS) exemption under Regulation ATS, 17 CFR §§ 242.300-303

The practical challenge: crypto trading platforms typically list dozens or hundreds of tokens, some of which may be securities and some of which may not be. Existing exchange registration requirements were designed for traditional securities markets and may not accommodate the operational realities of crypto trading.

The Task Force is reportedly exploring a framework that would allow platforms to register and trade both securities and non-securities under appropriate compliance requirements. This would require coordination with the CFTC, which has jurisdiction over commodity derivatives and spot commodity markets under the Commodity Exchange Act, 7 U.S.C. §§ 1-27f.

2. Token Issuer Disclosure Framework

Token offerings that qualify as securities must comply with registration requirements under Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e, or qualify for an exemption. Common exemptions include:

  • Regulation D (17 CFR §§ 230.500-508): Private placements to accredited investors
  • Regulation A+ (17 CFR §§ 230.251-263): “Mini-IPO” offerings up to $75 million
  • Regulation Crowdfunding (17 CFR §§ 227.100-503): Offerings up to $5 million through registered intermediaries
  • Regulation S (17 CFR §§ 230.901-905): Offshore offerings to non-US persons

The Task Force is reportedly developing streamlined disclosure requirements specifically tailored to token offerings, potentially including:

  • Modified Form S-1 disclosure requirements addressing token economics, smart contract functionality, and protocol governance
  • Simplified disclosure for tokens below specified market capitalization or offering size thresholds
  • Expedited SEC staff review for qualifying Regulation A+ token offerings

3. Token Status Transition Guidance (“Token Graduation”)

One of the most anticipated Task Force deliverables is guidance on when a token that was initially offered as a security may appropriately be reclassified or treated as a non-security for purposes of ongoing trading and compliance obligations.

The legal issue: Under the Howey test, an “investment contract” (and thus a security) requires (1) an investment of money (2) in a common enterprise (3) with an expectation of profits (4) derived from the efforts of others. Many tokens satisfy these elements at launch—purchasers invest money expecting profits from the issuer’s development efforts. However, as protocols decentralize, the “efforts of others” prong may no longer apply.

The Task Force has not published formal guidance on token status transitions. However, based on public statements from Commissioner Hester Peirce and other SEC officials, criteria under consideration may include:

  • Degree of protocol decentralization (no single entity controlling development)
  • Functional utility independent of speculative investment value
  • Cessation of ongoing promotional activity by the original issuer
  • Passage of time and market maturation

Important: Until the SEC publishes formal guidance, the concept of “token graduation” remains aspirational. Practitioners should not advise clients that tokens have “graduated” based on informal criteria.

4. Digital Asset Custody Guidance

Registered investment advisers are subject to the Custody Rule, 17 CFR § 275.206(4)-2, which requires client assets to be held by “qualified custodians.” Broker-dealers must comply with the customer protection rule, SEC Rule 15c3-3, 17 CFR § 240.15c3-3.

Both rules present challenges for digital assets, which involve unique custody considerations (private key management, blockchain-native risks, etc.). The Task Force is reportedly working on guidance that would:

  • Clarify how entities can qualify as custodians for digital assets
  • Align SEC custody requirements with OCC Interpretive Letter 1183 (March 2025) and Interpretive Letter 1184 (May 2025), which confirmed that national banks may provide cryptocurrency custody services
  • Address audit and proof-of-reserves requirements specific to crypto custody

How Does the SEC Crypto Task Force Coordinate with Other Regulators?

Interagency coordination is a stated Task Force priority. The fragmented US regulatory landscape—where the SEC, CFTC, OCC, FDIC, FinCEN, and state regulators each claim jurisdiction over various crypto activities—has been a persistent source of compliance uncertainty and cost.

SEC-CFTC Coordination

The jurisdictional boundary between the SEC (securities) and CFTC (commodities) remains legally unsettled for many digital assets. Bitcoin has been treated as a commodity in CFTC enforcement actions (see CFTC v. McDonnell, 287 F. Supp. 3d 213 (E.D.N.Y. 2018)), and SEC officials have informally stated that Ether is not a security. However, the status of most other tokens remains unclear.

The pending CLARITY Act, which passed the House of Representatives and is awaiting Senate consideration, would establish statutory criteria for distinguishing securities from commodities in the digital asset context. The Task Force is reportedly coordinating with CFTC staff pending potential legislation.

Banking Regulator Coordination

The OCC issued Interpretive Letter 1183 in March 2025 and Interpretive Letter 1184 in May 2025, clarifying that national banks may provide cryptocurrency custody services and related activities. These letters reversed prior OCC guidance that had created uncertainty about bank participation in crypto markets.

The Task Force is coordinating with OCC and FDIC staff to ensure that SEC custody requirements for registered entities align with banking guidance, reducing the risk of conflicting compliance obligations.

State Regulator Considerations

State money transmitter licensing (MTL) requirements and New York’s BitLicense (23 NYCRR Part 200) operate independently of federal securities regulation. The Task Force has indicated it will not seek to preempt state licensing requirements but is working to identify areas where federal registration might reduce duplicative state compliance burdens.

What to Do Now: Actionable Steps for 2026

While formal Task Force rules remain in development, crypto founders, exchanges, and compliance teams should take the following steps:

1. Monitor Official SEC Announcements

Subscribe to SEC press releases and monitor SEC.gov for Task Force updates. Avoid relying solely on industry media interpretations—read primary source documents.

2. Conduct Token Classification Analysis

Work with securities counsel to analyze whether your token offering constitutes a security under the Howey test. Document the factual basis for your analysis. This documentation will be essential if and when the SEC issues token status transition guidance.

3. Evaluate Registration and Exemption Options

If your token is likely a security, determine whether full registration (Form S-1) or an exemption (Regulation D, Regulation A+, Regulation Crowdfunding, Regulation S) is appropriate. Prepare offering documents that can be adapted as streamlined disclosure requirements emerge.

4. Participate in the Rulemaking Process

When the Task Force issues proposed rules or concept releases, submit substantive comments during the public comment period. The SEC is required to consider public comments under the Administrative Procedure Act, 5 U.S.C. § 553, and thoughtful industry input shapes final rules.

5. Ensure Tax Compliance

Form 1099-DA reporting requirements apply to transactions beginning in 2025. The IRS requires wallet-by-wallet cost basis tracking under IRC § 6045 as clarified in Notice 2024-56. Ensure your recordkeeping systems can satisfy both SEC disclosure requirements and IRS reporting obligations.

6. Review Custody Arrangements

If you hold customer crypto assets, evaluate whether your custody practices will align with emerging SEC guidance and OCC interpretive letters. Consider engaging qualified custodians that are positioning for regulatory compliance.

