SEC Chairman Gensler is advancing his tough stance on cryptocurrencies, contradicting his past assertions. His current position seems to negate the earlier Gensler who had spoken highly of Ethereum (ETH) and many other altcoins. Since taking office, he has made a 180-degree turn and started expressing the exact opposite.
SEC Chairman and Cryptocurrencies
At the Piper Sandler Global Exchange and Fintech Conference, SEC Chairman Gensler discussed cryptocurrencies under a specific heading. Here, he reiterated his previous statements and communicated a message of determination. When we examine his entire speech, some significant details emerge.
There’s absolutely nothing in the crypto securities markets that suggests investors and issuers deserve less protection under our securities laws. In 1933 or 1934, Congress could have stated that securities laws were only applicable to stocks and bonds. However, the objective of Congress implementing the securities laws was to regulate investments, regardless of how they’re made and what they’re referred to as. This isn’t just a point of discussion. As Judge Thurgood Marshall wrote in the Supreme Court’s renowned Reves ruling, it’s the law of this country. Congress has incorporated a long list of over 30 items in the securities definition, including the term “investment contract.
Then the topic shifted to the Howey Test.
As expressed in another famous Supreme Court decision, SEC v. W.J. Howey Co., an investment contract exists when money is invested in a common enterprise with a reasonable expectation of profits derived from the efforts of others. This test has been confirmed multiple times by the Supreme Court – the court referenced Howey as recently as 2019. In the Howey decision, the court stated that the definition of an investment contract “embraces a flexible principle, one that could be adapted to accommodate the countless and variable schemes devised by those who seek to use the money of others on the promise of profits.
Cryptocurrencies are Securities
This conversation could mark an important turning point. For the first time, Gensler is loudly asserting that nearly all altcoins are securities. He even attempts to substantiate his claim by comparing them to popular commodities.
There are teams promoting these tokens through their websites and Twitter accounts. Investors can even meet with the entrepreneurs. These tokens don’t materialize out of thin air. They are not growing from the soil like corn or wheat. Being digital doesn’t set them apart from the vast majority of capital markets where securities and currencies are already digital. Satoshi Nakamoto’s innovation has stimulated the development of crypto assets and the underlying blockchain ledger technology. However, regardless of the ledger used, whether it’s an Excel spreadsheet, a database, or blockchain technology, when investors put their money at risk, the economic realities of the investment are what matter. Therefore, issuers of crypto securities need to register their offering and sale of investment contracts with the SEC or meet the requirements for an exemption. For decades, we have had rules dictating how issuers should do this. We have flexible rules for the disclosures required in registration statements.
In his speech, Gensler provided examples from past lawsuits to defend that altcoins are securities and that additional benefits or features do not exempt them from this definition.
Some advocates of crypto asset securities claim their tokens have a function beyond just being an investment tool. However, as courts have said in the Telegram case and other cases, some additional benefits do not remove a crypto asset security from the definition of an investment contract. In fact, in the famous Howey decision, the Supreme Court wrote that it is irrelevant whether the enterprise is speculative or whether a property with or without intrinsic value is being sold if the test for an investment contract is met. Nevertheless, for tokens used exclusively within blockchain ecosystems, staff has shown willingness to provide no-action letters.
In the speech, the pressure on exchanges is once again emphasized.
Considering that most crypto tokens are subject to securities laws, it follows that most crypto brokers also need to comply with securities laws. Again, these crypto entities know the rules. As Binance‘s chief compliance officer frankly stated to a colleague in 2018, ‘Bro, we are operating as an unlicensed securities exchange in the US.’ They say this and they know what they are doing. In other parts of our securities markets, exchange, broker-dealer, and clearing functions are separate. This separation of basic functions helps reduce conflicts that could arise when such services mix. I disagree with the idea that compliance for crypto brokers is impossible – and recent history disproves this-. I acknowledge that it requires work and I believe it is appropriate.
