There were no surprises in the Securities and Exchange Commission (SEC) chief Gary Gensler’s conversation with Coindesk this morning. He hammered his main talking points – most crypto tokens are securities and crypto services should register with his agency – throughout the interview.
In a later industry conference, however, he said that he was looking forward to working with Congress to pave the way for regulation of non-security tokens by the Commodities Futures Trading Commission (CFTC). The caveat to his offer of cooperation is that it shouldn’t take away his agency’s power to regulate security tokens. Based on his earlier interview with Coindesk, that should mean most tokens trading in crypto markets today.
Regulatory Clarity? Not Much
Gensler’s remarks at the conference might have been a cause for celebration for crypto enthusiasts because they imply that his agency, which has initiated proceedings against many crypto projects, will not be responsible for the asset class. But the caveat to his statement means that the agency is not washing its hands off the asset class altogether. In fact, if one were to believe Gensler’s assertion that most crypto tokens are securities, the list of non-securities that might fall under CFTC jurisdiction might consist of one, or possibly two, names.
All regulators agree that Bitcoin is not a security. Ethereum was deemed to be “sufficiently decentralized” by former SEC commissioner William Hinman in a 2018 speech. But Gensler has refused to confirm it as a commodity. Some have interpreted his silence as an implication of its security status.
The SEC chief has come under fire from the crypto community for his aggressive stance against the asset class. His remarks today, while supportive of assets like Bitcoin, do not provide much “regulatory clarity” of the sort that the crypto ecosystem craves.
The question of determining the legal status of tokens remains. Crypto purists claim that existing laws and the Howey test – which is used to determine whether a given asset is a security or not – are inadequate to classify crypto tokens. The SEC chief insists otherwise. In public appearances and editorials, he has said the Howey test and current regulation is sufficient to evaluate their status.
The Implications of Security Tokens
The regulatory status of tokens has bearing on crypto’s workings. Security tokens require more regulatory disclosures, an uncomfortable proposition in an industry where anonymity – in transactions and identity – is prized. Its workings and price movements have largely remained opaque over the years. It could also affect operations at crypto businesses. If most tokens are deemed securities, then major exchanges like Coinbase are flouting existing laws by offering them to retail investors without adequate disclosure.
In his interview with Coindesk, Gensler talked about “facilitating compliance” for investors by encouraging platforms to “come and work with us, find a path forward.” A conversation with regulators might end up in a delisting of these securities and significantly increase operational costs at the exchanges.