7. Maintain State Licensing Compliance

Federal developments do not eliminate state licensing requirements. Continue pursuing and maintaining state money transmitter licenses as applicable to your business operations.

Practical Implications by Stakeholder

Token Issuers

The Task Force’s work creates potential pathways to either register token offerings compliantly or eventually reclassify tokens. However, until formal rules are published, issuers should not assume that future guidance will retroactively validate past unregistered offerings. Continue operating under current law while monitoring developments.

Crypto Exchanges and Trading Platforms

The dismissal of enforcement actions against Coinbase and Binance does not mean exchanges operate in a regulatory vacuum—it signals a preference for rulemaking over litigation. Exchanges should continue pursuing state licenses and prepare for potential federal registration requirements as frameworks emerge.

Investment Advisers and Institutional Investors

Custody guidance is particularly relevant for investment advisers subject to the Custody Rule. Clearer standards will enable advisers to hold crypto assets for clients with greater regulatory certainty. Work with compliance counsel to monitor custody developments and prepare for updated requirements.

Practicing Attorneys

The Task Force era requires a shift from primarily defensive enforcement work to proactive registration and compliance counseling. Stay current on Task Force releases, engage with the rulemaking process on behalf of clients, and advise on positioning for anticipated frameworks while maintaining compliance with existing law.

Outstanding Questions and Areas of Uncertainty

Significant legal questions remain unresolved. Practitioners should flag these areas as uncertain:

  • Token status transition criteria: No formal guidance has been published. The concept of “token graduation” remains aspirational, not established law.
  • DeFi protocol application: The Task Force has not clarified how registration requirements would apply to decentralized protocols with no identifiable issuer or controlling entity.
  • Secondary market trading during transitions: Even if tokens can reclassify from securities to non-securities, questions remain about trading platform obligations during any transition period.
  • Durability of policy shifts: Current enforcement priorities reflect policy, not statutory change. A future SEC Chair could reverse course.
  • Legislative developments: The CLARITY Act passed the House but remains pending in the Senate. If enacted, it would codify jurisdictional boundaries that the Task Force is currently addressing administratively.
  • Stablecoin regulation: The GENIUS Act, signed in July 2025, establishes federal stablecoin requirements including 1:1 reserve backing. The interaction between stablecoin regulation and SEC jurisdiction over certain stablecoin arrangements remains to be clarified.

Conclusion

The SEC Crypto Task Force represents a meaningful shift in US cryptocurrency regulation. After years of enforcement-focused regulation, the SEC under Chairman Atkins is pursuing guidance and rulemaking intended to provide workable compliance pathways for crypto market participants. The decline in enforcement activity during 2025 reflects this policy shift.

However, practitioners must distinguish between policy and law. Until the Task Force publishes formal rules through the APA rulemaking process, existing statutory requirements under the Securities Act of 1933 and Securities Exchange Act of 1934 remain fully in effect. Tokens that qualify as securities under Howey remain subject to registration requirements, and trading platforms facilitating securities transactions remain subject to exchange or broker-dealer registration requirements.

The prudent approach: prepare for anticipated frameworks while maintaining compliance with current law, and engage substantively with the rulemaking process as it unfolds.

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly—consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.

DeFi Tax Reporting Gaps in 2026: What Form 1099-DA Won’t Cover and How to Stay Compliant

The IRS’s Form 1099-DA represents the most significant cryptocurrency tax reporting expansion in a decade. Beginning with 2025 transactions—reported to the IRS in early 2026—centralized exchanges and custodial brokers must report your crypto disposals directly to the government. But here’s what most taxpayers don’t realize: the vast majority of DeFi activity falls entirely outside 1099-DA’s scope, leaving you responsible for self-reporting transactions the IRS cannot automatically verify.

For anyone who has swapped tokens on Uniswap, provided liquidity on Aave, claimed staking rewards through a non-custodial interface, or bridged assets across chains, this creates a compliance gap with real consequences. The IRS now has detailed records of your centralized exchange activity while expecting you to report everything else with equal precision—on Form 8949, Schedule D, and Schedule 1. Understanding what 1099-DA won’t cover is essential for DeFi taxes reporting compliance in 2026.

Key Takeaways

  • Form 1099-DA applies to custodial brokers only: Under the Infrastructure Investment and Jobs Act’s amendments to 26 U.S.C. § 6045, decentralized protocols operating without a controlling intermediary are not currently required to report transactions.
  • All DeFi income remains fully taxable: The absence of a 1099 does not reduce your tax obligation—yield farming rewards, airdrops, and liquidity mining income are taxable under I.R.C. § 61’s broad definition of gross income.
  • Wallet-by-wallet cost basis tracking is now required: Treasury regulations effective for 2025 transactions require specific identification of which units you’re selling from each wallet, eliminating universal FIFO across all holdings.
  • Accuracy penalties apply to unreported DeFi income: Under I.R.C. § 6662, understating your tax liability by failing to report DeFi transactions can trigger a 20% accuracy-related penalty—or 75% for fraud under § 6663.
  • Documentation created now is your best audit defense: Contemporaneous records—transaction hashes, timestamps, fair market value sources—carry far more weight with the IRS than reconstructed data years later.

What Changed: The 1099-DA Reporting Framework

The Infrastructure Investment and Jobs Act (Pub. L. 117-58, § 80603, 2021) expanded the definition of “broker” under 26 U.S.C. § 6045 to encompass entities “responsible for regularly providing any service effectuating transfers of digital assets.” Treasury and IRS issued final regulations (T.D. 9877, published in the Federal Register) implementing these requirements for centralized, custodial platforms beginning with the 2025 tax year.

Under these rules, covered brokers must report:

  • Gross proceeds from digital asset dispositions
  • Cost basis (where the broker has the information)
  • Date of acquisition and sale
  • Long-term versus short-term holding period designation

Critically, the regulations deferred application to decentralized exchanges and non-custodial platforms, recognizing the practical impossibility of compliance by entities that do not control user assets or possess customer identification information. This deferral—not an exemption—means DeFi protocols face no current reporting mandate, but taxpayers using them remain fully obligated to self-report.

What DeFi Transactions Does 1099-DA Miss?

Decentralized Exchange Swaps

When you swap ETH for USDC on Uniswap, Curve, or any automated market maker, no centralized broker intermediates the transaction. The smart contract executes automatically based on pool mechanics. These swaps are taxable dispositions under I.R.C. § 1001—you realize gain or loss equal to the difference between your cost basis in the asset disposed and the fair market value of what you receive—but no 1099-DA will be issued.

Your obligation: Report each swap on Form 8949, calculate gain or loss, and carry totals to Schedule D. If you made hundreds of swaps, each is a separate line item (or you may attach a statement with details and report totals).

