On September 14, the new Chairman of the Securities and Exchange Commission, Gary Gensler, appeared before the Senate Banking Committee to talk about how his agency planned to handle the financial markets during his tenure. He praised the American financial system, discussed the future of corporate bonds, and met on how stock market rules could be modified to make them more efficient. He quickly turned to the cryptocurrency markets, which are notorious for volatility, and adopted a darker tone. “Honestly, like I said before, I think it’s more like the Wild West,” Gensler said. On another occasion, he described cryptocurrency investments as “full of fraud, fraud and abuse.”
Gensler’s comments came after several years of a fraught relationship between the agency he now heads and the market for digital currencies, tokens and virtual currencies such as bitcoin, which are created using cryptography, many of which reside in giant, decentralized electronic ledgers that use blockchain technology. The SEC has so far failed to keep up with thousands of tokens and cryptocurrencies, and new companies and platforms have emerged to help store and trade them. The lack of regulations regarding this prosperous region created an opportunity for widespread fraud; The Federal Trade Commission reported in May that consumers lost more than eighty million dollars in crypto investment frauds between October 2020 and March 2021, more than ten times the amount lost during the same period the previous year. (Two million of them were lost to fraudsters impersonating Elon Musk.) Gensler now faces the challenge of explaining how to regulate the emerging market of the future. The stakes are also high for the cryptocurrency industry: until it becomes part of the regulated economy, it will be associated with the concept of criminality.
Gensler, sixty-three years old, has a long history in government and on Wall Street – a joint biography of officials chosen for important economic positions. He spent eighteen years at Goldman Sachs, where he worked as a mergers and acquisitions banker and became one of the company’s youngest partners, at the age of thirty. President Bill Clinton nominated him for the position of Assistant Secretary of the Treasury. In 2009, President Barack Obama appointed Gensler to be chair of the Commodity Futures Trading Commission, which regulates derivatives markets. After leaving the CFTC, in 2014, Gensler served as a professor at the Massachusetts Institute of Technology’s Sloan School of Management. During his time there, he focused much of his education on cryptocurrency. His first chapter, “Blockchain and Money,” covered the development of blockchain and its potential uses.
One of the biggest questions facing the industry is whether tokens – which are tradable assets that may function as units called cryptocurrencies but can also represent other things of value – qualify as securities; If so, they will be subject to securities laws and regulations. And if they aren’t securities, what are they? The answer to this question will help determine what other agency you might oversee. For many in the field, the letters from the Securities and Exchange Commission in the past few years have been confusing.
Nick Morgan, one of the securities attorneys I spoke to, a partner at Paul Hastings, noted that, around 2017, there was a wave of initial coin offerings — a fundraising strategy for cryptocurrency similar to an IPO — that was in full swing, coming Client to his law firm wishing to know the SEC’s opinion on ICOs, and whether the agency considers cryptocurrencies within its jurisdiction. Morgan joked that his first question was, “What is the initial coin offering?” He soon learned that there were very few SEC guidelines available. “What may be useful for everyone to know is, what are the characteristics of a digital asset Not security? “It would be helpful to draw that line,” Morgan said. “I was a bit optimistic, given Gensler’s tech background, that he might be the one to say, ‘Here’s the SEC’s purview, and if I designed code that way, it would be out of our purview. But he added, “I don’t think that’s going to happen.”
During a speech in early August, at the Aspen Security Forum, Gensler offered some thoughts on the matter. “Those tokens that are being offered, many of them are being offered and sold as collateral,” he said. “There is actually a lot of clarity on this front.” Gensler then reiterated a statement made by his predecessor, Jay Clayton, at a Senate hearing: “To the extent that digital assets like an ICO are securities — and I think every ICO I’ve seen is a security — we have jurisdiction and our federal securities laws apply. . ” But some may still feel that the details are still vague.
One way to understand what the Securities and Exchange Commission believes about a particular issue is to look at its enforcement cases, which help identify activities that violate securities laws. Last December, the Securities and Exchange Commission sued Ripple, a cryptocurrency company, alleging that it made an “unregistered offer of securities” by raising $1.3 billion through sales of a token called XRP. According to the agency’s complaint, XRP is a security, and the company must register its offer and sale to the public with the SEC. Ripple argues that XRP is a currency, making it subject to different laws and regulations overseen by different agencies — such as the Office of the Comptroller of the Currency or the Financial Crime Enforcement Network, both of which Part of the Treasury. Ripple has taken to Twitter to defend itself, as well as to present its arguments in court. It appears that part of its strategy includes trying to embarrass the SEC about the agency’s apparent contradictions surrounding cryptocurrency. In 2018, a SEC official named William Henman told an audience at a conference that based on his understanding, one of the most popular cryptocurrencies, ether, was not as safe and should not be regulated like it is. The trading price of Ether surged in the coming hours, and representatives in the cryptocurrency world grabbed the comments, which they interpreted to mean that many other cryptocurrencies were likely not securities. Ripple argued in court that XRP should be treated in the same way as ether. She also urged that certain internal documents of the SEC relating to what is or not a guarantee should be turned over as part of the case in order for them to be used in the company’s defense.
Recently, the Securities and Exchange Commission expressed interest in Coinbase, one of the largest cryptocurrency exchanges where individuals can buy and sell cryptocurrency. Coinbase went public earlier this year, and in June announced plans for a product called Lend that would enable crypto-holders to lend to them and pay interest on loans. On September 7, Coinbase announced in a blog post that the Securities and Exchange Commission had threatened to sue the company over Lend, claiming, as stated in the post, that the offer included a guarantee. According to the company, its executives have been “proactively engaging” with the Securities and Exchange Commission for six months, to clarify the legal status of its projects, but it has “not gotten much response.” She also said that the Securities and Exchange Commission has so far refused to clarify whether it considers the act of lending cryptocurrency to be a security, whether cryptocurrency itself is a security, and any other aspects of its reasoning. (The Securities and Exchange Commission said it cannot comment on issues involving specific companies.) On September 17, Coinbase announced that it was canceling the Lend program.
As the agency takes its time setting clear rules, the industry is left guessing. This may be the way the SEC wants things to be. “This is the best position for them to be in,” Morgan said. “The moment they determine, or the court determines, the characteristics of an asset that is outside the jurisdiction of the SEC, everyone will say, ‘Okay, we’ll do it this way.’ And they don’t want that.”
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