The US has no intention of banning cryptocurrencies, but many cryptocurrencies fall under the definition of security and should be regulated as such, according to SEC chairman Gary Gensler.
Summary
Gary Gensler: cryptocurrencies will not be banned
The chairman of the SEC responded to a question put by Ted Budd, Republican Congressman from North Carolina. The question was simple: is the US going to ban cryptocurrencies in favour of a CBDC like in China?
Gary Gensler’s answer was clear: no. Or rather, it will not be up to the SEC to ban crypto, that will be a decision of Congress.
However, he also reiterated that there is a need for regulation, whether for DeFi platforms or centralized exchanges, which will have to be licensed by the SEC. Finally, he added that most cryptocurrencies fall under the definition of security.
Why cryptocurrencies are not securities
Congressman Tom Emmer responded to these words:
.@GaryGensler thinks that most cryptocurrencies are securities. Let’s indulge his line of thinking for a moment just so we can see how harmful it is to everyday investors.
— Tom Emmer (@GOPMajorityWhip) October 5, 2021
His argument is that cryptocurrencies cannot be considered securities. Such a classification would be detrimental to investors.
Tom Emmer explains:
“Let’s say someone who issued a token agrees with Chairman Gensler wants to register it as a security with the SEC. Once registered, can this token trade on the NYSE or NASDAQ? No”.
He goes into detail: in his opinion, it is not possible for a broker dealer like Charles Schwab to manage digital assets and hold them under the guidance of the SEC. And further:
“If Gensler deems a coin with a $1B market cap and tens of thousands of investors a security, what happens to those investors? The value of the token will plummet & retail investors won’t be able to trade it”.
His conclusion is that if cryptocurrencies were treated as securities, there would be no place for retail investors. This would cause the value of Bitcoin and other crypto assets to plummet. It would be best if the SEC stayed away from cryptocurrencies:
“Clearly there is no path for digital asset securities to be traded anywhere, so it is clear that retail investors would be hurt by Gensler’s actions. Gary Gensler, step out of the way”.
Cryptocurrencies: security or commodity?
In the US, the debate on the nature of cryptocurrencies is significant: determining whether they are securities or commodities implies transferring authority over them to the SEC or CFTC respectively.
In reality, cryptocurrencies involve both. In 2019, the former SEC finance director William Hinman defined Ethereum as a commodity, i.e. a kind of raw material, just like gold, and therefore regulated by the CFTC. Commodities have one characteristic: their value is determined by the law of supply and demand.
In contrast, “derivative” products such as ICOs, futures or ETFs are considered to be securities. In these cases, the buyer expects an economic return. The Howey test is used to determine whether an asset falls within the definition of security. Three questions need to be answered:
- Is there an investment of money with the expectation of future profits?
- Is there investment of money in a common enterprise?
- Do any profits come from the efforts of a promoter or third party?
If the answer is yes, the asset is a security. A cryptocurrency like Bitcoin, traded on classic crypto exchanges does not seem like a security at all considering its decentralized nature.
While waiting for the authorities to come to an agreement on the definition of crypto, it seems clear that the US is intent on regulating the sector. It remains to be seen what the outcome will be and how this will impact the sector.