Liquidity Pool Deposits and Withdrawals

Depositing assets into an AMM liquidity pool in exchange for LP tokens raises unresolved tax questions:

  • Deposit treatment: The IRS has not issued specific guidance on whether exchanging tokens for LP tokens constitutes a taxable disposition. Many practitioners treat it as a taxable swap, recognizing gain or loss on the deposited assets at the time of deposit. Others argue for non-recognition under an “open transaction” theory. The conservative approach—recognizing the disposition—avoids penalty risk.
  • Withdrawal treatment: When you redeem LP tokens, you receive pool assets in potentially different proportions than deposited. Any gain should be recognized at withdrawal if not recognized at deposit.
  • Fee accrual: Trading fees earned by LP positions likely constitute ordinary income as they accrue, though the precise recognition timing remains unsettled.

Yield Farming and Liquidity Mining Rewards

Receiving governance tokens, protocol tokens, or other rewards for providing liquidity constitutes gross income under I.R.C. § 61. The Supreme Court’s broad interpretation in Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955), established that income includes “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.” DeFi rewards fit squarely within this definition.

Report this income on Schedule 1 (Line 8z, “Other income”) at fair market value on the date of receipt. This value becomes your cost basis for future disposition of the tokens.

Staking Rewards from Non-Custodial Staking

Direct protocol staking—such as running an Ethereum validator or staking through a non-custodial interface—generates rewards outside 1099-DA reporting. The IRS’s position, as reflected in its litigation stance in Jarrett v. United States, No. 3:21-cv-00419 (M.D. Tenn. 2022), treats staking rewards as taxable income upon receipt. While the Jarrett case settled without establishing binding precedent, the IRS’s position is clear: staking rewards are income when received, not when sold.

Airdrops

IRS Revenue Ruling 2019-24 directly addresses airdrops: they constitute ordinary income equal to fair market value at the time the taxpayer obtains “dominion and control” over the tokens. For most airdrops, this occurs when you have the ability to transfer, sell, or otherwise dispose of the tokens—typically when they appear in your wallet and any claim conditions are satisfied.

Cross-Chain Bridges and Wrapped Assets

Bridging ETH from Ethereum mainnet to Arbitrum or Optimism, or wrapping BTC as WBTC, presents unsettled questions. The IRS has not issued guidance on whether these transactions constitute taxable exchanges. Potential treatments include:

  • Non-taxable: If the wrapped/bridged asset is economically equivalent to the original, arguably no realization event occurs
  • Taxable exchange: If the bridged asset constitutes a different property right, disposition of the original triggers recognition

Given the uncertainty, maintain detailed records of all bridge transactions so you can support whatever position you take.

Penalties for Unreported DeFi Income

Failing to report DeFi transactions exposes you to significant penalties beyond the underlying tax liability:

  • Accuracy-related penalty (I.R.C. § 6662): 20% of the underpayment attributable to negligence, disregard of rules, or substantial understatement of income (understatement exceeding the greater of 10% of correct tax or $5,000)
  • Civil fraud penalty (I.R.C. § 6663): 75% of the underpayment attributable to fraud
  • Failure to file penalty (I.R.C. § 6651(a)(1)): 5% per month (up to 25%) if unreported income causes you to owe additional tax and fail to file or amend
  • Criminal penalties (I.R.C. § 7201): Willful tax evasion carries up to 5 years imprisonment and $250,000 in fines

The “reasonable cause” exception under I.R.C. § 6664(c) may eliminate accuracy penalties if you can demonstrate you acted in good faith and had reasonable cause for the underpayment. Contemporaneous documentation of your positions and reliance on professional advice strengthens this defense.

How the IRS Detects Unreported DeFi Activity

The absence of direct 1099 reporting does not mean the IRS lacks enforcement tools:

Blockchain Analytics

The IRS Criminal Investigation division contracts with blockchain analytics firms including Chainalysis. These tools trace transactions across protocols, cluster wallets belonging to the same user, and connect on-chain activity to known exchange accounts where identity verification occurred.

John Doe Summonses

Under I.R.C. § 7609(f), the IRS can obtain court-approved summonses compelling exchanges to produce records for users meeting specified criteria—such as users who withdrew assets to wallets that subsequently interacted with DeFi protocols. The IRS has successfully obtained John Doe summonses against multiple major exchanges.

On-Ramp/Off-Ramp Analysis

When you convert DeFi earnings to fiat through a centralized exchange, that exchange reports the sale via 1099-DA. If your reported cost basis across all 1099-DA transactions doesn’t explain the proceeds, the IRS may infer unreported income.

What to Do Now: Compliance Steps for 2026 Filing

1. Deploy Transaction Tracking Software

Import all wallet addresses into dedicated crypto tax software (Koinly, CoinTracker, TokenTax, or similar). These platforms automatically pull on-chain data and categorize transactions, but require manual review for accuracy—particularly for:

  • Internal transfers mislabeled as dispositions
  • Complex DeFi interactions (LP deposits, flash loans, collateral movements)
  • Cross-chain activity where the same address exists on multiple networks

2. Apply Wallet-by-Wallet Specific Identification

For 2025 transactions forward, you must identify which specific units you’re selling based on which wallet holds them. If you have ETH in multiple wallets acquired at different costs, each wallet’s cost basis is tracked separately. Document:

  • The wallet address from which each sale originated
  • The acquisition date and cost basis of assets in that wallet
  • Your method of specific identification (which lots within a wallet)

3. Create Contemporaneous Fair Market Value Records

For each income event (staking reward, yield farming claim, airdrop), document at the time of receipt:

  • Transaction hash
  • Block timestamp (convert to your local time zone)
  • Quantity and token received
  • Fair market value from a specified source (CoinGecko, CoinMarketCap, or exchange pricing)
  • Screenshot or PDF of the pricing source dated that day

4. File Complete Forms

Report crypto transactions on:

  • Form 8949: Every disposition (sale, swap, spend)—list each transaction or attach a statement
  • Schedule D: Summarize capital gains and losses from Form 8949
  • Schedule 1 (Line 8z): Staking rewards, airdrops, yield farming income, and other DeFi income
  • Form 1040 (Digital Asset Question): Answer “Yes” if you had any crypto transactions

5. Maintain Records for Seven Years

The standard audit statute of limitations is three years (I.R.C. § 6501(a)), extending to six years if you omit more than 25% of gross income (§ 6501(e)(1)(A)). There is no limitation for fraud. Retain all transaction records, cost basis documentation, and supporting materials for at least seven years.

6. Consider Professional Assistance

Given unsettled questions in DeFi taxation, working with a CPA or tax attorney experienced in digital assets can help you take defensible positions, properly characterize complex transactions, and establish reasonable cause documentation that may insulate you from penalties if the IRS later disagrees with your treatment.

