In a speech before the Aspen Security Forum on August 3, 2021, Securities and Exchange Commission (“SEC” or “Commission”) Chair Gary Gensler urged lawmakers to provide him with the power to police cryptocurrency trading, referring to it as the “Wild West.”[1] While he noted that the views he was sharing were his own and not those of the SEC, Chair Gensler made clear his concerns that the markets are “rife with fraud, scams, and abuse” where, in many cases, investors are unable to get the data they need in order to make an informed decision.[2] These statements come after many months of the market wondering where Chair Gensler would fall on cryptocurrency enforcement, especially given the omission of digital assets from the SEC’s recently published regulatory agenda, which listed a number of the Commission’s rule proposals for the next year.[3] Nevertheless, it is clear that the SEC plans to regulate cryptocurrency markets to the maximum extent possible using its existing authority. And the two enforcement actions brought by the SEC in the days following Chair Gensler’s speech illustrate the Commission’s clear intention to double down on crypto enforcement.[4]

The SEC’s Approach to Digital Assets

The SEC and its staff have generally been skeptical of digital assets. To date, the application of the securities laws to digital assets has been guided by SEC officials’ speeches,[5] SEC staff (as opposed to Commission) guidance,[6] the DAO Section 21(a) Report, [7] and enforcement actions.[8] The Commission has stood behind its staff’s guidance, applying the Howey test[9] to digital assets to determine whether the asset is an investment contract and therefore a security. There have been many calls for regulatory clarity as it applies to digital assets, decentralized finance (“DeFi”) products, and nonfungible tokens.[10] Commissioner Peirce has proposed token safe harbors and legislation has been proposed to clarify the regulatory landscape for digital assets, but no regulations or legislation to clarify the regulatory landscape of digital assets has been enacted.

Chair Gensler’s Regulatory and Enforcement Approach to Digital Assets

There has been an expectation that Chair Gensler would focus on enforcement and regulation of digital assets. Given that, it’s worth noting that Chair Gensler taught courses at the MIT Sloan School of Management on blockchain technology and digital currencies. In statements before being nominated as the SEC Chair, he stated that if the “crypto world is going to be part of the future,” it has to come within a regulatory scheme that “guard[s] against illicit activity” and “protect[s] investors[,]”[11] and that while crypto markets are “rife with scams, fraud, hacks and manipulation,” regulation could promote consumer confidence in those markets.[12] Yet he has seemed to remain critical of digital assets.

In what is arguably the first significant public commentary on cryptocurrency since his confirmation, Chair Gensler’s August 3 statement sets forth a clear path of active enforcement and regulation, and calls for legislation of what he deems the unregulated crypto market, which he notes has had explosive growth and a purported value of $1.6 trillion, with 77 tokens worth at least $1 billion each.[13] He explained that no single crypto asset “broadly fulfills all the functions of money,” which he defined as a store of value, a unit of account, and a medium of exchange. Rather, he views crypto assets as primarily providing “digital, scarce vehicles for speculative investment,” and thus can be seen as highly speculative stores of value.[14] He stated that crypto assets are not generally used as a unit of account. Nor does he believe that cryptocurrency has been used much as a medium of exchange, except in cases in which it has been used to “skirt our laws with respect to anti-money laundering, sanctions, and tax collection.”[15] He stated that the crypto industry is like the “Wild West” and that there is not enough investor protection. This is even more telling in light of his apparent view that investor protection is paramount of the SEC’s tripart mission — to protect investors; facilitate capital formation; and maintain fair, orderly, and efficient markets.[16]

Chair Gensler further indicated his agreement with former Chair Clayton when the latter testified that “to the extent that digital assets like [initial coin offerings, or ICOs] are securities — and I believe every ICO I have seen is a security — we have jurisdiction, and our federal securities laws apply.” Because Chair Gensler appears to agree with former Chair Clayton’s concern that “many tokens may be unregistered securities, without required disclosures and market oversight,”[17] it is clear that Chair Gensler intends to continue to implement the SEC’s prior views on these assets and ICOs no matter the type of token or product that is traded. In particular, Chair Gensler noted the numerous cases the SEC has brought in this area, prioritizing cases involving fraud or other significant harm to investors, and that the SEC has not yet lost a case. Chair Gensler also expressed concerns about platforms that offer crypto tokens or other products that are priced off of the value of securities and operate like derivatives as well as concerns with DeFi,[18] stable coins, and investment vehicles providing exposure to crypto assets. He made clear that he has “urged” SEC staff to continue their aggressive efforts to protect investors with respect to unregistered sales of securities.

