SEC head Gary Gensler signaled Tuesday that the agency would aggressively regulate cryptocurrency markets using existing rules. That sounds scary, but markets have barely blinked – Bitcoin even ticked up slightly this morning. Responses from some industry leaders and analysts were accepting, and even positive.
That’s surprising in an industry used to fending off harmful regulation, and more than anything reflects faith in Gensler’s deep knowledge of both the promise and technical underpinnings of blockchain and cryptocurrencies. Gensler affirmed on CNBC this morning that he is “pro innovation,” and broadly, it seems a lot of crypto types actually believe him.
David Z. Morris is CoinDesk's chief insights columnist. This article is excerpted from The Node, CoinDesk's daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here.
Gensler’s comments were delivered at the Aspen Security Forum yesterday. The prepared statement can be read in full here.
Among other points, Gensler reiterated the enduring importance of the Howey Test: If a financial instrument promises returns from the efforts of others, it’s a security and can be regulated by the SEC. “I believe we have a crypto market now where many tokens may be unregistered securities,” Gensler said. This was most pointedly a reference to Initial Coin Offerings, or ICOs, a fundraising process in which founders sell tokens to investors before building a system. They have been rife with fraud as unethical operators stand up fake or deceptive “projects” and sell tokens for them.
File that one under “Dog Bites Man” – there have been dozens of prosecutions of individual token issuers on those exact grounds. And while there are still plenty of operators clinging to the idea that “decentralization” makes it okay to issue unregulated securities, their numbers have dwindled.
The takeaway for some was that Gensler would continue focusing on deceptive “shitcoins”, a likely net positive for the industry. One of the more surprising expressions of approval came from Bruce Fenton, founder of the strongly libertarian Satoshi Roundtable, who wrote this morning that “we need securities markets to work right and help capital formation & building businesses and jobs.”
That sort of openness speaks volumes about the unique degree of respect Gensler enjoys from crypto leaders, thanks to his performance as head of the CFTC following the Financial Crisis and his three years as a professor at MIT, where he taught classes on blockchain topics. Crypto consultant Jeff Bandman summed up the consensus when he wrote of Gensler in January that “he gets it. He has clearly devoted himself immersively to understanding the space on many levels.” It’s unclear, though, whether Gensler can shift the SEC’s slow-moving whack-a-mole approach on ICOs towards something more systematic and consistent.
Michael Saylor, CEO of software firm/bitcoin holding entity MicroStrategy, declared that “Regulatory clarity will benefit #Bitcoin.” That’s certainly talking his own book, but Saylor has a leg to stand on: Bitcoin, thanks to its absent creator and its basically fair launch, has the single best claim in crypto to avoid classification as a security.
Gensler himself appeared to draw a moat around Bitcoin in the remarks, saying that after his time researching cryptocurrency at MIT, “I came to believe that, though there was a lot of hype masquerading as reality in the crypto field, [Satoshi] Nakamoto’s innovation is real. Further, it has been and could continue to be a catalyst for change in the fields of finance and money.”
On CNBC today, Gensler even went so far as to retell Bitcoin’s origin story and conclude “that part of it is okay” – strongly signalling he does not consider bitcoin a security. Gensler has also laid out a pathway to a long-dreamed-of Bitcoin ETF.
There was plenty to set other segments of the industry on edge, though. Gensler said that “stablecoins may also be securities,” a claim critics have questioned in part because it’s hard to see how a coin explicitly intended to not change in price can entail the expectation of profit.
Gensler also signaled real headwinds for exchanges like Coinbase: Many are not licensed as securities brokers, but Gensler seems to think they should be. “The probability is quite remote that, with 50 or 100 tokens, any given [crypto exchange] platform has zero securities,” he said.
Love it or hate it, the consensus is that Gensler’s speech has broad implications. Nic Carter, a CoinDesk columnist, described it as “catalytic” and “a significant show of intent” for the SEC.
Coming from another regulator, that could have meant panic. Take for comparison the crypto-taxation fiasco still working its way towards resolution in the U.S. legislature. A few lines of poorly crafted language threatened to completely disrupt the sector by imposing technologically impossible reporting requirements, and lobbyists had to spring into action to try and push things in the right direction. A lot is riding on the belief that Gensler is smart enough to avoid similar destructive screwups.