Practical Implications: State Taxes and Future Developments

Federal compliance is only part of the picture. Most states with income taxes conform to federal treatment of capital gains and ordinary income, meaning your DeFi activity creates state tax obligations as well. Some states—including California, New York, and New Jersey—have higher audit activity on high-income returns and may independently examine crypto reporting.

Looking ahead, Treasury has signaled intent to expand broker reporting to decentralized platforms through future rulemaking. Proposed approaches include requiring reporting from “front-end” interfaces or persons who deploy smart contracts, though significant legal and practical questions remain about enforceability. Taxpayers should assume that today’s reporting gaps will narrow over time—making current compliance even more important to establish consistent reporting history.

Conclusion

Form 1099-DA brings centralized cryptocurrency transactions into the same reporting framework as traditional brokerage accounts. But for DeFi users, 2026 presents a compliance landscape where the IRS can see your exchange activity in detail while your DEX swaps, liquidity mining rewards, and staking income remain invisible—unless you report them yourself.

The IRS has not exempted DeFi from taxation; it has merely deferred third-party reporting. Every swap, every reward claim, every airdrop remains a taxable event subject to accuracy penalties if unreported. The taxpayers best positioned for this environment are those who implement rigorous tracking now, document fair market values contemporaneously, and maintain records sufficient to support their positions if questioned.

DeFi taxes reporting compliance isn’t about predicting what the IRS will detect—it’s about meeting your legal obligations regardless of enforcement probability. Build the systems now, and you’ll be prepared whether you’re selected for audit in 2027 or never hear from the IRS at all.

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly—consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.

Senate Democrats Demand Binance Sanctions Investigation (2026): Legal Analysis and Compliance Implications

Senate Democrats have formally requested that Attorney General Pam Bondi and Treasury Secretary Scott Bessent investigate Binance for potential ongoing sanctions violations—a significant escalation coming just over two years after the exchange’s record-breaking $4.3 billion settlement with federal authorities in November 2023.

This congressional intervention raises critical questions for cryptocurrency exchanges, compliance officers, and legal practitioners: What are the specific allegations? How might this affect Binance’s existing monitorship obligations? And what does this bipartisan focus on sanctions enforcement signal for the broader industry?

Key Takeaways

  • Nature of action: This is a congressional request for investigation, not a confirmed DOJ or OFAC enforcement action. No charges have been filed.
  • Settlement at risk: If new violations occurred post-settlement, Binance’s November 2023 deferred prosecution agreement could be revoked, exposing the company to original charges plus new counts.
  • Bipartisan priority: Sanctions enforcement enjoys bipartisan congressional support regardless of the administration’s broader approach to crypto regulation.
  • Industry-wide implications: All US-connected exchanges should treat this as a compliance wake-up call, particularly regarding geographic blocking and wallet screening.
  • Monitor role in focus: Binance’s independent compliance monitor may be required to report on any identified deficiencies, potentially accelerating any investigation.

Background: Binance’s November 2023 Settlement

On November 21, 2023, Binance Holdings Limited and its founder Changpeng Zhao (CZ) entered into a comprehensive settlement with the Department of Justice, Treasury’s Financial Crimes Enforcement Network (FinCEN), and the Office of Foreign Assets Control (OFAC). The combined penalties totaled approximately $4.3 billion—at the time, the largest corporate resolution in cryptocurrency history.

The settlement resolved allegations that Binance:

  • Violated the Bank Secrecy Act (31 U.S.C. § 5311 et seq.) by failing to implement an adequate anti-money laundering program
  • Failed to register as a money services business as required under 31 U.S.C. § 5330
  • Processed transactions involving sanctioned persons and jurisdictions in violation of the International Emergency Economic Powers Act (50 U.S.C. § 1701 et seq.)

As part of the resolution, Binance agreed to:

  1. A three-year monitorship by an independent compliance monitor with authority to review and report on compliance programs
  2. Implementation of enhanced AML and sanctions controls, including real-time transaction monitoring and blockchain analytics
  3. Geographic blocking of US users from the Binance.com platform
  4. Ongoing cooperation with federal law enforcement
  5. CZ’s personal guilty plea to BSA violations and his resignation as CEO

This settlement was structured as a deferred prosecution agreement (DPA), meaning DOJ agreed not to prosecute certain charges provided Binance satisfied all conditions during the three-year term, which runs through approximately November 2026.

What Is the Senate Democrats’ Letter Requesting?

According to available reporting, Senate Democrats have sent a letter to AG Bondi and Secretary Bessent requesting a federal investigation into whether Binance has continued to facilitate transactions with users in sanctioned jurisdictions despite its 2023 settlement and monitorship obligations.

Important caveat: As of this writing, the full text of the congressional letter has not been publicly released. The specific factual allegations underlying the request remain unclear. This article will be updated when additional details become available.

What we can assess is the legal framework that would apply if the alleged conduct is substantiated.

What Are the Legal Consequences of Post-Settlement Violations?

Revocation of the Deferred Prosecution Agreement

Binance’s DPA with DOJ contains standard provisions allowing the government to revoke the agreement and pursue prosecution if the company materially breaches its obligations. See generally U.S. Attorneys’ Manual § 9-28.1100 (discussing DPA terms and breach provisions).

If DOJ determines that Binance committed new sanctions violations after November 2023, it could:

  • Revoke the DPA and prosecute the original charges that were deferred
  • Bring new charges based on post-settlement conduct
  • Seek enhanced penalties based on the breach of trust
  • Extend the monitorship term beyond November 2026

The evidentiary bar for proving breach of a DPA is generally lower than a criminal conviction, requiring only a preponderance of evidence that material terms were violated.

IEEPA Criminal Penalties

Willful violations of sanctions orders under the International Emergency Economic Powers Act can result in:

  • Criminal fines up to $1 million per violation
  • Imprisonment up to 20 years for individuals

See 50 U.S.C. § 1705(c).

For a high-volume exchange processing thousands of transactions daily, the per-violation structure of IEEPA penalties can result in aggregate exposure in the billions of dollars.

OFAC Civil Enforcement

Separately from criminal prosecution, OFAC can pursue civil monetary penalties under its Economic Sanctions Enforcement Guidelines (31 C.F.R. Part 501, Appendix A). Key features:

  • Strict liability standard: Unlike criminal violations, OFAC civil penalties do not require proof of willfulness. A company can be liable even for inadvertent violations, though intent affects penalty calculations.
  • Per-violation penalties: The statutory maximum is the greater of approximately $330,000–$360,000 per violation (adjusted annually for inflation) or twice the value of the underlying transaction. For current figures, see OFAC’s annual inflation adjustment notices in the Federal Register.
  • Aggravating factors: Prior violations—including the 2023 settlement—are a significant aggravating factor under OFAC’s penalty matrix, potentially resulting in penalties at or near the statutory maximum.

