SEC Chair Gary Gensler, in an August 5, 2021, letter responding to Sen. Elizabeth Warren, urged lawmakers to grant the SEC greater power to regulate cryptocurrency trading and lending, as well as decentralized finance (DeFi) platforms. Warren sought answers last month from the SEC chief on whether the commission needs additional authority to police crypto exchanges.(See Sen. Warren Seeks Answers from SEC Chair Gensler on Crypto Exchange Regulation in the July 12, 2021, edition of Accounting & Compliance Alert.)
The Massachusetts Democrat wanted to clarify the SEC’s authority in light of growth in exchanges such as Coinbase, where trading volume has spiked this year. She and other Democrats are pushing for tougher crypto oversight, and Gensler, in his response, seemed to echo those priorities, writing that he believes “investors using these platforms are not adequately protected.”
A typical trading platform has more than 50 tokens, with many offering twice that amount, he wrote.
“While each token’s legal status depends on its own facts and circumstances, the probability is quite remote that, with 50 or 100 tokens, any given platform has zero securities,” Gensler wrote. “I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight.”
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. “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.”
Warren, in a statement, welcomed Gensler’s response, and said she will “continue to engage with the SEC and other federal regulators on this, and will work to close regulatory gaps through legislation.”
But Rep. Patrick McHenry, the top Republican on the House Financial Services Committee, blasted Gensler’s letter as a “blatant power grab that will hurt American innovation,” and warned of a “backroom deal” between Gensler and Warren.
“Given the distinct nature of digital assets, policymakers must be thoughtful and deliberative in legislating in this space,” McHenry said in his statement, pointing to his bill, H.R. 1602, the Eliminate Barriers to Innovation Act.
H.R. 1602, which passed the House in April, would set up a working group with the Commodity Futures Trading Commission (CFTC) on digital asset regulations.
The panel, under McHenry’s bill, would have one year following enactment of the bill 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 ACA.)
This article originally appeared in the August 13, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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