Securities and Exchange Commission Chairman Gary Gensler on Thursday defended his agency’s stance on regulating crypto tokens, arguing that nearly all crypto offerings available today fit the definition of a traditional security and should be registered and regulated accordingly.
SEC Chair Gensler reiterated his view that the Supreme Court has addressed the definition of a security and that there is a well-established, multifactor test that most tokens meet.
Eric Lee/Bloomberg
Securities and Exchange Commission Chairman Gary Gensler on Thursday defended his agency’s stance on regulating crypto tokens, arguing that nearly all crypto offerings available today fit the definition of a traditional security and should be registered and regulated accordingly.
Gensler made his case to skeptical members of the Senate Banking Committee, who pressed him on his view that while Bitcoin behaves more like a commodity, most tokens are more like conventional stocks.
“Crypto tokens have varying degrees of decentralization, they usually do not have a financial claim on the issuer, and typically can be settled in real time without intermediaries,” said Pat Toomey (Penn.), the top Republican on the panel. “These are very major and important differences from traditional securities and they merit a clearly stated and tailored regulatory framework.”
Throughout Thursday’s hearing, Gensler reiterated his view that the Supreme Court has addressed the definition of a security, that there is a well-established, multifactor test that most tokens meet.
“There are many factors,” he said in response to Toomey’s questioning. “It’s not one spectrum of decentralization versus decentralization.”
Gensler argued that most tokens share the basic structure of a start-up business where there are a handful of entrepreneurs promoting investment in their project, and investors who buy a stake in the enterprise do so with the expectation that they will make a profit.
By that reckoning, the underlying technology and logistics of a token sitting on a distributed ledger are unimportant to the question of how it should be regulated.
“I think about a group of individuals in the middle,” Gensler said. “That developer is in the middle and the investing public is betting on them, counting on them even if the token might be on a thousand computers. That’s not what the Supreme Court’s looking at. It’s not about the token being on a thousand computers.”
For Toomey and other critics of the SEC’s approach, that explanation isn’t good enough.
“It is not reasonable to fail to provide the definition of exactly where on this continuum you have a sufficient common enterprise that it qualifies as a security and where you don’t,” he said. “You’ve said Bitcoin doesn’t. Some of your colleagues have said Ethereum doesn’t, but a reasonable developer who wants to comply with this doesn’t know where that line is drawn.”
Many players in the crypto space have called on policy makers to set clearer rules that would be distinctly tailored to the industry. It’s a view shared by some inside the SEC.
Toomey echoed those appeals, suggesting it should ultimately fall to Congress to set a new definition of security.
“Given the novel nature of these tokens, really Congress ought to step in and provide clarity,” he said. “In particular we need to revisit the definition of security as part of a larger effort to tailor a regulatory framework that is calibrated to the unique risks and activities of the crypto market.”
