Lowenstein Crypto advises leading digital asset and cryptocurrency projects, exchanges, and trading firms. Our practice covers regulatory advice, transactions and structuring advice, investigations, and adversarial matters including commercial disputes, bankruptcy, and related litigation. As these markets continue their rapid growth and market participants continue to evolve and mature their businesses, we are providing this weekly digest as a resource that highlights and summarizes a selection of key recent legal regulatory developments.

SEC Releases Proposal For Crypto Assets Custody Rules For Investment Advisors and Funds

On October 1, Securities and Exchange Commission (SEC) released proposed rules in connection with the custody rules for crypto assets held by investment advisers and funds (the Proposed Rules). Under the Proposed Rules, investment advisers and funds would be allowed to self-custody crypto assets, provided that at the outset and every quarter, it is determined that no permitted custodian is available to hold the assets. Advisers would need safeguarding systems that cover private key management, approval of transactions by at least two persons, and segregation of each client’s crypto assets at separate addresses. Additionally, advisers would need cybersecurity controls, an annual internal control report from an independent accountant, a documented annual review, and quarterly account statements or their equivalent. The Proposed Rules also include state trust companies to the list of qualified custodians permitted to hold client crypto assets. See the SEC’s press release here and a copy of the Proposed Rules here.

SEC Staff Issues New FAQs on Crypto Asset Classification

On September 25, the Securities and Exchange Commission’s (SEC) Division of Corporation Finance staff issued frequently asked questions (FAQs) on the SEC’s March 17 Interpretive Release on crypto asset classification. The FAQs clarify, among other things, that staking receipt tokens are digital commodities if a protocol-based liquid staking provider issues them and are digital tools otherwise. Additionally, a “receipt” must meet a narrow three-part test: It cannot (i) change the deposited asset’s rights, (ii) add financial incentives, or (iii) give the issuer ownership or control. Notably, the FAQs also provide that crypto asset buybacks for functional crypto systems with no central party do not trigger the creation of an investment contract; however, a crypto asset could be an investment contract if a buyback is facilitated for a nonfunctional crypto system. See the FAQs here and Lowenstein Sandler’s Client Alert here for additional information.

Treasury Publishes Interim Final Rule for State Certification Under GENIUS Act

On September 30, the U.S. Department of the Treasury (Treasury) published an interim final rule that sets out the forms and procedures for states seeking federal approval to supervise smaller stablecoin issuers under the GENIUS Act (Act). Under the Act, state-qualified issuers with no more than $10 billion in outstanding payment stablecoins may choose state regulation. To qualify, the state regulator must certify that its regime is “substantially similar” to the federal framework; such certification is subject to approval by the Stablecoin Certification Review Committee, which includes the Treasury Secretary, the Federal Reserve Chair, and the Federal Deposit Insurance Corp. Chairman. An initial certification must include a signed attestation, a detailed narrative explaining how the state regime meets Treasury’s substantial-similarity principles, and supporting statutes, regulations, and guidance. The statute sets a one-year deadline for initial certifications. See the interim final rule here.

Illinois Releases Proposed Rules in Connection With Digital Asset Tax Act 

On September 28, the Illinois Department of Revenue posted draft proposed rules (Proposed Rules) for the Digital Asset Tax Act (Act) seeking comments through October 30. Beginning January 1, 2027, the Act imposes a 0.2% tax on the value of the digital asset involved whenever an Illinois customer receives “digital asset business activity,” meaning the exchange, transfer, or storage of a digital asset. The Proposed Rules provide that a transaction is taxable only if it involves an Illinois customer, includes that customer’s receipt of the activity, is made for valuable consideration, and is conducted by a “digital asset broker.” A digital asset broker does not include decentralized finance (DeFi) platforms that collect only liquidity-pool swap fees, issuers that only mint tokens, and Illinois retailers that accept crypto as payment. Transactions subject to the digital asset tax include spot trades, on-ramping and off-ramping, bridging, crypto- or stablecoin-settled derivatives, wallet transfers made for a fee (even between the customer’s own accounts), and separately paid storage. In contrast, transactions that are not taxed include direct peer-to-peer trades with no intermediary and no consideration, internal ledger updates with no blockchain movement, derivatives settled in fiat, DeFi swaps that pay only liquidity-pool or network fees, retailers accepting crypto as payment, and transactions involving non-fungible tokens, tokenized securities, gaming currencies, or rewards points. Out-of-state brokers must collect the tax once their Illinois gross receipts reach $100,000 or more. See the Proposed Rules here.

California Governor Signs Bill Banning Meme Coins Issued by Public Officials 

On September 27, California Gov. Gavin Newsom signed into law a bill that prohibits a California public officer or covered employee from issuing or promoting a meme coin. As defined, a “meme coin” is a digital asset marketed or recognized mainly for its association with internet memes, public figures, characters, cultural phenomena, current events, or social trends, whose value comes mainly from public interest, speculation, or community engagement. The bill also prohibits digital asset service providers from listing for sale to or on behalf of California residents any meme coin issued on or after January 1, 2027, that is offered by or with a federal public official (a category the amendments add) or a state or local public officer. The bill grants the Attorney General the authority to enforce both prohibitions through a civil action for an injunction and disgorgement. See the press release here. 

Wyoming and New York Sign Memorandum of Understanding To Facilitate Coordinated Efforts in Regulating Virtual Currencies and Digital Assets 

On October 1, the Wyoming Division of Banking and the New York State Department of Financial Services announced a Memorandum of Understanding (MOU) to facilitate coordinated efforts in connection with the oversight of entities engaged in virtual currency and digital asset activities in Wyoming and New York. The MOU formalizes the coordination and enables the regulators to share expertise and supervisory insights. The MOU covers “digital assets” as defined under Wyoming law and “virtual currency” as defined in 23 NYCRR Part 200, and it applies to any entity that operates, or wants to operate, in either or both states. A notable feature is a fast track for firms that already hold a license in one state. If a licensee has operated under its home regulator for at least three years, is not subject to an enforcement action, and proposes a substantially similar business model, the other state will expedite its review of the application. For entities licensed in both states, the regulators will try to coordinate exam schedules and run joint examinations where practicable. See the press release here and a copy of the MOU here.