U.S. Securities and Exchange Commission (SEC) chair Gary Gensler reaffirmed his stance on cryptocurrencies, saying they should be considered investment contracts subject to appropriate regulation.
At the Piper Sandler Global Exchange & FinTech Conference, Gensler said that cryptocurrencies, regardless of their digital nature, meet the requirements of the Howey test. Unlike agricultural commodities like corn or wheat, teams actively promote cryptocurrencies, indicating their status as investment assets.
He acknowledged the significant impact of Satoshi Nakamoto’s innovation in developing crypto assets and blockchain technology. At the same time, the chairman also stressed that the economic realities of investing remain the determining factor, regardless of the underlying ledger technology.
“Congress included a long list of 30-plus items in the definition of a security, including the term’ investment contract,'” said Gensler. “The vast majority of crypto tokens meet the investment contract test. … Thus, crypto security issuers need to register the offer and sale of their investment contracts with the SEC or meet the requirements for an exemption.”
He asserted that crypto companies have no legitimate excuse for failing to operate within the existing regulations. Gensler dismissed any claims that companies are unable to comply with the current laws governing the industry.
Addressing concerns about regulatory resources and legal clarity in the crypto industry, Gensler pointed out that the SEC had already made it clear that existing rules apply to platforms trading crypto asset securities, including decentralized finance (DeFi) systems. He emphasized that these rules are already in place and should be adhered to by all market participants.
Gensler underscored the importance of understanding and complying with the law, saying, “Not liking the law, not liking the rules is different than not hearing it or not getting it.”
He urged companies to familiarize themselves with the regulatory requirements and ensure that their operations comply.
SEC lawsuits threaten crypto industry’s viability
Earlier this week, the SEC took legal action against major crypto exchanges Binance and Coinbase, alleging that they offered securities intermediation services without proper registration. Coinbase was additionally accused of commingling its exchange, broker-dealer and clearinghouse functions, while Binance was accused of commingling investors’ assets.
Gensler highlighted that the expansive definition of security encompasses investment contracts, making most crypto tokens subject to SEC registration or exemption requirements. He specifically addressed staking as a service, saying that pooling resources to generate returns qualifies as classic security.
Gensler expressed disappointment that companies like Binance, Coinbase and Bittrex knowingly violated these rules, potentially making calculated decisions to operate under the risk of enforcement actions.
“Registration is not just about process. Failure to register is not just a foot fault in a tennis match. It is essential to provide investors and our markets with basic protections “he said.
He also strongly condemned the prevalence of fraud abuse, and non-compliance in the crypto industry, likening the current frenzy to the 1920s before securities laws were established.
Gensler called out hucksters, fraudsters, scam artists and Ponzi schemes, expressing concern for the public’s trust and investors’ well-being. By pointing out the absence of regulation in cryptocurrency firms, he expressed concerns about the potential risks retail investors encounter when projects collapse, ultimately leaving them stranded in bankruptcy courts.
Inside Bitcoins reports that if the allegations against Coinbase are substantiated, it could substantially affect the company’s business model. If the SEC is successful, Coinbase might be subjected to restrictions, possibly leading to a situation where it can only provide services for Bitcoin and Ethereum.
Industry experts, such as blockchain consultant and lawyer Preston Byrne, predict a 33 percent chance of Coinbase ceasing operations in the U.S. within five years.
Critics question SEC’s actions
Lawmakers and experts are showing sharp criticism of Gensler’s actions, accusing him of exceeding his authority and disregarding congressional oversight. Some lawmakers view Gensler’s actions as undermining legislative efforts to regulate the digital asset industry.
Democratic Representative Ritchie Torres from New York strongly condemned the recent enforcement action against Coinbase, labeling it a clear case of regulatory overreach. Torres expressed concern that Gensler’s actions demonstrate a lack of respect for Congress, which is actively working on developing a comprehensive regulatory framework for cryptocurrencies.
Gensler’s discontentment with the cryptocurrency industry has become increasingly apparent through his speeches, congressional hearings and media appearances. In a congressional panel in April, he was taken aback by the sector’s lack of adherence to laws passed by Congress, claiming it to be unprecedented in his 40 years of involvement in finance.
Torres, a member of the House Financial Services Committee overseeing the SEC, said that Gensler’s perspective on the technology has shifted since his time teaching a blockchain and money course at MIT in 2018.
According to Torres, Gensler’s changing perspective on the law is driven by political motives, shifting from endorsing cryptocurrencies to adopting a more cautious position. Torres said that Gensler is positioning cryptocurrencies as the antagonist to enhance his own political image. The SEC, however, declined to comment on these claims.
Republican members of the House Financial Services Committee have been vocal in their criticism of Gensler. During a recent event, Arkansas Representative French Hill accused the SEC of using actions against Coinbase and Binance as distractions from its failure to prevent the collapse of FTX. Hill referred to the FTX collapse as “the largest fraud and the most significant wrongdoing in the history of American finance.”
Critics argue that the SEC’s enforcement efforts, particularly the Coinbase case, are misplaced for focusing on the failure to register as a securities exchange instead of alleging fraud. The lawsuit centers on the SEC’s claim that certain tokens offered on Coinbase, such as Solana and Cardano, are securities, although their legal status remains ambiguous.
These cases require substantial resources from the SEC, involving multiple popular cryptocurrencies. The ongoing Ripple lawsuit, filed under former Chairman Jay Clayton, has been ongoing for over two years and involves a single token. Expanding the SEC’s claims to numerous cryptocurrencies increases the stakeholders involved in the lawsuit.
Industry representatives perceive these enforcement actions as part of a broader “war against crypto” by the U.S. government. They are now urging Congress to pass new legislation establishing a comprehensive regulatory framework for cryptocurrencies. Former assistant U.S. attorney Katherine Dowling called for urgent action, requesting a crypto market structure bill that balances consumer protection and industry growth.
As the SEC’s actions against Coinbase and Binance unfold, concerns arise regarding the allocation of regulatory resources and the clarity of cryptocurrency laws. The industry looks to Congress for decisive action, but the pace and effectiveness of legislative efforts remain uncertain.