Securities and Exchange Commission (SEC) Chairman Gary Gensler is changing directions in the argument over whether or not cryptocurrencies are securities, signalling a change in tactics.
In an Aug. 19 op-ed in The Wall Street Journal, Gensler took a much broader, for-the-layman approach to the issue than he generally has in the past year, comparing the consumer protections of the securities laws to the seat belt requirements of the National Traffic and Motor Vehicle Safety Act of 1966.
“Despite many innovations in automotive technology … drivers and passengers deserve to be protected,” he wrote. “There’s no reason to treat the crypto market differently from the rest of the capital markets just because it uses a different technology.”
That last part is what he’s been arguing for 16 months now, ever since he hung up his MIT cryptocurrency professor hat for that of the nation’s top securities cop.
The problem is, it’s an argument that he’s slowly been losing in Congress, where the deep-pocketed and suddenly influential cryptocurrency industry is lobbying for oversight by the (presumably) lighter-handed Commodity Futures Trading Commission (CFTC) to protect and encourage innovation.
The main piece of legislation looking to provide a broad regulatory framework for the blockchain and cryptocurrency industry, the Responsible Financial Innovation Act proposed by Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.), turns control over firmly to the CFTC — although both of them, and a number of other pro-CFTC legislators, have hedged their bets by acknowledging that something can be both a commodity and a security.
And while the debate will likely change when the Biden administration releases its own multi-agency crypto regulatory proposals that were called for under the president’s executive order earlier this year, the argument has already been framed in Congress by Lummis and Gillibrand and other bills.
Latching Onto Lending
That is why Gensler has grabbed onto a new issue, one that arose in the past few months amid a series of insolvencies and bankruptcies. More than a half-dozen crypto lenders like Celsius, Voyager Digital and others have left hundreds of thousands of dollars of investors’ money stuck in Chapter 11 limbo — and it’s unlikely unsecured creditors will see all of their investments back.
What Gensler is seeing is a chance to reframe the debate as one in which sketchy crypto lenders convinced a hypothetical “Alice and millions of other everyday investors [to] put their assets” into companies that offered too-good-to-be-true returns of “4%, 7% or 19% returns” on billions of everyday investors’ dollars.
The Supreme Court’s Howey Rule — where an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others” is a security — was left unnamed as Gensler said the Securities Act’s required “disclosures help her understand what Bob is doing with her assets … How is he funding the promised returns, and what risks is he taking?”
The type of assets doesn’t matter, he added — pointing to “cash, gold, bitcoin, chinchillas or anything else.”
He then turned to one of the lenders crushed in the recent collapse, set off when the crypto winter’s price collapses led to the collapse of a hedge fund that had borrowed billions from those lenders.
While BlockFi was rescued from bankruptcy by FTX CEO Sam Bankman-Fried in a deal that could give him control of the firm, Gensler highlighted it because it had previously agreed to a $100 million settlement for not declaring its crypto lending business to be a securities offering.
And while Gensler’s traditional appeal to the cryptocurrency industry to “come in and talk to SEC staff” is still there, at the end, he’s not talking to the crypto industry, or even to lawmakers.
Instead, he’s talking to the public, who he hopes can shift the terms of the debate from innovation versus consumer protection to consumer protection that allows responsible innovation.
“As with seat belts in cars, we need to ensure that investor protections come standard in the crypto market,” Gensler said.
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