What Role Does the Independent Monitor Play?

A critical element of Binance’s 2023 settlement is the appointment of an independent compliance monitor. This monitor has authority to:

  • Review Binance’s compliance policies and procedures
  • Test the effectiveness of sanctions screening and transaction monitoring
  • Report findings directly to DOJ and potentially to FinCEN and OFAC
  • Recommend remedial measures

If the allegations underlying the Senate Democrats’ letter are accurate, a key question is whether the independent monitor identified these issues in periodic reports—and if so, what remedial actions were taken or recommended.

Monitor reports are typically confidential, but they may become relevant evidence in any subsequent investigation or litigation.

Why Is Sanctions Enforcement a Bipartisan Priority?

The congressional letter is notable because it represents Democratic lawmakers requesting investigation by a Republican administration. This reflects a genuine bipartisan consensus on sanctions enforcement that exists independently of broader debates over cryptocurrency regulation.

Several factors drive this consensus:

Russia sanctions evasion: Since Russia’s 2022 invasion of Ukraine, the US has imposed comprehensive sanctions on Russian individuals, entities, and economic sectors. Concern about cryptocurrency as an evasion vector has been a consistent theme in congressional oversight. See Treasury, “2024 National Illicit Finance Strategy.”

North Korea weapons financing: North Korean state-sponsored hackers, including the Lazarus Group, have stolen billions in cryptocurrency to fund weapons of mass destruction programs, according to UN Panel of Experts reports and US government assessments.

Iran sanctions: The US maintains comprehensive sanctions on Iran, and crypto exchanges have faced repeated enforcement for processing Iranian transactions. See, e.g., OFAC enforcement actions against BitGo (2020) and Kraken (2022).

Regardless of how the current administration approaches securities classification, stablecoin regulation, or DeFi oversight, sanctions enforcement is an area where there is no deregulatory appetite in either party.

How Does This Affect Binance.US?

Binance.US operates as a legally separate entity from Binance.com, holding state money transmitter licenses in most US states and serving American customers. However, the relationship between the entities has been a subject of regulatory scrutiny.

The Senate Democrats’ letter appears directed at Binance’s global operations, not Binance.US specifically. However, any investigation could:

  • Raise questions about the actual operational separation between Binance.com and Binance.US
  • Prompt state regulators to examine Binance.US’s compliance programs
  • Affect banking relationships for Binance.US as correspondent banks conduct enhanced due diligence
  • Create litigation risk from customers or investors

Binance.US has not been named in the congressional referral. This article will be updated if that changes.

What Should Other Exchanges Do Now?

The Binance investigation request carries implications beyond a single company. For compliance purposes, exchanges should assume heightened enforcement scrutiny and take the following steps:

Immediate Actions (Next 30 Days)

  1. OFAC list screening audit: Verify that your sanctions screening covers the current SDN (Specially Designated Nationals) List, Sectoral Sanctions Identifications List, and all relevant geographic sanctions programs. Screening should apply to both fiat and crypto transactions.
  2. Wallet screening review: Confirm that blockchain analytics tools are identifying wallets associated with sanctioned persons, including wallets identified in OFAC designations and those within one or two hops of designated addresses.
  3. Geographic blocking test: Conduct testing of IP-based restrictions, VPN detection, and identity verification for users from comprehensively sanctioned jurisdictions (Cuba, Iran, North Korea, Syria, and the Crimea, Donetsk, and Luhansk regions of Ukraine).
  4. Documentation review: Under OFAC’s enforcement guidelines, the existence of a compliance program is a mitigating factor in penalty calculations. Ensure written policies, training records, and audit trails are current and accessible.

Ongoing Compliance Measures

  • Subscribe to OFAC update notifications for real-time list changes
  • Conduct regular training for compliance staff on sanctions requirements
  • Establish clear escalation procedures for potential sanctions matches
  • Consider voluntary self-disclosure procedures if past violations are identified—OFAC provides significant penalty mitigation for companies that self-report

Practical Implications by Stakeholder

For exchange operators: The message is unambiguous—prior settlements do not provide immunity from future enforcement. Sanctions compliance must be treated as a core operational imperative, not a checkbox exercise. Budget accordingly.

For compliance officers: Document everything. If your screening systems flag potential matches, ensure resolution is documented even when transactions are cleared. If systems are inadequate, memorialize your recommendations to management in writing.

For legal counsel: When advising crypto clients, emphasize that sanctions law is not an area of regulatory uncertainty. Unlike securities classification or custody rules where frameworks are evolving, OFAC requirements are well-established and strictly enforced. Counsel clients accordingly.

For retail users: Understand that using exchanges that facilitate sanctions evasion could create personal legal exposure under 50 U.S.C. § 1705. Consider the regulatory risk profile of platforms where you hold assets.

What Happens Next?

Several developments to monitor in coming weeks and months:

  • DOJ and Treasury response: Will AG Bondi and Secretary Bessent open a formal investigation? Congressional requests do not require agency action, but they create political pressure.
  • Binance statement: Any public response from Binance regarding the allegations and its compliance posture.
  • Monitor reports: Whether any information from the independent compliance monitor becomes public through litigation or congressional disclosure.
  • OFAC actions: Any new designations of Binance-related wallets or entities, or civil enforcement announcements.
  • State regulator response: Whether state regulators with jurisdiction over Binance.US take any action in response to federal developments.

Conclusion

The Senate Democrats’ request for a federal investigation of Binance reinforces a critical point for the cryptocurrency industry: sanctions compliance is not optional, negotiable, or subject to regulatory discretion.

For an exchange already operating under a monitorship stemming from a $4.3 billion settlement, allegations of continued sanctions violations represent serious legal exposure. If substantiated, these allegations could result in revocation of Binance’s deferred prosecution agreement, new criminal charges, and additional civil penalties.

For the broader industry, this is a clear signal. While legitimate debates continue over securities classification, stablecoin frameworks, and DeFi regulation, sanctions law is settled territory. Every exchange with US customers, US dollar exposure, or US correspondent banking relationships must treat OFAC compliance as a non-negotiable priority.

CryptoLaw.blog will provide updates as this matter develops.

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly — consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.

SEC Issues Guidance on Broker-Dealer Stablecoin Capital Requirements: Understanding the 2% Haircut Rule (2026)

The Securities and Exchange Commission has issued new guidance permitting broker-dealers to apply a 2% haircut to proprietary positions in certain qualifying stablecoins under the agency’s net capital rules. This February 2026 development provides significant regulatory clarity for broker-dealers considering stablecoin activities and signals the SEC’s willingness to accommodate digital assets within existing securities regulatory frameworks.

