Bitcoiners were enthusiastic at the new SEC chair’s broad comments on crypto regulation. Others, unsurprisingly, were not.
Gary Gensler, the SEC’s chairman, said on Tuesday that the agency would use current rules to aggressively oversee cryptocurrency marketplaces. That may sound frightening, but markets have barely moved — Bitcoin has even risen modestly this morning. Some industry executives and analysts expressed acceptance, if not outright approval.
This is remarkable in an industry accustomed to fighting damaging legislation, and it indicates confidence in Gensler’s strong understanding of both the promise and technical underpinnings of blockchain and cryptocurrencies. Gensler stated on CNBC this morning that he is “for innovation,” and it appears that many crypto enthusiasts agree with him.
Gensler emphasized the importance of the Howey Test, which states that if a financial instrument offers profits on the work of others, it is a security that can be regulated by the SEC. According to Gensler, “I believe we now have a crypto market where many tokens may be unregistered securities.” This was specifically a reference to Initial Coin Offerings, or ICOs, which are a type of financing in which innovators sell tokens to investors before constructing a system. They’ve been rife with fraud, as unethical operators set up phony or fraudulent “projects” and sell tokens in exchange for them.
There have been numerous of convictions of individual token issuers on those precise grounds, so file that one under “Dog Bites Man.” While there are still some operators who believe that “decentralization” allows them to issue unregulated securities, their numbers are decreasing.
Some speculated that Gensler will continue to focus on fraudulent “shitcoins,” which would be a net good for the industry. Bruce Fenton, founder of the highly libertarian Satoshi Roundtable, said this morning that “we need securities markets to work well and help capital formation & developing businesses and jobs,” which was one of the more startling statements of praise.
Because of his performance as the head of the CFTC following the Financial Crisis and his three years as a professor at MIT, where he taught lectures on blockchain themes, Gensler commands a unique level of respect from crypto leaders. When crypto consultant Jeff Bandman wrote of Gensler in January, he summed up the consensus by saying, “He gets it.” On many levels, he has definitely dedicated himself to knowing the space.” It’s unclear whether Gensler will be able to change the SEC’s whack-a-mole approach to ICOs to something more systematic and consistent.
“Regulatory clarity would assist #Bitcoin,” said Michael Saylor, CEO of MicroStrategy, a software firm and bitcoin holding company. That’s clearly talking about his own book, but Saylor has a point: Bitcoin has the best claim in crypto to escape being classified as a security, given to its missing creator and essentially fair launch.
In his remarks, Gensler seemed to create a moat around Bitcoin, claiming that during his time researching cryptocurrency at MIT, “I came to feel that, despite a lot of hype masquerading as truth in the crypto industry, [Satoshi] Nakamoto’s innovation is real.” It has also been and could continue to be a catalyst for change in the financial and money fields.”
Gensler went so far as to recreate Bitcoin’s creation narrative on CNBC today, concluding that “that portion of it is good,” implying that he does not believe bitcoin to be a security. Gensler has also paved the way for a long-awaited Bitcoin ETF.
However, there was plenty to agitate other parts of the industry. “Stablecoins may also constitute securities,” according to Gensler, a position that skeptics have questioned, in part because it’s difficult to see how a coin deliberately designed to not vary in price can imply the expectation of profit.
Gensler also pointed out that many exchanges, including Coinbase, are not regulated as securities brokers, despite the fact that Gensler believes they should be. “With 50 or 100 tokens, the likelihood of any individual [crypto exchange] platform having zero securities is pretty remote,” he said.
Whether you like it or not, Gensler’s speech has far-reaching ramifications. A CoinDesk columnist, Nic Carter, called it “catalytic” and “a big display of intent” for the SEC.
That could have signaled alarm if it had come from another regulator. Consider the crypto-taxation saga that is still being worked out in the United States legislature. A few lines of poorly worded text threatened to entirely disrupt the industry by imposing technologically unfeasible reporting requirements, and lobbyists were called in to try to steer things in the correct way. There’s a lot riding on Gensler’s ability to avoid making such disastrous mistakes.