Overview
On Sept. 14, Gary Gensler, chair of the Securities and Exchange Commission, testified before the Senate Banking Committee that the agency has authority using the existing, “broad” definition of a “security” to regulate the trillion-dollar market for cryptocurrency. Specifically, when asked by senators about gaps in the current regulatory regime, Gensler stated that agency officials have a “great deal of authority … a great deal of clarity” as to what is a security, citing guidance issued by the agency on digital assets under the leadership of former SEC Chair Clayton. These sentiments were echoed in an August letter to Sen. Elizabeth Warren (D-MA), in which Gensler wrote that “the test to determine whether a crypto asset is a security is clear. The SEC has taken and will continue to take our authorities as far as they go.” At a Washington Post event on Sept. 21, Gensler reiterated that the SEC has “broad authority” over what constitutes a security and said Congress could help improve coordination between agencies.
Gensler’s testimony about the SEC’s authority to regulate cryptocurrency is a departure from his previous remarks in recent months before both the House Financial Services and House Appropriations committees and at the Aspen Security Forum. At all three events, Gensler repeatedly called attention to the lack of regulatory oversight of crypto assets and asked Congress to provide the agency with sufficient authority to fill the void.
Absent congressional action, Gensler appears to have reviewed the agency’s authorities and concluded that the definition of a security is broad enough to support regulatory activity.
However, some crypto industry participants and policymakers are far from clear on when and how the securities laws should apply. At the Senate Banking Committee hearing, Ranking Member Pat Toomey (R-PA) lamented the lack of publicly available guidance regarding the criteria the SEC uses to determine whether a digital asset is a security and urged the Securities and Exchange Commission to signal its views to the public prospectively rather than pursue an ex post “regulation-by-enforcement” strategy. Gensler predicted additional enforcement action while speaking at the Washington Post event.
Crypto and Congress
With the congressional calendar clogged by a host of must-pass items—infrastructure, reconciliation, the debt ceiling and annual appropriations—for the remainder of the year, Gensler’s position on the SEC’s authority may allow for quicker agency activity in the crypto space.
Crypto assets have been the subject of growing congressional scrutiny in recent years and received an inaugural mention in the Federal Reserve’s semiannual monetary policy report in July. In addition, over 30 crypto-related bills were introduced in the 116th Congress. While Republicans often highlight the positive impacts crypto platforms have on financial inclusion, Democrats fear they lack sufficient investor protections. In response to Democrats’ calls for increased oversight of crypto markets, Republicans caution that imposing additional regulatory burdens on companies and investors would restrict innovation.
These divides are reflected in crypto legislation introduced in recent years, including the Blockchain Regulatory Certainty Act (H.R. 5045, 117th Cong.)—a Republican bill to provide a safe harbor for certain blockchain companies—and the Managed Stablecoins are Securities Act (H.R. 5197, 116th Cong.)—a Democratic bill to classify managed stablecoins as securities. A more process-oriented proposal from Ranking Member Patrick McHenry (R-NC), the Eliminate Barriers to Innovation Act (H.R. 1602), would require the SEC and CFTC to develop a digital assets working group. The bipartisan bill passed the House in April. The close margins in the House and Senate this session would also further complicate any effort to instill the SEC with additional statutory authority or directly regulate cryptocurrency.
Though the parties diverge on how and to what degree crypto assets should be regulated, there is a general consensus that greater clarity around what qualifies as a security would benefit investors and other market participants. The question remains whether the SEC can or will undertake action to specify distinct characteristics that make a crypto asset a security beyond the conventional hallmarks found in the Supreme Court’s lodestar Howey test. From the SEC’s perspective, an offer of prospective advice may be difficult because of the complexity of different assets such as “currencies,” token and other marketable rights; from the market’s perspective, the need for some prospective literature on the SEC’s thinking is a key ingredient in driving innovation.
Taming the “Wild West”
The next steps for Gensler, who famously dubbed crypto the “Wild West” earlier this year, are not immediately clear. Crypto regulations were noticeably absent from the Unified Agenda of Federal Regulatory and Deregulatory Actions published in June, leaving the timeline for any regulatory action uncertain. He will likely direct staff to prepare recommendations for the commission’s consideration or release a set of questions for public comment. The SEC is currently seeking feedback from the public about their experience with online trading and investment platforms, which may provide the agency information regarding how retail investors engage with cryptocurrency.
The regulatory agenda will be updated in the fall, providing Gensler with an opportunity to formally update the SEC’s plans to include crypto items. Absent additions to the regulatory plan, the agency may continue to regulate through enforcement, a practice criticized by Republicans.
Then an MIT professor, Gensler testified before the House Agriculture Committee in 2019 to share his views on both the dangers and benefits of digital assets. Like most policymakers, Gensler highlighted how better regulating the crypto space would reduce volatility, bolster market efficiency and integrity, reduce tax evasion and money laundering, and protect investors. However, where Republicans caution that regulation would stunt innovation and cede ground to Chinese competitors, Gensler believes a proper regulatory regime would foster innovation.
The SEC’s role in competing with China is already a point of interest as the agency, through the Public Company Accounting Oversight Board (PCAOB), works to implement the Holding Foreign Companies Accountable Act (HFCAA) and ensure Chinese companies listed on U.S. exchanges are adequately inspected. The SEC and CFTC were also recently named to the White House Competition Council, where the U.S.-China relationship may be a regular agenda item.
However Gensler proceeds, he is likely to face some pushback from Republican commissioners. Hester Peirce, who began serving on the commission in 2018, has released two proposals to create a three-year safe harbor for certain network developers to assess whether their token transactions involve the offer or sale of a security.
Ultimately, despite Gensler’s remarks to the Senate Banking Committee, meaningful SEC regulation in the crypto space should not be expected by the end of 2021. In the interim, information-gathering efforts, congressional hearings and heightened scrutiny at the federal level will certainly continue.