For broker-dealers that have faced years of uncertainty about how stablecoin holdings affect their capital adequacy calculations, the guidance offers a path forward—treating compliant stablecoins more like cash equivalents than speculative securities.

Key Takeaways

  • Favorable Capital Treatment: Broker-dealers may apply a 2% haircut to qualifying stablecoin positions under Rule 15c3-1—significantly more favorable than the higher deductions applicable to most securities.
  • Qualification Standards Apply: Not all stablecoins will qualify. The guidance establishes criteria that likely include reserve backing requirements, issuer regulatory status, and redemption terms.
  • Reduced Barriers to Entry: Lower capital requirements may reduce the cost of broker-dealer participation in stablecoin markets, potentially expanding institutional infrastructure.
  • Not a Securities Classification Ruling: The guidance addresses capital treatment only—it does not determine whether stablecoins are or are not securities under federal law.
  • Action Required: Broker-dealers must affirmatively determine whether specific stablecoins meet the qualifying criteria before applying favorable treatment.

Why Does the Net Capital Haircut Matter?

SEC Rule 15c3-1, the “net capital rule,” requires broker-dealers to maintain minimum levels of liquid net capital to protect customers and counterparties. See 17 C.F.R. § 240.15c3-1. When calculating net capital, broker-dealers must reduce (“haircut”) the value of their proprietary securities positions to account for potential market risk.

Haircut percentages vary based on asset type and risk profile. Under Rule 15c3-1(c)(2)(vi), lower-risk instruments like U.S. government securities and money market instruments receive minimal haircuts, while equities and less liquid securities face substantially higher deductions. Prior to this guidance, stablecoins lacked a defined treatment, forcing broker-dealers to apply conservative assumptions—often treating stablecoins as high-haircut securities or non-allowable assets entirely.

The 2% haircut for qualifying stablecoins places them in a category comparable to high-quality short-term commercial paper, reflecting a regulatory judgment that properly structured stablecoins present limited market and credit risk for capital adequacy purposes.

What Stablecoins Qualify for Favorable Treatment?

The guidance establishes qualification criteria for stablecoins eligible for the 2% haircut. Based on available information, these criteria address:

  • Reserve Composition: Requirements regarding the assets backing the stablecoin (likely U.S. dollars or highly liquid dollar-denominated assets)
  • Reserve Verification: Standards for attestation or audit of reserves by independent accountants
  • Issuer Regulatory Status: Whether the issuer holds appropriate federal or state licenses or registrations
  • Redemption Rights: Terms governing holder redemption at par value

[Note: Practitioners should consult the full guidance text for specific qualification requirements. The criteria summarized above reflect the general framework indicated by SEC statements but may not capture all conditions or limitations.]

How Does This Fit the SEC’s Broader Crypto Policy Direction?

This guidance aligns with the SEC’s evolving approach to cryptocurrency regulation under Chairman Paul Atkins, who has emphasized the need for workable regulatory frameworks that accommodate digital asset innovation while maintaining investor protection. The Commission’s Crypto Task Force has focused on identifying areas where existing rules can be clarified or adapted for digital assets without requiring new legislation.

The stablecoin capital guidance demonstrates this approach in practice: rather than creating an entirely new regulatory category, the SEC has provided interpretive guidance on how existing net capital rules apply to a specific digital asset class. This incremental, guidance-based approach offers faster regulatory clarity than rulemaking while preserving the SEC’s flexibility to adjust as markets evolve.

What This Guidance Does Not Address

Practitioners should clearly understand the guidance’s scope and limitations:

Securities Classification: The guidance provides capital treatment rules, not a determination of whether stablecoins are securities. The legal analysis of whether a particular stablecoin constitutes a security under SEC v. W.J. Howey Co., 328 U.S. 293 (1946), remains unchanged and must be conducted separately.

Customer Custody: The guidance applies to broker-dealer proprietary positions. It does not modify SEC Staff Accounting Bulletin No. 121, which requires entities safeguarding customer crypto-assets to recognize those assets and corresponding liabilities on their balance sheets. Broker-dealers custodying stablecoins for customers still face SAB 121’s requirements.

Customer Reserve Requirements: The guidance’s application to Rule 15c3-3 customer protection and reserve calculations is not clear from available information. Broker-dealers should not assume the 2% haircut applies to customer-related calculations without further clarification.

Practical Implications

For Broker-Dealers

The guidance creates a viable path for broker-dealers to hold stablecoin positions without prohibitive capital costs. Firms that have avoided stablecoin activities due to capital uncertainty should reassess whether the improved treatment supports new service offerings such as stablecoin settlement, trading, or treasury management.

However, the qualification criteria require affirmative compliance analysis. Broker-dealers cannot assume all stablecoins qualify—due diligence on specific stablecoins is essential, and firms should document their qualification analysis for examination purposes.

For Stablecoin Issuers

Issuers seeking institutional adoption now have a concrete regulatory framework to target. Meeting the SEC’s qualification criteria—particularly around reserve transparency and regulatory licensing—becomes a competitive differentiator that may drive broker-dealer and institutional preference.

For Institutional Market Participants

Expanded broker-dealer participation in stablecoin markets could improve liquidity, reduce settlement friction, and increase the availability of institutional-grade stablecoin services. Market participants should monitor which stablecoins broker-dealers determine meet qualification standards.

What to Do Now

  1. Obtain the Full Guidance: Review the complete SEC guidance document, including any staff statements, FAQs, or interpretive notes.
  2. Assess Current Positions: Inventory existing stablecoin holdings and evaluate each against the qualification criteria.
  3. Document Qualification Analysis: For stablecoins you determine qualify, maintain written analysis supporting that conclusion for regulatory examination purposes.
  4. Update Net Capital Procedures: Coordinate with compliance and finance teams to implement the 2% haircut for qualifying positions in net capital calculations.
  5. Evaluate Business Opportunities: Consider whether improved capital treatment justifies expanding stablecoin trading, settlement, or liquidity services.
  6. Monitor for Clarification: Watch for SEC staff guidance, no-action letters, or examination observations that clarify qualification criteria or application issues.

Conclusion

The SEC’s guidance permitting broker-dealers to apply a 2% haircut to qualifying stablecoin positions marks a meaningful step toward integrating digital assets within the traditional securities regulatory framework. By providing capital treatment comparable to money market instruments, the SEC has reduced a significant barrier to broker-dealer participation in stablecoin markets.

The guidance’s practical impact depends on the specific qualification criteria and how broadly they apply to major stablecoins in circulation. Broker-dealers should carefully review the full guidance, conduct due diligence on specific stablecoins, and ensure their compliance analysis is documented before applying favorable capital treatment.

