What Did SEC Chairman Gensler Say in the House of Representatives?
U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler testified before the House Financial Services Committee. Gensler addressed the cryptocurrency market in his testimony and noted that most cryptocurrencies are considered securities. Emphasizing the importance of compliance with securities laws, Gensler said, “It’s the law; it’s not a choice.” Gensler pointed out that cryptocurrency brokers often combine various functions such as stock market, brokerage activity, custody, clearing and lending, which leads to potential conflicts of interest and risks for investors. Gensler also argued that crypto investors should have the same protection as other investors, and said, “Calling yourself a DeFi platform, for instance, is not an excuse to defy the securities laws.”
Gensler stressed that waiving investor protection puts real people's life savings at risk and that the regulation is intended to protect U.S. investors. Gensler quoted Judge Thurgood Marshall as saying: “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.”
Gensler reiterated that Congress has mandated the SEC to protect investors regardless of the labels or technology used, stressing that nothing related to the cryptocurrency market is incompatible with securities laws.
At the opening of the session, House Financial Services Committee Chairman Patrick McHenry criticized Gensler’s “rushed” rule-making process, claiming it was damaging and lacking due diligence or evidence base. He also confronted Gensler about a number of issues surrounding Ethereum (ETH) and asked whether it is a commodity or a security.
Patrick McHenry asked Gensler whether Ethereum is a security or a commodity, stating that an asset cannot be both a security and a commodity. However, Gensler refused to answer this question, referring to the Howey test. McHenry then asked the same question again. Again, Gensler did not give a clear answer to this question. McHenry said there was a lack of clarity in the market and that the regulatory actions of Gensler and the CFTC showed there was a great deal of uncertainty.
Prior to the session, Republicans on the Committee, led by Patrick McHenry, Chairman of the House Financial Services Committee, sent Gensler a letter criticizing the SEC's approach to digital asset regulation. Republicans accused the SEC of forcing digital asset trading platforms to register under the National Stock Exchange (NSE) framework, which they argue is an inappropriate framework for digital assets. While the letter stressed the importance of developing clear rules for digital assets to encourage innovation and protect investors, the SEC's current approach was criticized as inconvenient for the digital asset ecosystem, consumers, and the economy. The letter also emphasized that the lack of clarity on which digital assets are considered securities by the SEC makes it difficult for NSEs to list such assets. Republicans urged Gensler and the SEC to work with Congress to ensure that innovators and investors have the regulatory clarity and protections they deserve.
Other representatives also questioned Gensler about the SEC taking steps to prevent banks from holding digital assets and expressed surprise that the SEC seemed unaware of certain operational aspects of major crypto asset platforms like FTX. Representative Andy Barr questioned Gensler about this issue and criticized the SEC's lack of information on operational details, such as FTX's reliance on Quickbooks. Representative Tom Emmer also criticized Gensler for the SEC's failure to provide clear rules for cryptocurrency companies, accusing him of incompetence. Emmer said of Gensler that he had become an incompetent cop who did nothing to protect Americans.
Democratic Congresswoman Maxine Waters asked Gensler if the SEC has the authority it needs to align cryptocurrency issuers and brokers with the investor protection and market integrity framework that has been built over the past 90 years. asked. Gensler replied that he believes they have the powers and laws they need to protect investors. Waters asked Gensler to say that one more time. In response, Gensler reiterated that the SEC has the authority to oversee cryptocurrency intermediaries, etc.
Gensler also emphasized the importance of artificial intelligence in his speech, saying that AI will be much more important for capital markets than cryptocurrencies.
Gensler makes a statement after the Ethereum Merge Upgrade
Gary Gensler, Chairman of the SEC, evaluated the securities status of cryptocurrencies in his speech after the transition from Proof of Work to Proof of Stake with the Merge Upgrade of Ethereum. Gensler said that projects that work with the staking mechanism can pass the Howey test, which is used to determine whether an asset is a security. Gensler said that despite the name differences, staking is quite similar to giving credit.
What Is the Howey Test?
According to the Howey test, an asset is a security if:
- It is an investment of money
- It is with the expectation of profit
- The investment is made in a company/enterprise
- The profit is derived from the efforts of a third party
What Does the CFTC Think About Ethereum?
There are different opinions in the U.S. on whether Ethereum is a commodity or a security. While the New York Attorney General describes Ether as a security, Rostin Behnam, Chairman of the CFTC, the US Commodity Transactions Commission, describes Ether as a commodity. Lastly, at a Senate Agriculture Committee hearing in March, Behnam reminded that Ethereum has been listed on the CFTC exchanges for a while, and said, “We would not have allowed the Ether futures product to be listed on a CFTC exchange if we did not feel strongly that it was a commodity asset.”