Gary Gensler, the chairman of the Securities and Exchange Commission (SEC), has publicly expressed concerns about new bipartisan legislation drafted by Sens. Cynthia Lummis (R-Wy.) and Kirsten Gillibrand (D-N.Y.) that would provide clarity around laws concerning the use and trade of bitcoin, stablecoin, and other cryptocurrencies, and the regulatory jurisdiction under which such commodities fall.
The new legislation would limit the SEC’s ability to regulate crypto assets and would turn over responsibility to the commission’s civil enforcement counterpart, the Commodity Futures Trading Commission (CFTC), helping to foster a relatively regulation-lite and pro-business environment for blockchain traders.
Some see Gensler’s new expressions of concern as “too little, too late,” given how long digital currencies have been around and the SEC’s perceived lack of resolve in the past around issuing clear and consistent guidance.
A business development manager in the blockchain and crypto space who asked not to be identified told The Epoch Times that it feels to him and some of his clients as if the SEC and the CFTC are “battling” over jurisdiction in the crypto space, even as clients increasingly seek clarity around the rules and want to know whether they will be required to register with the SEC or the CFTC.
Gensler has reacted negatively to the new bill despite having had ample time in the past to try to achieve clarity around the nuts and bolts of day-to-day crypto regulation, observers say.
In a statement accompanying the June 7 announcement of the new bill, the Responsible Financial Innovation Act, Gillibrand described it as “landmark bipartisan legislation” that will see a “complete regulatory framework for digital assets that encourages responsible financial innovation, flexibility, transparency, and robust consumer protections while integrating digital assets into existing law.”
Stellar Growth
In her release, Gillibrand went on to describe digital assets and cryptocurrencies as having undergone “tremendous growth in the past few years” and holding out the prospect of “substantial potential benefits if harnessed correctly.”
In that statement, the senator alluded to rapid growth that helped the global blockchain market attain a value of $5.92 billion in 2021, with further steady growth expected between 2022 and 2030, according to Grand View Research figures.
The Lummis-Gillibrand bill seeks to provide for the “correct harnessing” of the products by establishing, in the explicit language found in Title 3 Section 301, the legal status of digital assets as either commodities or securities.
To do this, the bill applies the standard set forth under the 1946 Howey Test, which establishes the existence of an investment contract as one of the conditions of a security.
Under the Howey Test, those assets determined to be ancillary assets will be subject to modest (twice yearly) disclosures to the SEC but will, at bottom, enjoy the status of commodities rather than securities.
What kinds of assets fall into this category?
As a section-by-section summary of the bill states, “Digital assets which are not fully decentralized, and which benefit from entrepreneurial and managerial efforts that determine the value of the assets, but do not represent securities because they are not debt or equity or do not create rights to profits, liquidation preferences or other financial interests in a business entity (‘ancillary assets’), will be required to furnish disclosures with the SEC twice a year. Ancillary assets in compliance with these disclosure requirements are presumed to be a commodity.”
This description encompasses large numbers of the digital assets whose value is very much subject to entrepreneurial and managerial efforts in day-to-day trading. In its current form, the bill would formally wrest control of a good part of the digital market from the SEC and turn it over to the CFTC, which is known to have fewer and more flexible disclosure and filing requirements than the SEC.
Hence, it is little wonder that just days after the announcement, SEC Chair Gensler came out and publicly criticized the bipartisan bill.
A June 15 article in the Wall Street Journal quoted Gensler telling participants at a CFO Network Summit, “We don’t want to undermine the protections we have in a $100 trillion capital market.”
Apparently unconcerned with the more technical nuances of the Howey Test as applied to digital assets, Gensler also said, “We’re not looking to extend our jurisdiction. But these tokens are being offered to the public, and the public is hoping for a better future. That’s the characteristics of an investment contract.”
A Regulatory Turf War?
Gensler’s remarks came on the heels of public calls from CFTC head Rostin Behnam for a bolder stance on the part of his own agency in light of a rising caseload of digital asset manipulation and fraud.
The Wall Street Journal on May 18 quoted Behnam stating that roughly two-thirds of the number of crypto-related fraud enforcement actions came in the last two and a half years. The same article noted the crash in May of cryptocurrency TerraUSD and its sister stablecoin, Luna.
For some observers, the growing interagency rivalry may stem partly from the SEC’s failure in the past to provide clarity around an issue where many market participants waited patiently for guidance.
“From a regulatory standpoint, sponsors and prospective sponsors of crypto-related investment products want to know the rules of the road. It’s been surprising to many how long this has taken, that there hasn’t been a more formal pronouncement by the SEC. The continuing uncertainty has been problematic, and, again, somewhat surprising,” Wayne Davis, a partner at Tannenbaum Helpern Syracuse & Hirschtritt in New York, told The Epoch Times.
There are those who would argue that, by this point in the game, the SEC should already have taken a proactive approach to establishing its regulatory scope on all things cryptocurrency-related, Davis said.
To some observers, the regulator has pursued a regulation-heavy approach not favorable to the innovators and entrepreneurs who are the movers and shakers in a $5.92 billion market.
“Clearly, there are commissioners, in addition to the chairperson, who are very familiar with cryptocurrency and the market nuances. And yet, to this point, the SEC has chosen not to take a proactive stance, but rather to regulate incrementally and reactively, via enforcement action,” Davis added.
If the new bill fails and regulation of the crypto market falls under the SEC’s purview, that is likely to mean more red tape for players in the crypto space.
“Generally speaking, relative to the CFTC, the SEC tends to have more filing and disclosure requirements,” Davis said. “The question is why the SEC has not yet moved forward with its own proposals, allowing for industry comments, with an eye toward putting SEC regulations into effect.”
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