This development reflects the Commission’s broader effort under Chairman Atkins to provide regulatory clarity for digital assets through interpretation of existing rules. While significant questions remain—particularly regarding customer custody treatment and SAB 121 implications—the guidance represents a constructive foundation for institutional stablecoin activities.

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly—consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.

SEC Approves Nasdaq Tokenized Equities Pilot: A Watershed Moment for Digital Asset Securities

The Securities and Exchange Commission has granted approval for Nasdaq to operate a pilot program facilitating the trading of tokenized equities on blockchain infrastructure. This marks the first time a US regulator has authorized a national securities exchange to integrate distributed ledger technology into its core trading operations—a development that could fundamentally reshape how traditional securities markets function.

For practitioners, issuers, and market participants who have watched the SEC’s cautious approach to digital assets over the past decade, this approval signals an inflection point. The Commission is not merely tolerating blockchain technology; it is authorizing its deployment at the heart of US capital markets infrastructure.

This analysis examines the legal framework underlying the approval, its implications for tokenized securities regulation, and what practitioners should do now.

Key Takeaways

  • Historic first: This is the first SEC approval authorizing a national securities exchange to operate blockchain-based trading infrastructure for registered securities.
  • Securities law applies fully: Tokenized equities remain securities under federal law. The blockchain is infrastructure, not a regulatory exemption.
  • Pilot structure suggests caution: The SEC’s use of a pilot program indicates controlled experimentation rather than blanket approval of tokenization.
  • Custody and settlement are key: The approval necessarily addresses how digital asset custody and settlement integrate with existing regulatory requirements—details that will matter for the broader industry.
  • Competitive implications: Other exchanges (NYSE, CBOE) and existing security token platforms will need to evaluate strategic responses.

What We Know vs. What Remains Unclear

Before analyzing implications, practitioners should understand the current information landscape:

Confirmed:

  • The SEC has approved a Nasdaq pilot program for tokenized equity trading
  • This represents the first such approval for a national securities exchange
  • The approval involves blockchain-based infrastructure for securities trading

Awaiting Confirmation (Pending Full Disclosure):

  • Specific blockchain technology approved (public, permissioned, or proprietary)
  • Pilot program duration, scope, and eligible securities
  • Detailed custody and settlement requirements
  • Conditions and limitations imposed by the SEC
  • Any accompanying SEC guidance or no-action relief

The analysis below applies established legal principles to the known facts while flagging areas where the full approval documentation will provide essential clarity.

The Legal Foundation: Why Blockchain Doesn’t Change Securities Law

The SEC’s approval rests on a foundational principle: the technological medium through which a security is represented does not alter its legal classification. This principle flows directly from the Supreme Court’s functional approach to securities analysis established in SEC v. W.J. Howey Co., 328 U.S. 293 (1946), and consistently applied since.

A share of common stock tokenized on a blockchain remains a security subject to:

  • Registration requirements under Section 5 of the Securities Act, 15 U.S.C. § 77e
  • Antifraud provisions under Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5
  • Exchange trading regulations under the Securities Exchange Act of 1934
  • Broker-dealer requirements for intermediaries

The SEC articulated this position clearly in its 2017 Report of Investigation concerning The DAO, stating that “whether or not a particular transaction involves the offer and sale of a security—regardless of the terminology used—will depend on the facts and circumstances, including the economic realities of the transaction.” SEC Release No. 81207 (July 25, 2017). The Commission reinforced this framework in its April 2019 “Framework for ‘Investment Contract’ Analysis of Digital Assets,” which provided guidance on applying Howey to digital assets.

The Nasdaq pilot involves tokenizing existing registered equities—not novel crypto assets of uncertain classification. The underlying securities have satisfied registration requirements. The blockchain serves as alternative market infrastructure, not as a mechanism to evade securities regulation.

National Securities Exchange Requirements

Understanding this approval requires understanding what it means to operate as a national securities exchange. Nasdaq is registered under Section 6 of the Exchange Act, 15 U.S.C. § 78f, which imposes substantial requirements including:

  • Rules designed to “prevent fraudulent and manipulative acts and practices” (Section 6(b)(5))
  • Rules that “promote just and equitable principles of trade” (Section 6(b)(5))
  • Capacity to enforce compliance with federal securities laws and exchange rules
  • Fair representation of members in governance and rule-making
  • Non-discriminatory access (with limited exceptions)

To implement blockchain-based trading, Nasdaq must file proposed rule changes under Section 19(b) of the Exchange Act, 15 U.S.C. § 78s(b). The SEC reviews such filings to determine whether they are “consistent with the requirements of [the Exchange Act] and the rules and regulations thereunder.” 15 U.S.C. § 78s(b)(2)(C)(i).

The approval indicates the SEC has concluded—at least for pilot purposes—that blockchain infrastructure can satisfy these requirements. This conclusion has implications extending well beyond Nasdaq.

Custody: The Critical Regulatory Hurdle

Custody has been the primary regulatory obstacle for institutional adoption of digital asset securities. The SEC’s approval necessarily addresses this challenge.

Under Rule 15c3-3 (the Customer Protection Rule), 17 C.F.R. § 240.15c3-3, broker-dealers must maintain “physical possession or control” of fully paid customer securities. The SEC and FINRA have expressed concern about whether this standard can be met for digital assets. In their July 2019 Joint Statement on Broker-Dealer Custody of Digital Asset Securities, the agencies identified specific concerns including:

  • Cybersecurity vulnerabilities and risk of theft
  • Irreversibility of blockchain transactions (unlike traditional securities transfers)
  • Challenges in demonstrating “possession or control” of private keys
  • Uncertainty regarding custodial arrangements during insolvency

The SEC subsequently provided limited relief through a 2021 no-action letter to FINRA, and the Commission has signaled ongoing work on custody rules for digital assets. However, comprehensive custody guidance has remained elusive.

The Nasdaq pilot approval almost certainly specifies custody requirements—potentially including qualified custodian mandates, specific technological standards, insurance minimums, and key management protocols. These details, once public, will provide a regulatory template applicable beyond this specific pilot.

Settlement: T+1, T+0, or Something Else?

US securities markets transitioned to T+1 settlement effective May 28, 2024, reducing the settlement cycle from two business days to one. Blockchain technology theoretically enables near-instantaneous settlement—often called atomic settlement or T+0.

However, faster settlement is not purely beneficial. The SEC has acknowledged trade-offs, including:

  • Reduced time for error detection and correction
  • Increased funding requirements for market participants
  • Potential disruption to securities lending markets that rely on settlement timing
  • Complications for cross-border transactions involving different time zones

The DTCC has been developing its own blockchain capabilities through Project Ion, a platform for bilateral same-day settlement of US equities that has been operating in parallel with traditional systems. The Nasdaq approval should be viewed alongside these DTCC initiatives as part of broader market structure evolution.

