How Different Definitions Shape Regulation and Enforcement

Until recently, the US federal government has lacked both consistency and support for digital assets. Agencies have each defined the term “digital assets” differently, leaving the industry with conflicting interpretations depending on the regulatory agency involved. This lack of clarity has caused jurisdictional disputes, compliance challenges, and enforcement difficulties.

This article explores how key U.S. regulatory agencies define digital assets, how these definitions impact regulation in practice, and the consequences for law enforcement.

The SEC: Digital Assets as Securities

The Securities and Exchange Commission (SEC) classifies digital assets as securities based on the Howey Test, a legal framework used to determine whether an asset qualifies as an investment contract. This classification places digital assets under SEC oversight, subjecting them to strict regulatory requirements similar to traditional financial instruments.

A key area of focus for the SEC has been Initial Coin Offerings (ICOs), which it considers securities offerings - meaning they must comply with registration and disclosure rules. Exchanges that offer unregistered securities risk being classified as illegal securities exchanges, exposing them to enforcement actions. However, the SEC has maintained that Bitcoin and Ethereum (ETH) are not securities, creating inconsistencies in its regulatory approach.

Using the Howey Test, the SEC has aggressively pursued enforcement actions against digital asset issuers, including Ripple (XRP) and Dapper Labs. These cases have sparked ongoing legal battles over the SEC’s authority and the nature of digital assets.

Most recently, however, the SEC’s stance appears to be shifting. The agency dismissed the June 2023 lawsuit against Coinbase, which had alleged that the exchange offered unregistered crypto asset securities and operated illegally as an exchange, broker, and clearing company. The lawsuit cost Coinbase over $50 million in litigation fees while also severely damaging the SEC’s reputation - and wasting taxpayer money. 

This dismissal is a significant win for the crypto industry. It suggests that under new leadership, the SEC may be reconsidering its aggressive enforcement strategy while also signaling that it had overstepped its authority. With the lawsuit dropped, Coinbase is expected to expand its staking business, which had been constrained due to regulatory scrutiny.

The SEC’s approach has already evolved under the new administration. Following President Trump’s inauguration, the SEC announced in February 2025 the creation of the Cyber and Emerging Technologies Unit (CETU)1. This new division replaces the Crypto Assets and Cyber Unit and takes a broader approach, focusing on cyber-related misconduct and emerging technologies that could be misused for financial fraud.

By shifting its enforcement strategy from exclusively targeting crypto assets to tackling broader fintech and cybersecurity threats, the SEC appears to be adjusting its regulatory priorities. The dismissal of the Coinbase lawsuit suggests a shift toward a more balanced and predictable regulatory environment.

The CFTC: Digital Assets as Commodities

The Commodity Futures Trading Commission (CFTC) classifies Bitcoin and Ethereum as commodities, similar to gold or oil, giving it authority over commodities fraud and wrongdoing under the Commodity Exchange Act.

The CFTC oversees crypto derivatives markets, futures, and swaps but does not regulate spot markets (direct crypto purchases and sales). However, it retains the authority to prosecute fraud in spot markets.

The SEC and CFTC have clashed over who has primary authority over digital assets, which has resulted in uncertainty for exchanges, businesses, and investors since different licensing and regulations apply depending on if digital assets are classified as a security or a commodity. 

At times, the SEC and CFTC align - as seen when the SEC affirmed Ethereum’s status as a commodity and approved ETH exchange-traded funds (ETFs) under commodity-based trust share rules.

Like the SEC, the CFTC’s approach is evolving under the new administration. In February, the CFTC announced they would hold a forum with industry-leading firms to discuss the launch of the CFTC’s digital asset markets pilot program for tokenized non-cash collateral such as stablecoins2. We are seeing a shift in regulatory bodies, which are now looking to engage with the marketplace to ensure regulatory clarity for digital asset markets. That clarity goes hand in hand with strong guardrails to ensure compliance, which reputable exchanges all support as the crypto markets have matured. 

