The US Securities and Exchange Commission (SEC) is on a crusade against cryptocurrencies. Now the US Congress demands clarity from SEC chair Gary Gensler. By Christoph Bergmann
Tuesday last week, Gary Gensler, chairman of the US Securities and Exchange Commission (SEC), had to face many critical questions from the US Congress’ Financial Service Committee. The hearing, which lasted more than five hours, could become a turning point in the SEC’s increasingly harsh crypto policy.
The SEC is currently suing several US exchange, such as Kraken, Coinbase, Gemini and Bittrex, for trading unregistered securities. The exchanges argue that the SEC neither sets clear rules nor offers a viable way to register. You could call this modern-day highway robbery: the SEC makes it practically impossible to be compliant with regulation but then sues companies for not complying.
In his opening remarks at the hearing, committee chair Patrick McHenry accused Gensler of unfair practices.
“You have started more than 50 lawsuits against digital currency companies, but refuse to provide clarity on whether a digital asset is a security or a commodity and, more importantly, how companies can be compliant with the law. You’re punishing companies that work with digital assets for not complying while they don’t know how they should do that.”
As the regulators from SEC and the CFTC, which is responsible for the commodities market, are at odds over what constitutes crypto assets. McHenry said Congress must work to craft clear rules for the market. Gensler’s SEC’s “regulation by enforcement” approach is neither satisfactory nor sustainable, he said. “Your approach drives innovation abroad and threatens American competitiveness.”
Gensler then explains his position at length: The SEC, he argues, has the mandate to supervise a 100-trillion-dollar market and to ensure consumer protection, regardless of the technology used. Therefore, the crypto market also falls under its supervision: “I’ve said it countless times: the vast majority of crypto tokens are securities.” Therefore, intermediaries working with crypto tokens would have to register with the SEC. Calling themselves a DeFi platform would be no excuse.
The SEC is currently working on several legislative proposals to classify crypto-assets. Gensler himself favours a variant that makes all crypto-assets securities. Such a rule would retroactively legitimise what the SEC is already doing, and could decide all currently ongoing proceedings in favour of Gensler’s agency. If he gets away with it, it would probably be the end of the crypto market in the US.
However, Gensler is reluctant to wholly satisfy Congress’ need for clarity. In particular, on the question of what Ethereum is in his eyes, security or commodity, he squirms like an eel without giving a precise answer.
“In 2018, then-SEC Chief Financial Officer Bill Hinman said he thought Ether was not a security” said McHenry. “Last month, CFTC Chairman Rostin Behnam said Ether is a commodity. But the New York attorney general suggested in a paper last month that Ether is a security. An asset obviously can’t be both a commodity and a security, can it?”
Gensler initially replies evasively, “I don’t want to talk about a specific asset.”
But McHenry chimes in, “You’ve already talked about Bitcoin, now let’s move on to Ethereum, the second largest crypto asset.”
Gensler: “I’m talking about tokens, there are 10,000 to 20,000 of them.”
“I asked about Ethereum.”
“Again, it depends on facts and the law.”
“I’m asking how you interpret the facts.”
“You don’t want me to prejudge …”
“But you do, you’ve filed more than 50 lawsuits. People ask which assets are security and which aren’t, and we just want a simple answer to a simple question about the second biggest digital asset.”
Gensler doesn’t want to be pinned down on whether Ether is a security or a commodity in his eyes. In a way, that’s understandable: if he says Ether is a commodity, the SEC’s position in the ongoing court cases worsens. If he says Ether is a security – and he obviously thinks it is – he in turn makes himself vulnerable, on the one hand by the Senate, which is unlikely to be united in scuttling the entire Ethereum ecosystem – and on the other hand by lawyers, who thus have a statement to complain about.
For whatever reason Gensler doesn’t want to or can’t provide clarity, and the Congress is not very happy with this. The closing statement with which Congressman Warren Davidson ends the hearing is scathing.
The Republican politician from Ohio accused Gensler of a “number of failures”. The SEC chief had failed to protect investors and had abused his power. For example, Gensler proposed two new rules per month, set unreasonably short deadlines for public comments and imposed unlawful and unenforceable ESG rules.
For the crypto market, he established a “Hotel California” rule: “You can check in whenever you want, but you can’t check out.” He says there is no clarity for those caught in the market, Gensler’s proposals are useless and a “de facto ban”. Davidson even proposed that Gensler be removed and replaced with another director.
Congressman Donalds added that Congress never gave Gensler the mandate to regulate digital assets. “Where do you get that? You just take it away, that’s part of the problem at hand.”
The crypto industry welcomes this turn of events. A few Bitcoin maximalists are annoyed that Ethereum may not be regulated as a security after all, as they hoped. But most in the community are happy that it will now be more difficult for the SEC boss to continue his raid through the crypto ecosystem.
Christoph Bergmann is the editor of Bitcoinblog.de, Germany’s leading publication on cryptocurrencies. This article has been published there first in German. Translation and editing: Aaron Koenig