Notably, Chair Gensler stated that he believes certain rules related to crypto assets are well-settled, such as the test to determine whether a crypto asset is a security — the application of the Howey test. But he sees gaps in this space, and called on Congress to enact legislation targeted at preventing transactions, products, and their platforms “from falling between regulatory cracks” in an effort to protect investors from what he believes is a “volatile sector.”[19]

Conclusion

Market participants should consider themselves forewarned that Chair Gensler views the digital asset industry as the “Wild West” and investors need to be better protected, which likely means an even more active enforcement initiative in this area. All market participants in this industry would be well-advised to ensure that they are operating within the confines of the many applicable laws, regulations, and best practices — to include those that arise from securities laws, commodities laws, tax laws, and Treasury regulations. 

[1] U.S. Sec. & Exch. Comm’n, Gary Gensler Public Statement, Remarks Before the Aspen Security Forum (Aug. 3, 2021), available at https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03.
[2] Id.
[3] John J. Carney, Teresa Goody Guillen, Michelle N. Tanney, BakerHostetler, SEC Sets Forth Regulatory Initiatives for the Next Year (June 17, 2021), available at https://www.bakerlaw.com/alerts/sec-sets-forth-regulatory-initiatives-for-the-next-year.
[4] U.S. Sec. & Exch. Comm’n, Rel. No. 2021-147, SEC Charges Poloniex for Operating Unregistered Digital Asset Exchange (Aug. 9, 2021), available at https://www.sec.gov/news/press-release/2021-147; U.S. Sec. & Exch. Comm’n, Rel. No. 2021-145, SEC Charges Decentralized Finance Lender and Top Executives for Raising $30 Million Through Fraudulent Offerings.
[5] See, e.g., U.S. Sec. & Exch. Comm’n, Jay Clayton, Statement on Cryptocurrencies and Initial Coin Offerings (Dec. 11, 2017), available at https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11 (“By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws.”); U.S. Sec. & Exch. Comm’n, William Hinman, Digital Asset Transactions: When Howey Met Gary (Plastic) (June 14, 2018), available at https://www.sec.gov/news/speech/speech-hinman-061418 (“If the network on which the token or coin is to function is sufficiently decentralized — where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts — the assets may not represent an investment contract. Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.”).
[6] U.S. Sec. & Exch. Comm’n, Framework for “Investment Contract” Analysis of Digital Assets, available at https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.
[7] U.S. Sec. & Exch. Comm’n, Rel. No. 81207, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (July 25, 2017), available at https://www.sec.gov/litigation/investreport/34-81207.pdf.
[8] See, e.g., U.S. Sec. & Exch. Comm’n, Rel. No. 2020-338, SEC Charges Ripple and Two Executives with Conducting $1.3 Billion Unregistered Securities Offering (Dec. 22, 2020), available at https://www.sec.gov/news/press-release/2020-338; U.S. Sec. & Exch. Comm’n, Rel. No. 2020-146, Telegram to Return $1.2 Billion to Investors and Pay $18.5 Million Penalty to Settle SEC Charges (June 26, 2020), available at https://www.sec.gov/news/press-release/2020-146; U.S. Sec. & Exch. Comm’n, Rel. No. 2017-227, Company Halts ICO After SEC Raises Registration Concerns (Dec. 11, 2017), available at https://www.sec.gov/news/press-release/2017-227.
[9] SEC v. Howey Co., 328 U.S. 293 (1946).
[10] Letter from Vincent Molinari, Chief Executive Officer of Arkonis Capital, LLC, to Vanessa Countryman, Secretary of the SEC, regarding “Rulemaking Regarding Non-Fungible Tokens” (Apr. 12, 2021), available at https://www.sec.gov/rules/petitions/2021/petn4-771.pdf.
[11] Bloomberg Mkts. & Fin., Ex-CFTC Chair Gary Gensler Says Cryptocurrency Needs More Regulation Than Oil, YouTube (Oct. 15, 2018), available at https://www.youtube.com/watch?v=mhmds4gDK7g.
[12] Jonathan R. Barr, John J. Carney, Kevin R. Edgar, Jimmy Fokas, Madison Gaudreau, Teresa Goody Guillen, Bari R. Nadworny, Michelle N. Tanney, BakerHostetler, The Future of SEC Enforcement Under the Biden Administration (Apr. 16, 2021), available at https://www.bakerlaw.com/alerts/the-future-of-sec-enforcement-under-the-biden-administration#22.
[13] Supra note 1.
[14] Id.
[15] Id.
[16] Id. (stating that “at our core, we’re about investor protection”).
[17] Id.
[18] On August 6, 2021, the Commission charged two Florida men and their Cayman Islands company for unregistered sales of more than $30 million of securities using smart contracts and DeFi technology, and for misleading investors concerning the operations and profitability of their business DeFi Money Market. https://www.sec.gov/news/press-release/2021-145?utm_medium=email&utm_source=govdelivery.
[19] Id.