March 11, 2025
Jessica Furr - Associate General Counsel
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Download the PDF Version Here
25.03.11_History of Regulation by Enforcement_Dragonfly Report.pdf
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Important disclaimers located at the end of the report
Funds managed by Dragonfly may be invested in some of the tokens and protocols mentioned in this report. This report should not form the basis for making any investment decision, nor be construed as an investment recommendation.
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Dragonfly is a prominent global crypto investment firm with assets under management of approximately $3 billion. Since its founding in 2018, Dragonfly has built a reputation as a crypto-native firm and a leader in crypto investing, backed by a team with over a decade of experience building and funding the crypto space. With a portfolio of more than 120 investments, the firm leverages deep industry expertise and thought leadership to shape the future of crypto.
(Oct. 2008 to Jan. 2025)
The history of regulation by enforcement in the U.S. crypto industry reveals a patchwork approach that has created significant confusion and contradictions. By examining this history, we will illustrate how inconsistent enforcement strategies and evolving interpretations of securities laws have left crypto projects navigating an unpredictable and often contradictory regulatory landscape.
The evolution of Bitcoin began in 2008 with the publication of the now-famous Bitcoin White Paper, leading to the mining of the first Bitcoin in 2009.[1] Five years later, in 2014, Ethereum entered the market, bringing with it groundbreaking advancements; it introduced smart contracts and the Ethereum Virtual Machine enabling the development of decentralized applications.[2] Despite the rapid pace of blockchain innovation, regulatory agencies like the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) remained largely dormant during this early period, exposing significant oversight gaps and setting the stage for future conflicts over jurisdiction and control.
It wasn’t until a series of high-profile incidents that regulatory attention intensified. The launch of the infamous Silk Road Marketplace (2011), the first dark web market of the internet era,[3] and, the collapse of Mt. Gox (2014), one of the largest Bitcoin exchanges of the time,[4] highlighted significant regulatory blind spots. These events prompted agencies like the CFTC and SEC to sharpen their focus on cryptocurrency.[5]
Statements from CFTC Chairman Massad and CFTC Actions Against Coinflip and Bitfinex
In December 2014, CFTC Chairman Massad claimed the agency’s jurisdiction over derivative contracts involving virtual currencies, categorizing them as “commodities” under the Commodity Exchange Act (“CEA”).[6] This stance was reinforced nine months later in September 2015 when the CFTC officially classified Bitcoin and other virtual currencies as commodities under the CEA in an enforcement action against CoinFlip, Inc., a Bitcoin options trading platform, and its founder Francisco Riordan.[7] The CFTC further solidified this position in June 2016 with an enforcement action against Bitfinex, posturing that virtual currencies fell under the CEA and CFTC regulations.[8] This case was instrumental in highlighting that regulators would investigate the historical practices of a company, with the CFTC in this instance looking back as far as 2013, serving as a reminder to companies that they may be liable for past compliance failures. Up to this point, it seemed that the U.S. government’s stance was that digital assets would be deemed commodities thereby falling under the purview of the CFTC.[9] However, with the start of the 2017 crypto bull run, other U.S. regulators began to pay significant attention to crypto.[10]
The period from 2017 to 2018 was characterized by increased regulatory focus, as the SEC and state authorities intensively reviewed ICOs to determine if token sales represented unregistered securities offerings or involved deceptive promotional practices. This increased oversight suggested that regulators would assess whether a token sale fell under securities laws based on factors such as the token functionality, marketing, exchange listings, and investor expectations, thereby creating a state of uncertainty for crypto projects about how to structure their offerings whilst also avoiding SEC attention.[11]
SEC’s DAO Report
The SEC’s first major move into crypto regulation came in 2017 with the DAO Report.[12] In this foundational document, the agency applied the Howey test, which originated from the 1946 Supreme Court decision in SEC v. W.J. Howey Co. It is the primary standard used to determine whether a transaction qualifies as an “investment contract” and thereby subject to U.S. securities laws. Specifically, the test puts forth that for an asset to be considered an investment contract, it must involve: (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) derived primarily from the efforts of others.