USA Law and Practice Contributed by: Margo H. K. Tank, Michael Fluhr, Deborah Meshulam, Kristin Boggiano, David Stier, Liz S. M. Caires, Adam Dubin, Emily Honsa Hicks, Meghan Carey, Kathleen Birrane and Eric Hall, DLA Piper LLP
istered with the CFTC. Derivatives on securities would be regulated by the SEC. 10.9 Decentralised Finance (DeFi) It remains unclear what regulations govern vari - ous activities and products in DeFi. Considera - tions include how and whether decentralised activities can be regulated, what level of control or influence is there by a centralised figure, and the nature of the underlying asset (eg, collecti - bles, securities, etc). Regulators and courts have expressed a variety of views on these issues. Treasury published Illicit Finance Risk Assess- ment of Decentralized Finance in 2023, which acknowledged that there is “currently no gen- erally accepted definition of DeFi, even among industry participants, or what products make a product, service, arrangement or activity decen- tralized” . Treasury asserted that whether an enti - ty is subject to regulation depends on specific facts and circumstances, and degrees of decen - tralisation may not be dispositive. The appellate court decision overturning OFAC’s designation of Tornado Cash illustrates the uncertainty around when DeFi activities fall subject to regulations. Potentially relevant to DeFi exchanges is 2019 FinCEN guidance that an exchange is not a money transmitter where it operates P2P and the parties both maintain control over the assets and interact directly with the payment system. See 2.10 Significant Enforcement Actions and 6.3 Impact of the Emergence of Cryptocur- rency Exchanges . 10.10Regulation of Funds In the US, funds are regulated based on the assets held. If a fund primarily invests in secu -
rities, it is regulated by the SEC; if it primarily invests in commodities or derivatives, it is regu - lated by the CFTC. If a fund invests in securities and commodities, the fund may be regulated by both regulators. The SEC and CFTC regulations require regis - tration of funds and their advisors. There are exemptions to registration requirements for funds and advisors that meet certain criteria. Advisers that manage a fund holding digital assets must consider several issues, including: • disclosure requirements addressing digital asset risk factors; • fair valuation of assets; • custody; • treatment of assets in bankruptcy; • policies on whether the assets are securities or commodities; • investment thesis documentation address - ing why assets fit the portfolio management criteria; • tax considerations, and • SEC-compliant marketing materials. 10.11Virtual Currencies The term “virtual currency” is used by money and banking regulators to describe a money-like representation of value. Certain activities con - cerning cryptocurrencies (ie, virtual currencies), most notably transmission and trading, are sub - ject to regulation by federal and state money and banking regulators. See 6. Marketplaces, Exchanges and Trading Platforms .
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