The pilot program terms will clarify whether the SEC is permitting accelerated settlement or requiring conformity to existing T+1 timelines. Either approach establishes precedent for future tokenized securities infrastructure.

FINRA’s Oversight Role

While SEC approval is necessary for exchange-level rule changes, FINRA maintains oversight authority over broker-dealers that will participate in tokenized trading. Broker-dealers trading tokenized securities must comply with:

  • FINRA Rule 4311 (carrying agreements with clearing firms)
  • FINRA Rules 3110 and 3120 (supervisory systems)
  • FINRA Rule 2111 (suitability) and Regulation Best Interest where applicable
  • FINRA Rules governing books and records, 17 C.F.R. § 240.17a-3 and 17a-4

FINRA has been developing expertise in digital asset supervision, including examination protocols for firms dealing in digital assets. The self-regulatory organization’s approach to the Nasdaq pilot—including any supplemental guidance for participating broker-dealers—will affect implementation timelines and compliance costs.

International Context: US Catches Up

This approval positions US markets to compete with jurisdictions that have moved more aggressively to accommodate tokenized securities:

European Union: The DLT Pilot Regime, Regulation (EU) 2022/858, created a regulatory sandbox for DLT-based trading and settlement systems. The regime allows temporary exemptions from certain MiFID II and CSDR requirements for qualifying DLT market infrastructures. Multiple EU member states have approved pilot participants.

Switzerland: The Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (the “DLT Act”), effective February 1, 2021 (with certain provisions effective August 1, 2021), created “ledger-based securities” (Registerwertrechte) as a legally recognized category that can be transferred via blockchain without intermediary involvement. The SIX Digital Exchange (SDX) operates under this framework.

Singapore: The Monetary Authority of Singapore’s Project Guardian initiative has facilitated institutional pilots of tokenized securities, including collaboration with major financial institutions on tokenized bonds and deposits.

United Kingdom: The FCA has established a Digital Securities Sandbox under the Financial Services and Markets Act 2023, allowing firms to test DLT-based securities trading and settlement with modified regulatory requirements.

The Nasdaq approval may reverse concerns about regulatory arbitrage driving tokenized securities innovation offshore, though the pilot program’s scope and limitations will determine how competitive US markets become.

Implications for Existing Security Token Platforms

Several platforms currently facilitate tokenized securities trading as Alternative Trading Systems under Regulation ATS, 17 C.F.R. § 242.300 et seq. These include tZERO ATS, Securitize Markets, and others that have registered as broker-dealers operating ATSs.

The Nasdaq approval creates both challenges and opportunities for these platforms:

Competitive pressure: A national exchange with blockchain infrastructure offers liquidity, credibility, and institutional access that ATS platforms struggle to match.

Validation effect: SEC approval of tokenized trading infrastructure legitimizes the entire sector, potentially increasing demand for all platforms.

Partnership opportunities: Existing platforms may pursue integration or partnership arrangements with Nasdaq or other exchanges developing similar capabilities.

Regulatory template: The pilot approval’s technical and operational requirements may inform future ATS applications involving blockchain infrastructure.

Implications for Security Token Offerings

While the Nasdaq pilot focuses on tokenizing existing registered securities, the approval has significant implications for the security token offering (STO) market.

STOs typically issue securities under registration exemptions:

  • Regulation D (Rules 506(b) and 506(c)) – Private placements, primarily to accredited investors
  • Regulation A+ (Tier 2) – Offerings up to $75 million with scaled disclosure
  • Regulation Crowdfunding – Offerings up to $5 million through registered funding portals
  • Regulation S – Offerings to non-US persons outside the United States

Securities issued under these exemptions face significant secondary market liquidity constraints because they cannot trade on national exchanges without registration. If tokenized securities infrastructure eventually accommodates exempt offerings—through exchange listing standards or separate regulatory accommodation—the liquidity discount that has limited STO adoption could diminish substantially.

Practical Implications

Immediate Actions (Next 30 Days):

  • Obtain and analyze the full SEC approval order and Nasdaq’s rule filing when publicly available
  • Review any accompanying SEC guidance, staff statements, or no-action letters
  • Assess current client exposure to tokenized securities developments

For Securities Issuers:

  • Evaluate whether tokenization could reduce administrative costs or enable new functionality (programmable dividends, automated compliance)
  • Consult counsel regarding any restrictions in existing governing documents that might affect tokenization
  • Monitor pilot program progress and eligibility requirements

For Broker-Dealers:

  • Assess custody infrastructure and technology partnerships for blockchain compatibility
  • Review compliance procedures for potential modifications required for tokenized trading
  • Evaluate FINRA guidance and examination expectations for participating firms

For Security Token Platforms:

  • Analyze competitive positioning relative to exchange-based tokenized trading
  • Consider strategic partnerships or technology licensing arrangements
  • Review whether pilot approval’s technical standards affect platform architecture

For Institutional Investors:

  • Evaluate custody solutions compatible with tokenized securities
  • Assess operational and compliance procedures for blockchain-based instruments
  • Monitor fund documentation for any restrictions on tokenized holdings

Outstanding Questions

Key questions that the full approval documentation should address:

  1. Blockchain specifications: Which technology platform(s) has the SEC approved? Public permissionless, permissioned enterprise, or proprietary systems?
  2. Pilot scope: What securities are eligible? Which market participants may participate?
  3. Duration and success metrics: What is the pilot timeline, and what criteria will determine permanent approval?
  4. Smart contract risk: How does the approval address bugs, exploits, or malfunctions in smart contracts affecting ownership records?
  5. Transfer agent integration: How do tokenized securities interact with transfer agent requirements under Exchange Act Section 17A?
  6. Interoperability: Must the system integrate with existing clearing and settlement infrastructure (DTCC)?

Conclusion

The SEC’s approval of Nasdaq’s tokenized equities pilot program marks a watershed moment for tokenized securities regulation in the United States. By authorizing a national securities exchange to deploy blockchain-based trading infrastructure, the Commission has moved tokenization from regulatory gray zone to legitimate market infrastructure.

This approval does not signal deregulation. Tokenized securities remain securities, fully subject to federal registration, disclosure, and trading requirements. What has changed is regulatory acceptance that blockchain technology can meet the standards required of critical market infrastructure.

For practitioners, the immediate priority is obtaining and analyzing the full approval documentation. The specific requirements—for custody, settlement, technology, and compliance—will establish templates that shape tokenized securities markets for years to come.

CryptoLaw.blog will provide detailed analysis of the approval documentation as it becomes available.

This article is for informational and educational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations in the cryptocurrency space change rapidly — consult a qualified attorney for advice specific to your situation and jurisdiction. Seth Goettelman is licensed to practice law in Wisconsin and Florida.