In a speech before the Aspen Security Forum on August 3, 2021, SEC Chair Gary Gensler followed the lead of his predecessor and repeated the SEC’s view that current securities regulations are clear and almost all tokens are securities. In the same speech however, he cited “facts and circumstances” that need to be assessed and evaluated, i.e., a subjective evaluation of facts and circumstances based on the multi-pronged Howey test, and suggested the new regulation, and even new laws requiring Congressional action, are likely necessary. When pushed to elaborate in Q&A, he did not articulate a clear test beyond the basic Howey prongs or point to any asset that he has definitively determined is not a security out of the 77 tokens worth at least $1 billion each and 1,600 tokens with at least a $1 million market capitalization that he cited in his comments. Gensler stated that technology alone does not change the fundamental nature of a securities offering and analogize the adoption and implementation of blockchain technology as akin to the development of the Internet. The Internet changed the way that issuers, intermediaries and investors communicated, and existing rules could simply be adapted to new digital communications such as the use of Internet investment portals through which accredited investors could invest in private offerings behind password protected walls,[1] electronic delivery of offering materials[2] and public company disclosures using websites and social media[3]. The development of blockchain technology, in contrast, has created an entirely new asset class, means of transacting with unknown third parties and mechanisms for storing and transferring value. Gensler’s oversimplification of the rise of blockchain technology as akin to the evolution of the use of the Internet in offerings of common stock is not a fair or accurate comparison. Cryptocurrencies are not a new mechanism for offering securities, they are broadly a new asset, but more specifically hundreds of new assets as each cryptocurrency, blockchain, protocol, ecosystem or project contemplates a different use case.
Gensler also simplified the Howey test: “Did you give someone money, in anticipation of profits on their efforts?” Unfortunately, even this simple test does not take into account the many different ways that digital assets are distributed, many of which do not involve any exchange of money between a protocol’s sponsor and the recipient of the digital asset. Gensler seemed to elaborate on the idea of “their efforts” describing it as “the handful of people at the center of project and in effect the investor is hoping those people do well.” Again, this fails to take into account the many iterations and innovations of decentralized structures and the basic idea that the “handful of people” may very well be a developer in South America, a foundation in Switzerland, a group of developers in Europe, validators in Asia and an entity in the United States that is incorporating the protocol into its new application and utilizing the digital asset for the benefit of its customers. Simplification of the test does not simplify the facts to which that test must be applied; that is the difficult part.
Gensler’s approach seemed to forewarn more aggressive enforcement activity, but the message seems to indicate that exchanges – centralized and decentralized – are the intermediary through which the SEC may regulate the broader crypto and blockchain industry. He acknowledged over 1,700 tokens and gave numerous generalized examples of exchanges that he theorized probably were trading in securities if they were trading more than three or four tokens. While the SEC cannot put the genie back in the bottle with 1,700 tokens, it may seek to prevent liquidity and trading in those tokens through digital asset exchanges, and that may be the first target of Gensler’s enforcement directive. His jurisdiction over those exchanges, however, may not be as clear as his comments appeared to indicate as current and former CFTC commissioners commented shortly after Gensler’s speech that jurisdiction over commodities trading facilities fall within the authority of the CFTC, not the SEC.[4] It will remain to be seen which agency may take the lead in comprehensive crypto regulation, but that may not stop the SEC’s enforcement regime in the near term.
It appears that through the change of leadership, the approach remains the same: declare the regulatory landscape clear while also inviting Congressional action, new rules and industry driven solutions as necessary to help clarify what has been deemed clear, all while bringing enforcement actions that provide no clear policy or regulatory goal. In light of this, many projects are seeking out alternative jurisdictions, creating a risk that these alternative jurisdiction will control this next phase of innovation and reap its benefits, much as the US did with the Internet-age, but it may not be in a position to do so in the crypto-age.
[1] See , e.g. , Staff no-action letters, IPONET (available July 26, 1996); Lamp Technologies, Inc. (available May 29, 1997).
[2] Use of Electronic Media for Delivery Purposes, SEC Release 33-7233 (October 6, 1995).
[3] See, e.g., Commission Guidance on the Use of Company Web Sites, SEC Release 34-58288 (Aug. 7, 2008); Securities Act Rules C&DIs, Question 110.01 (April 21, 2014) (describing how issuers may comply with Rule 134 while using social media platforms that may limit the number of characters in a post).
[4] Commissioner Brian Quintenz via Twitter: “Just so we’re all clear here, the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil… or #crypto assets.” @CFTCquintenz, August 4, 2021. Former CFTC Chairman Chris Giancarlo via Twitter: “Only one US regulatory agency has experience regulating markets for #Bitcoin & #Crypto and it is not @SECGov. It is @CFTC. If #BidenAdministration is serious about sensible #Cryptocurrency #regulation, it needs to nominate a CFTC #chariman.” @giancarloMKTS, August 4, 2021.
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