Securities and Exchange Commission Chair Gary Gensler focused his remarks on cryptocurrencies while addressing attendees of the Practising Law Institute’s SEC Speaks conference in Washington on September 8.
Gensler briefly recounted the basic ideas of the Securities Acts of 1933 and 1934 and the Investment Company Act of 1940 before turning his conversation to cryptocurrencies.
“The core principles from these statutes apply to all corners of the securities markets, and that includes securities and intermediaries in the crypto market,” he said. “Nothing about the crypto markets isn’t compatible with the securities laws. Investor protection is just as relevant regardless of the underlying technologies. We’re technology neutral, but we’re not public policy neutral.”
Before Gensler began his chair’s remarks, he noted that the views he shared were his own and that he was not speaking on behalf of the Commission or its staff. He joined the in-person audience over video. Nearly 10,000 crypto tokens
Gensler shared some perspectives on crypto tokens.
“Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities offers, and sales of these thousands of crypto security tokens are covered under the securities laws,” he said.
The way Justice Thurgood Marshall put it, “Congress painted the definition of a security ‘with a broad brush,’” said Gensler. “He further stated, ‘Congress’s purpose in enacting the securities laws was to regulate investments in whatever form they are made and by whatever name they are called.’”
“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,” said Gensler — considerations under the Supreme Court’s 1946 Howey Test.
“My predecessor Jay Clayton said it, and I will reiterate it: Without prejudging any one token, most crypto tokens are investment contracts under the Howey Test.”
Regardless of how these tokens are derived or used, said Gensler, “These are not laundromat tokens: Promoters are marketing and the investing public is buying most of these tokens, touting or anticipating profits based on the efforts of others.”
Gensler added that some tokens may not meet the definition of a security — what he refers to as crypto non-security tokens. However, “These likely represent only a small number of tokens, even though they may represent a significant portion of the crypto market’s aggregate value,” he said.
Protecting investors
“Investors deserve disclosure to help them sort between the investments that they think will flourish and those that they think will flounder,” said Gensler.
Gensler has asked the SEC staff to work directly with entrepreneurs to get their tokens registered and regulated as securities, where appropriate. In addition, “I recognize that it may be appropriate to be flexible in applying existing disclosure requirements,” he said. For example, he noted that asset-backed securities have different disclosure requirements than equities.
“Our fundamental goal here is to provide investors with the protections and disclosures they deserve, and that are required by law,” he said.
Stablecoins: facts and circumstances
Gensler spoke about “so-called stablecoins” which “have features similar to, and potentially competing with, money market funds, other securities, and bank deposits,” he said. Currently, they’re primarily used as a way to participate in, or as settlement tokens inside of, crypto platforms, he explained.
“Some stablecoins purportedly are backed by reserves of U.S. dollars,” Gensler said. Others, “so-called algorithmic stablecoins, are not backed fully by fiat moneys and bear heightened risks related to whatever mechanisms are used purportedly to maintain a stable value.”
Depending on if and how stablefunds pay interest, the mechanisms used to maintain their value, “and how they’re offered, sold and used within the crypto-ecosystem,” he said, “they may be shares of a money market fund or another kind of security.” If so, they’d have to register and offer investor protections, he said.
“The point is, it’s important to look at the facts and the circumstances of the product, not its label, to determine whether it is a crypto security token, a crypto non-security token or another instrument,” said Gensler.
Final thoughts
Crypto intermediaries often handle trades and investments in both crypto security tokens and crypto non-security instruments, said Gensler. He has asked his staff to work with intermediaries to make sure they register each of their functions (exchange, broker-dealer, custodial, etc.). Some crypto intermediaries may need to register with both the SEC and the CFTC, he said.
“I look forward to working with crypto projects and intermediaries looking to come into compliance with the laws. I also look forward to working with Congress on various legislative initiatives while maintaining the robust authorities we currently have,” said Gensler. “Let’s ensure that we don’t inadvertently undermine securities laws underlying $100 trillion capital markets.”
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