Additional Classifications

The Internal Revenue Service (IRS) takes a different approach, treating digital assets as property for tax purposes. Crypto sales and exchanges can trigger capital gains or losses, and investors and businesses must report digital asset transactions or they could face fines for unreported taxable events. Mining and staking rewards are considered taxable income, leading to challenges in accurately tracking and reporting income. Enforcement can be tricky when assets cross borders or are held on decentralized platforms that do not possess traditional tax reporting mechanisms. 

The Financial Crimes Enforcement Network (FinCEN) considers digital assets a form of value that substitutes for currency. Under anti-money laundering (AML) laws, many crypto businesses fall under money services business (MSB) regulations and must register with FinCEN (or seek an exemption), implement know-your-customer (KYC) policies, and report suspicious transactions under the Bank Secrecy Act. Failure to comply with FinCEN regulations can result in lawsuits and fines. For example, Binance’s $4.3 billion settlement with U.S. regulators included violations of FinCEN's AML rules.

Regulatory Overlap & Consequences for Law Enforcement

Law enforcement faces unique challenges in tracing, seizing, and forfeiting digital assets, particularly when dealing with privacy coins and decentralized platforms that obscure transaction data.

The Department of Justice (DOJ) does not define digital assets but applies existing laws to prosecute crimes involving them. The DOJ has pursued cases related to money laundering, such as Silk Road and Tornado Cash, fraud schemes, such as OneCoin and FTX, and sanctions violations, including crypto mixer operations facilitating illicit transactions. 

Conflicting classifications across agencies create major hurdles for regulators and law enforcement. Businesses and investors must navigate this uncertain, sometimes contradictory regulatory framework as they attempt to comply with it. Cross-border enforcement adds another layer of complexity, particularly with crypto held overseas on decentralized networks, which makes seizures and prosecutions more difficult, requiring a time-consuming Mutual Legal Assistance Treaty (MLAT) request.

Lawmakers may continue to define digital assets on a case-by-case basis, or they may decide to treat digital assets as their own asset class with bespoke rules. In the European Union, Markets in Crypto Assets (MiCA) is taking the latter approach by providing regulations for wallet providers and exchanges to protect consumers and ensure fair trading. This approach is not a silver bullet either though, as there are still issues that need to be addressed on a case-by-case basis, such as excluding crypto assets providing services or physical assets that are unique and not fungible (such as real estate), or if non-fungible tokens (NFTs) are unique to the holder. 

The SEC’s creation of the CETU signals an effort to streamline enforcement across digital assets, yet jurisdictional disputes remain unresolved. The SEC’s expanded focus through CETU aligns with the DOJ’s increasing emphasis on cyber-enabled financial crimes. This suggests that going forward, there will be greater interagency cooperation in tracking and prosecuting crypto-related offenses. New leadership at the SEC, CFTC, and investigative agencies must work together with the industry to provide certainty to markets and protections to consumers.

Conclusion: The Need for Clearer Regulations

While we are still suffering from compliance confusion, enforcement gaps, and jurisdictional disputes, recent headlines suggest there is a light at the end of the tunnel. With the dismissal of the Coinbase case and the new administration prioritizing innovation and regulatory clarity, there’s reason for optimism. There is an opportunity this year to re-focus on legislation and provide clarity, and that clarity has the power to position the US as the world leader in digital asset innovation. 

In March, the Senate Banking Committee will hold a hearing on “bipartisan legislative frameworks” for digital assets with industry leaders. This signals that lawmakers aim to craft regulations that keep crypto innovation in the U.S. rather than pushing it offshore, offering a path to much-needed regulatory clarity. Whether or not Congress will deliver clarity or more confusion remains to be seen, but there is a noticeable shift towards treating virtual assets favorably and embracing the innovation that comes from them. 

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References

1. U.S. Securities and Exchange Commission. SEC Announces Cyber and Emerging Technologies Unit to Protect Retail Investors. SEC Press Release.

2. Commodity Futures Trading Commission. CFTC Announces Crypto CEO Forum to Launch Digital Asset Markets Pilot. CFTC Press Release.

3. Internal Revenue Service. Frequently Asked Questions on Virtual Currency Transactions. IRS Website.