The top Republicans on the House Committee on Financial Services and Committee on Agriculture in a August 16, 2021, letter urged the SEC and CFTC to establish a joint working group on digital assets. The letter, from Reps. Patrick McHenry of North Carolina and Glenn Thompson of Pennsylvania, aims to stave off the SEC’s “concerning roadmap for regulatory actions” on the crypto-currency market.
“A working group on digital assets would enable both the SEC and CFTC to explore how to effectively use their current jurisdiction cooperatively,” the lawmakers wrote. “Such a working group can foster transparent engagement with innovators in the digital asset ecosystem. As Congress contemplates additional legislation to address regulatory gaps, this work could provide us with additional information and clarity as we make these important policy decisions.”
The plea is similar to the directives of McHenry’s H.R. 1602, the Eliminate Barriers to Innovation Act, which cleared the House in April. Under that measure, which Thompson cosponsored, the joint working group would have one year following enactment to submit a report to the SEC and CFTC analyzing the legal and regulatory framework, and related developments in the U.S. and other countries, on digital assets, with recommendations on the “creation, maintenance, and improvement” of digital asset markets; custody, cybersecurity, and other standards; and best practices to reduce fraud and manipulation, protect investors, and aid in countering money-laundering and financial terrorism.(See House Passes Bills on Executive Trading Plans, Digital Assets, Senior Investor Protection in the April 22, 2021, edition of Accounting & Compliance Alert.)
“While H.R. 1602 would require the creation of a working group, nothing prevents the SEC and CFTC from undertaking similar activities under existing law,” McHenry and Thompson wrote in their letter.
The Republican letter follows a recent exchange between SEC Chair Gary Gensler and Sen. Elizabeth Warren of Massachusetts, in which Warren sought answers on the SEC’s authority to regulate crypto exchanges, and Gensler responded by reasserting the commission’s power to regulate digital assets traded on the exchanges that qualify as securities, and warned that “investors using these platforms are not adequately protected.” (See SEC Chair Gensler Asks Congress for Power to Regulate Cypto Trading, Decentralized Finance in the August 13, 2021, edition of ACA.)
“Recent comments made by Chairman Gensler and his recent exchange with Senator Elizabeth Warren provide a concerning roadmap for regulatory actions that will have long-term implications,” McHenry and Thompson wrote in their letter. “Rather than regulate innovation and job creation out of this country, we should promote an active dialogue between regulators and market participants.”
The SEC has today been regulating the crypto market primarily through enforcement, an effort that largely hinges on its ability to tie the assets to the definition of a security. To determine whether an asset represents a security, the SEC applies the “Howey test” established in the 1946 Supreme Court ruling in SEC v. W.J. Howey Co. Under that test, a security must involve an investment of money in a common enterprise, with an expectation of profit from the efforts of a third party.
“Certain rules related to crypto assets are well-settled,” Gensler wrote in his August 5 response to Warren. “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.”
This article originally appeared in the August 18, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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