Several days ago, SEC Chairman Gary Gensler took to the pages of WSJ.com to reflect on crypto markets and regulations. This has been a hot topic for several years now as clear-cut rules by regulators still don’t quite exist. Chair Gensler is of the opinion that just about all digital assets are securities and thus fall under his domain. Unfortunately, legislation has yet to be signed into law granting this authority, and in the interim, the SEC has pursued regulation by enforcement in lieu of new rules leaning heavily on the Howey Test.
Chair Gensler asked the rhetorical question:
“What do car manufacturers have to do with crypto lending platforms? Consumers and investors deserve protection—that’s true of motor vehicles and investment vehicles alike.”
But are all digital assets securities? Are some commodities? Or perhaps something else or all of the above? Tough questions.
Jack Soloway, a Policy Analyst at Cato, took to Twitter today to bemoan Chair Gensler’s “regulation by Op-ed” because many digital asset platforms have been operating without formal guidance. So while Bitcoin is not a security, and maybe not Ethereum too, everything else could be considered a security, unless it is decentralized enough – or something like that.
2/ The SEC has given us regulation by enforcement and "regulation by op-ed" but has not provided formal rules clarifying the application of securities laws to crypto tokens.https://t.co/qSrObzCvax
— Jack Solowey (@JackSolowey) August 24, 2022
“According to the SEC Chair, $BTC is not a security. As for the rest, well, he’s not gonna say, but be careful out there kids… Because you just might find out through an enforcement action … Informal guidance and remarks from SEC staff (with caveats that views may or may not reflect those of the Commission) indicated that a key question for whether a crypto token is a security is the extent to which the project is decentralized.”
Soloway notes that Gensler’s request for people to come to talk to SEC staff is potentially a regulatory trap with the Enforcement Division stepping in. The chatter in the industry indicates SEC staff can be good listeners, but that’s about all you get.
Earlier this month, Solowey and Jennifer J. Schulp (a former Enforcement Director at FINRA), writing for Cato, proposed their own recommendation for crypto regulation – including disclosure. You may read it here and decide for yourself if this is the correct path. Currently, there is legislation working its way through Congress that attempts to resolve the opaque regulatory ecosystem, but there is no telling when policymakers will address unique challenges like DeFi and smart contracts.
In the end, what the digital asset industry truly needs are bright line regulations provided by Congress, which can be adjusted over time – kind of like seatbelts in cars and other automobile safety features that evolved as the market demanded.