New SEC Chairman Gives His First Speech on Crypto | Latham & Watkins LLP

Gary Gensler asserts the SEC’s broad powers over digital property, and places client safety on the forefront.

On August 3, 2021, Gary Gensler, chairman of the US Securities and Alternate Fee (SEC), gave a speech on the digital asset trade. The speech supplied some indication of what he expects the SEC to concentrate on on this space however didn’t present concrete steering for trade individuals in search of readability on regulatory uncertainties. He did, nevertheless, clarify that he believes “we simply don’t have sufficient investor safety in crypto” and that the SEC will play a extra energetic function in regulating the trade.

Background

Ever since Mr. Gensler’s affirmation as chairman of the SEC in April 2021, observers have been keen to search out out what his stance shall be on regulating the crypto ecosystem. Not just because he’s the brand new chairman of the world’s most influential securities regulator, or as a result of he’s the previous chairman of the world’s foremost commodities regulator (the US Commodity Futures Buying and selling Fee), but in addition due to his “avenue cred.” Mr. Gensler taught a course on blockchain and cryptocurrencies on the Massachusetts Institute of Expertise for 3 years.

Resulting from this familiarity with crypto that stems each from his time as a regulator in addition to an educational, many assume that Mr. Gensler brings a larger understanding and broader perspective of the digital asset trade than did his predecessors. Whereas that presumption could also be legitimate, those that assumed that Mr. Gensler shall be a “crypto-friendly” regulator look like headed for disappointment.

Shopper Safety Is Paramount

With respect to crypto, Mr. Gensler is especially targeted on the investor safety pillar of the SEC’s mission. Within the speech, he took a broad view of the securities legal guidelines and spoke of digital asset innovation primarily by means of the lens of client and market safety. Mr. Gensler was additionally clear that he believes the mandate of the SEC and different regulators is far-reaching, asserting that “we have now taken and can proceed to take our authorities so far as they go.”

Under is a sampling of Mr. Gensler’s views as outlined within the speech:

Cryptoassets and preliminary coin choices (ICOs): As a result of the SEC retains jurisdiction over securities, the definition of a safety is essential. Based on Mr. Gensler, the oft-cited Howey check (see this Latham blog post for extra data) is just one of many methods the SEC determines whether or not a digital asset should adjust to the securities legal guidelines. Mr. Gensler additionally echoed former SEC Chairman Jay Clayton views when Mr. Gensler testified in 2018 that “to the extent that digital property like [initial coin offerings, or ICOs] are securities — and I imagine each ICO I’ve seen is a safety — we have now jurisdiction, and our federal securities legal guidelines apply.” Whether or not this view consists of extra fashionable iterations of token distributions that don’t embrace a public sale stays to be seen.

Crypto derivatives: In line with the present legal guidelines, Mr. Gensler stated that tokens or different merchandise that derive their value from the worth of securities or are backed by securities are possible securities throughout the SEC’s jurisdiction, whether or not or not they’re security-based swaps.

Stablecoins: He stated that stablecoins might be securities and the platforms internet hosting them could also be funding corporations. He famous that stablecoins which might be primarily based on a basket of securities function like derivatives and thus are possible securities.

Decentralized finance (DeFi): Based on Mr. Gensler, decentralized crypto buying and selling platforms and lending platforms might fall below the SEC’s jurisdiction to the extent that the buying and selling and lending exercise entails securities, and the platforms aren’t in any other case exempt from the securities legal guidelines.

Crypto exchange-traded funds (ETFs): Fairly just a few purposes for digital asset ETFs are pending the SEC’s evaluation. Mr. Gensler appeared to point that the SEC workers would prioritize evaluation of these in search of to register below the Funding Firm Act of 1940 (the 1940 Act), “if these [registrations] are restricted to … CME-traded Bitcoin futures.” The place filings associated to autos involving something aside from CME-traded Bitcoin futures stand stays to be seen. Since delivering the speech, a wave of recent ETF purposes have been filed which might be restricted to CME-traded Bitcoin futures or are pursuant to the 1940 Act.

Custody of cryptoassets: On December 23, 2020, the SEC issued an announcement and request for remark (“Custody of Digital Asset Securities by Particular Function Dealer-Sellers”) (see this Latham blog post) outlining its place on how broker-dealers should function when performing as custodians of digital asset securities with the intention to keep away from enforcement motion. The SEC’s assertion is in impact for 5 years, and feedback could also be submitted at any time all through the five-year time period. Based on Mr. Gensler, crypto custody is an space by which the SEC “shall be seeking to maximize regulatory protections.” He didn’t draw a distinction between custodial options that take “possession” of the digital asset versus non-custodial options that don’t (corresponding to within the case of most DeFi platforms), so the place these regulatory protections shall be carried out stays unclear.

Taming the Wild West

To Mr. Gensler, the crypto trade at the moment seems just like the “Wild West.” After all, the trade does undergo from an absence of authorized and regulatory readability within the US.  And, one would possibly hope that together with Mr. Gensler’s want to enhance investor safety, he intends to deliver a bit extra order to the trade. Although, he famous that solely Congress can stop digital asset “transactions, merchandise, and platforms from falling between regulatory cracks” by establishing bright-line definitions and particular regulatory parameters for the (typically competing) sister businesses.

Whereas Mr. Gensler’s speech signifies that he believes the SEC’s authority extends to many facets of the crypto trade, many within the trade imagine the SEC’s authority is narrower and fear Mr. Gensler is overstepping the legislative limits of the company’s mandate. This group seems to incorporate CFTC Commissioner Brian Quintenz, who addressed this level in response to Mr. Gensler’s speech, by noting that “the SEC has no authority over pure commodities or their buying and selling venues, whether or not these commodities are wheat, gold, oil …. or crypto property.”

Given Mr. Gensler’s background, the trade can once more hope that he’ll contemplate balancing public curiosity and safety measures with the chance of “over” regulation. The digital asset ecosystem is essentially pseudonymous, open supply, and geared up with distributed work forces, and as such it has possible by no means been simpler for a whole trade to maneuver off-shore or underground — a proven fact that Mr. Gensler is definitely cognisant of given his historical past and data of the trade. Regulators are subsequently tasked with balancing competing goals of investor safety and market stability whereas avoiding the implementation of untimely or overly burdensome laws that stifle innovation or drive it off-shore or underground.

How Mr. Gensler will method this admittedly tough downside largely stays to be seen. However additional SEC engagement and motion below his management seems a certainty.