On September 27, the House Financial Services Committee held a hearing titled ‘Oversight of the Securities and Exchange Commission’ with SEC Chair Gary Gensler as the sole witness. In the last SEC Oversight hearing in Congress back in April, Chairman Patrick McHenry (R-N.C.) had a contentious back and forth with Gensler with questions over the status of Ether as either a security or a commodity.
This hearing saw a repeat of the wrangling back and forth but with questions over Bitcoin. Both times, Chair McHenry has chosen these questions to be the very first ones asked during the hearing. It appears the top two digital assets by market size, Bitcoin and Ether, are still creating consternation for policymakers as to the right regulatory approach. More importantly, the question as to whether action by Congress is needed to help provide a regulatory paradigm that consumers, investors, and businesses can rely upon when it comes to digital assets.
To help get to the heart of the matter, I had a chance to speak to two of the top crypto attorneys in the space to help provide some insights on what the public heard regarding the status of Bitcoin and Ether. For Bitcoin, Gensler answered, “I would say it’s not a security and then the test is otherwise for other laws.” For Ether, Gensler’s answer was, “I am not going to speak about any specific one,” and that it is based on the facts and circumstances of each cryptocurrency token.
Lewis Cohen, co-founder of DLx Law, a boutique law firm focusing on clients active in the blockchain and crypto asset space, said “The SEC Chair seems reluctant to take on the question of whether ether is a security, not because there is doubt as to whether ether is a security (it is not) but because answering the question directly would then require grappling with many more difficult questions regarding other crypto assets.
I asked H. Joshua Rivera, Operating Partner and General Counsel at Blockchain Capital, the first venture capital fund dedicated to crypto builders since 2013 with over $2 billion in assets under management, whether some of the reluctance in answering the question had to do with a regulatory turf war between the SEC and the Commodity Futures Trading Commission (CFTC). Rivera said, “I don’t know if it’s a turf war. What Gensler wants to do, he wants most people to believe that crypto generally is a security and therefore subject to SEC regulation.”
Crypto Regulations: Clear As Mud Or Crystal Clear?
Regarding Gensler’s refusal to answer the question on Ether, McHenry expressed the concern that the crypto industry is finding out as we go along due to all the numerous enforcement actions the SEC is issuing. McHenry then asked whether Gensler could at least agree there is a lack of clarity. Gensler would not, saying “I think the clarity is there.” Gensler has also said publicly many times that he has never seen an industry filled with as much noncompliance as crypto. However, is it the regulations are clear and there are all bad actors in the space, or is this industry that creates value like any other, with legitimate actors as well as its share of frauds and scams.
Cohen says, “By pursuing enforcement actions against parties in the crypto space not accused of fraud or malfeasance, the SEC risks diluting their authority and provides the courts with an opportunity to second-guess the Commission’s extremely broad interpretations of the power granted to them by Congress. That is unfortunate.” Rivera said along this vein that Gensler, “… wants to fulfil an objective – bring the crypto under the SEC’s jurisdiction and slow the crypto industry down because it has accelerated so rapidly.” Rivera went on to note that, “ In any industry that creates value there is going to be fraud and scams. [Gensler] is less interested in collaborating with the industry to come up with sensible regulations.”
Is It Time For Congress To Enact New Legislation For Digital Assets?
When McHenry asked if a new law from Congress would help consumers to be better protected when dealing with Bitcoin, Gensler explained that while the Commodity Futures Trading Commission (CFTC) has antifraud authority, the agency does not have plenary authority, or the ability to write rules to better regulate the digital asset marketplace, and that this would help them [the CFTC].
Currently, the bill in Congress farthest along that could establish a market structure for crypto and settle the questions on Bitcoin, Ether, and numerous other cryptocurrencies, the FIT For the 21st Century Act (H.R. 4763) has been voted out of both the House Financial Services Committee and House Agriculture Committee for consideration by the entire House of Representatives. McHenry has been driving the charge behind this legislation.
When it comes to what kind of legislation might help the industry, Cohen said, “ I would like to see Congress adopt principles-based legislation that recognizes that investment schemes inherently involve fundraising and that non-fundraising exchanges of crypto assets in secondary market are not securities transaction unless the crypto asset is used to create legal rights or an interest in some identifiable legal entity.” Cohen went on to note, “It would also be good to see a bespoke disclosure regime adopted for crypto assets that are not securities.”
As to Gensler’s acknowledgement that Congress could do something to help the CFTC, Rivera commented, “That recognition in and of itself is a tacit rebuke of Gensler’s position where he is basically of the opinion to let him go and regulate the crypto markets”.
McHenry’s clash against what he describes as an SEC chair leading a ‘crusade against the digital asset ecosystem’ while Gensler continues to insist regulations are clear and it is an industry filled with noncompliance, leaves an ongoing debate in political circles that questions whether legislation is needed and what type of policy is best for all stakeholders in the new cryptocurrency ecosystem.
