When Michael Corleone ordered hits on the rival bosses The Godfather, he had Don Cuneo locked inside the revolving door and captured. Getting hit while trapped in the forbidden door appears to be the treatment of United States Securities and Exchange Commission Chairman Gary Gensler for US crypto projects based on recent SEC enforcement activities and comments from the chair.
The SEC should not be left to wage an unsupervised dirty war on crypto. Congress must defend its oversight authority and give American crypto developers, entrepreneurs and users a clear path to doing business legally. Providing a common sense disclosure framework for asset-backed stablecoins is a place to start.
SEC Gensler seems to be trying to solve “the whole family business” with crypto. On February 9, the SEC ruled on allegations that Kraken’s “staking-as-a-service” program (a way to earn rewards for helping maintain the crypto network) was an illegal sale of unregistered securities. Later in the month, news emerged that the SEC sent a Wells notice to stablecoin publisher Paxos, indicating potential future enforcement actions over the Binance USD token (BUSD) (a Binance-branded asset designed to maintain a 1:1 peg with the US dollar), which the commission also charged as an unregistered security. And Gensler indicated in a recent interview that every crypto project – “everything other than Bitcoin” – could have an SEC target behind it.
https://www.youtube.com/watch?v=NelPe_T9Qr8
The SEC maintains that it only enforces registration and disclosure requirements on crypto tokens and services that are considered securities. But this is misleading for two reasons.
One, the application of the securities law to the project at issue – staking service Kraken and Paxos BUSD stablecoin – is, at least, contestable. More so if the idea is that every crypto token other than Bitcoin (BTC) should be considered a security. And two, regulators interested in ensuring that consumers provide the best possible disclosure of new products, including stablecoins, will provide clear guidance on how to do so. The SEC hasn’t.
related: Expect the SEC to use the Kraken playbook against staking protocols
With Kraken, the SEC said the staking service included a type of security known as an investment contract. In a broad stroke, these securities cover investments with the expectation of profit based on managerial or other entrepreneurial efforts. Whether Kraken serves is debatable. With Paxos, we don’t yet know what type of security the SEC thinks the BUSD stablecoin represents and why, but in general, it’s more difficult, though not certain, to see how an asset the buyer doesn’t want will turn a profit. is security.
Problematically, Gensler’s comments may indicate that he considers decentralized tokens, such as Ether (ETH), to be securities. This is inconsistent with previous comments by SEC officials, as well as the idea that securities law is meant to address managerial risk – the hallmarks of centralized bodies, not decentralized software protocols.
In addition, even if one considers that a certain token or service is a security, there is still the issue of registration. And here’s where the SEC looks like a door-buster.
It’s not true when Gensler describes the crypto security registration process as “just a form on our website.” As Michael Corleone might have scowled, Gensler’s line “underestimates my intelligence and makes me very angry.” Because as SEC Commissioner Hester Peirce explained about her disapproval of Kraken’s actions, “in the current climate, crypto-related offerings do not go through the SEC registration pipeline.”
Parliamentarians have an important role to play in restoring administrative accountability. At a February 14 Senate Banking Committee hearing, Republican Senator Tim Scott told the hearing, “If Chairman Gensler is going to take enforcement action, Congress needs to hear from him as soon as possible.” Across the aisle, Democratic Sen. Kirsten Gillibrand echoed similar sentiments: “I have a lot of concerns about Chairman Gensler and his approach to this place.”
Monitoring will be most welcome. Congress should go further by enacting legislation, first providing a practical registration path for stablecoins.
related: SEC Gary Gensler plays games, but not what you think
Of course, the SEC wants issuers to disclose the risks of stablecoins to consumers. The main risk is that the stablecoin will “demonetize,” losing 1:1 redeemability with the asset it is pegged to, such as the US dollar, because the issuer does not have the reserves it claims. Basic requirements on assurance and disclosure subject to antifraud authority will directly address this.
However, some, including the President’s Working Group, say more is needed and that only insured depository institutions should issue stablecoins. But limiting the issuance of stablecoins to banks is just another way to block the door to new markets. Straightforward rules that allow competition, not protectionist restrictions, are the path to continued financial leadership.
The SEC should not be left in the shadows to try to eliminate American work and access to new classes of technology. As Chairman of the House Financial Services Committee Patrick McHenry has recognized, the future of digital assets “is a major political and economic question that must be decided by Congress.”
The decision should include initiating direct stablecoin legislation and democratic accountability. After all, regulators are in no position to demand from Congress, “Don’t ask about my business.”
Jack Soloway is a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives (CMFA), focusing on financial technology, crypto and DeFi. He has a law degree from New York University School of Law and a bachelor of arts from the University of Pennsylvania.
Jennifer J. Schulp is director of Financial Regulatory Studies at the Cato Institute’s CMFA, where he focuses on securities and capital markets regulation. He holds a law degree from the University of Chicago Law School and a bachelor’s degree from the University of Chicago.
This article is for general information purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.