On August 3, 2021, Securities and Exchange Commission (“SEC”) Chair Gary Gensler made headlines when he dubbed the current cryptocurrency landscape the “Wild West.” Though attention-grabbing, these remarks are not isolated, as recent announcements and developments highlight the need for a shift towards a clearer picture of the federal government’s strategy to regulating the crypto market, and a clearer approach. In the meantime, the SEC is asserting its authority.
Mr. Gensler discussed a variety of issues regarding crypto regulation in an address to the Aspen Security Forum. At bottom, he underscored the need to elevate the regulatory environment in the face of a system that is “rife with fraud, scams, and abuse[.]”1 Mr. Gensler’s remarks made clear his intention to use the fullest extent of the SEC’s regulatory and jurisdictional powers to rein in illicit behavior in the crypto market. He also expressed his hope that Congress would soon step in and fill the cracks in the current legal scheme.
To this point, the growth of cryptocurrency markets and exchanges have outpaced the government’s ability to impose applicable regulations. The questions of which agencies should oversee the crypto industry and how they should do it remain largely unanswered. Mr. Gensler’s remarks last week highlight his attempt to bring clarity to these questions, asserting the SEC as a prominent regulator. To make the case that the SEC is the appropriate agency to regulate this space, Mr. Gensler asserted that “many . . . tokens are offered and sold as securities,” and he cited Supreme Court precedent in likening “investment contracts” to tokens.2 If there had been any question about Mr. Gensler’s view on whether tokens are subject to securities laws, his remarks now leave little room for doubt, as he stated: “Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These products are subject to the securities laws and must work within our securities regime.”3
Though Mr. Gensler’s comments purport to underscore clear enforcement mandates for the SEC, the responsibility for cryptocurrency regulation varies greatly depending on an asset’s classification. For example, any cryptocurrency that is deemed a commodity (such as Bitcoin) is not regulated by the SEC; rather, it is regulated by the Commodity Futures Trading Commission. For some assets, like stable value coins, clear classification has not yet been established, meaning that the proper regulatory authority is up for debate. Nevertheless, Mr. Gensler asserted the SEC’s authority over this space, too, by stating that “stablecoins also may be securities and investment companies[, and to] the extent they are, [the SEC] will apply the full investor protections of the Investment Company Act and the other federal securities laws to these products.”4
One area in which the SEC has already asserted its regulatory authority is over decentralized finance (“DeFi”) platforms. On August 6, 2021, the SEC announced the settlement of its first case against a firm that operates in the DeFi sector. DeFi platforms are places where cryptocurrencies can be traded, but without a centralized regulatory system. The first DeFi case brought by the SEC involved a Florida-based company and two men who allegedly sold $30 million of unregistered securities.5 The case settled for a roughly $13 million disgorgement and $125,000 in penalties against each of the two men.6 In the agency’s announcement, Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, stated that “federal securities laws apply with equal force to age-old frauds wrapped in today’s latest technology.”7 This recent settlement opens up this additional lane where the SEC will likely continue to assert its regulatory and enforcement powers in the crypto world.
Because this landscape is rapidly evolving and concerns a range of legal uncertainties, a prudent next step would be for Congress to establish legislation to govern this space so that the SEC, or other agencies who would be granted authority over it, can develop rules regarding crypto regulation. Without fresh boundaries, many players may not know that they’re running afoul of SEC expectations until the authorities come knocking. Indeed, Mr. Gensler made clear in his recent remarks that “the legislative priority should center on crypto trading, lending, and DeFi platforms.”8 He added, “Regulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending.”9 Whether and when this will happen remains unknown. In the meantime, however, it is clear that the SEC is intent on becoming the new crypto sheriff in town, using the authority it already has and construing it to cover this fast-evolving crypto landscape. Companies operating in this space should be sure to familiarize themselves with the applicable securities framework that could potentially be used by the SEC to govern it.
1 Public Statement, Gary Gensler, Chair, Sec. & Exch. Comm’n, Remarks Before the Aspen Security Forum (Aug. 3, 2021), https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03.
2 Id. (citing SEC v. Howey Co., 328 U.S. 293 (1946)).
3 Id.
4 Id.
5 Press Release, Sec. & Exch. Comm’n, SEC Charges Decentralized Finance Lender and Top Executives for Raising $30 Million Through Fraudulent Offerings (Aug. 6, 2021), https://www.sec.gov/news/press-release/2021-145.
6 Id.
7 Id.
8 Gensler, supra note 1.
9 Id.
