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SEC delays definition of 'digital asset,' Coinbase petition given 10-day deadline

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(Kitco News) - The U.S. Securities and Exchange Commission (SEC) has remained adamant that most, if not all, cryptocurrencies are considered to be securities, but the agency has once again come up short in providing a clear definition of the term “digital asset.”

Amendments to Form PF, a form that needs to be completed by SEC-registered funds as part of their reporting requirements, were published by the regulator on Wednesday, but curiously, the previously included definition of “digital asset” was absent.

Form PF helps the SEC assess any potential “systemic risks” that a hedge or private equity fund may propose to the wider financial system. The financial watchdog first proposed the changes in August 2022, and the original proposal included the first-ever official definition of digital assets.

Based on the text of that proposal, a digital asset is “an asset that is issued and/or transferred using distributed ledger or blockchain technology, including, but not limited to, so-called ‘virtual currencies,’ ‘coins,’ and ‘tokens,’” also referred to as as “crypto assets.”

But now, the SEC says that it wants to pause providing a definition for the time being.

“We proposed adding ‘digital assets’ as a new term to the Form PF Glossary of Terms,” the SEC wrote in a footnote contained within the document. “The Commission and staff are continuing to consider this term and are not adopting ‘digital assets’ as part of this rule at this time.”

With this change, firms that submit a Form PF will continue to report their digital asset holdings in the “other” category, which results in “less robust Form PF data for analysis,” the SEC said.

While it has neglected to define digital assets at this time, the SEC did include changes related to the unfolding banking crisis in the update. SEC-registered funds must now report on the occurrence of any key events that possibly indicate systemic risk or harm to investors should a U.S. banking crisis unfold. Firms are also required to disclose the details related to all fees and expenses.

SEC ordered to respond to Coinbase within ten days

Last week, Coinbase filed a lawsuit against the SEC seeking to compel the regulator to provide a “yes or no” response to a petition that the firm originally submitted last July seeking clarity on cryptocurrency regulation.

The courts responded to the filing quickly and on Wednesday, the Third Circuit Court of Appeals said that the SEC must file its response within ten days.

According to a Wednesday tweet from Paul Grewal, chief legal officer at Coinbase, “The Third Circuit just issued a text-only order directing the SEC to file a response to our mandamus petition within 10 days (and gave us 7 days for a reply).”

The text of the order reads, “TEXT ONLY ORDER (Clerk) At the direction of the Court, Respondent is ordered to file an answer to the petition for writ of mandamus within 10 days of the date of this order. Petitioner may file a reply to the response within 7 days of the date of filing of the response.”

SEC looks to modify exchange rules to include DeFi platforms

In the filing from Coinbase that prompted the 10-day response order, the exchange said the commission “at a minimum must set forth how those inapt and inapposite requirements are to be adapted to digital assets.”

The original petition, which was filed by Coinbase in July 2022, sought to have the SEC propose and adopt a clear regulatory framework for the cryptocurrency industry in the U.S. and establish guidelines for companies like Coinbase to work from as they build out their businesses.

The petition included 50 questions that covered a wide range of topics related to the regulatory treatment of certain digital assets. Of specific interest for Coinbase, as well as numerous other players in the ecosystem, is the question asking the SEC to provide clarification about its process of determining the classification of a token as a security or a commodity.

The 10-day deadline ordered this week refers to the SEC's requirement to provide a legal basis for why it has not responded to the petition.

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