Gary Gensler: “No honest business should fear the SEC.”

Crypto tokens and cryptocurrencies are two key topics that SEC Chairman Gary Gensler focused on in his address. At the same time, the head of the regulator emphasized that the expressed opinion is purely subjective.

The common thread running through the monologue was a quote from the first chairman Joseph Kennedy: “No honest business should fear the SEC.” Gensler is convinced that despite the differences in the underlying technologies, the crypto market has no peculiarities that would strongly contradict the securities law. Therefore, the issue of investor protection remains relevant.

Most cryptocurrencies are securities

Gensler states that the bulk of digital assets on the market today fall under securities laws. This conclusion can be drawn from the Howey test. It was created in 1946 by the U.S. Supreme Court to identify financial transactions that can be interpreted as investing in securities.

When is the Howey test positive? The following conditions must be met:

Based on the criteria presented, Gensler fully shares the opinion of his predecessor Jay Clayton and categorizes most cryptocurrencies as securities: “In general, the investing public is buying or selling crypto security tokens because they’re expecting profits derived from the efforts of others in a common enterprise.”

The SEC’s primary goal has been investors’ protection, which requires disclosure to help with investment tactics and fraud prevention. For this purpose, the Commission has launched an initiative to work directly with entrepreneurs to register and regulate certain digital assets as securities.

Given the nature of crypto investments, I recognize that it may be appropriate to be flexible in applying existing disclosure requirements. Tailored disclosures exist elsewhere – for example, asset-backed securities disclosure differs from that for equities.

However, there are still many cryptocurrencies that partially meet the criteria of the Howey test and cannot be classified as securities. Other ways of regulation should be considered for them. For example, Gensler called Bitcoin (BTC) a speculative and scarce digital “precious metal” and proposed that stablecoins be treated as shares of a money market fund.

Crypto intermediaries must be registered with the SEC

Assuming that most tokens are securities, it becomes evident that crypto exchanges must register with the SEC. It does not matter if they are centralized or decentralized crypto projects.

Trading platforms provide a wide range of services, from buying and selling tokens to clearing, lending, and custodial functions. On the one hand, this is convenient for investors, but on the other hand, it carries a certain risk. 

The commingling of the various functions within crypto intermediaries creates inherent conflicts of interest and risks for investors. Thus, I’ve asked staff to work with intermediaries to ensure they register each of their functions – exchange, broker-dealer, custodial functions, and the like – which could result in disaggregating their functions into separate legal entities to mitigate conflicts of interest and enhance investor protection.

Gensler insists that the effectiveness of the SEC’s control of the financial markets should not be reduced just because of the introduction of new technologies. Cooperation between the Commission and crypto projects guarantees stability in the $100 trillion capital markets.