O'Melveny Insights 2023

15 Why? First, there are so many people losing so much money in crypto that calls to investigate and enforce will drown out those demanding new regulations; and second, the SEC likes the rule it has: Howey, a four-prong test based on a 1946 Supreme Court case, is what now determines whether an asset is a security and subject to SEC oversight. And even if the SEC did fire up its regulation machine tomorrow, nothing would likely be adopted in 2023. In fact, the SEC has doubled down on enforcement, beefing up its crypto staffing—even hiring blockchain experts—and in light of FTX’s demise, more investigators are surely on the way. There are whole swaths of the crypto business that haven’t been intensely investigated…yet. At the dawn of the crypto-universe, investigators had easy picking: the fraudsters, dissemblers, and get-rich-quick schemers were not hard to spot. With the collapse of Terra, Celsius, and FTX—which many had thought was the golden child of crypto— regulators will now likely take a hard look at everyone, giving no one the benefit of the doubt. The industry has lost two-thirds of its value in one year—from US$2.25 trillion in December 2021, to less than US$800 billion in December 2022. For a time, many questioned whether the train had left the station: surely regulators would not take action that would threaten a US$2 trillion-plus industry. Now, consumers and investors have taken heavy losses and Congress and others are questioning where were the regulators. If there’s ever a time to act, it is now. Cries that the SEC is “regulating through enforcement” instead of by rules and regulations will be heard again in 2023, though new rules and regulations are unlikely to be forthcoming. O’Melveny is ‘able to find simple and practical solutions to complex matters.’ —Client testimonial, Chambers FinTech