Does SEC Chair Gary Gensler have the final say? – Cointelegraph Magazine

In a February interview with New York Magazine, Gary Gensler, chairman of the United States Securities and Exchange Commission, said that just about every crypto transaction, with the exception of Bitcoin spot transactions and buying or selling things with cryptocurrency, falls within the jurisdiction of the SEC. 

In the interview, when discussing what types of crypto transactions should be regulated as securities, Gensler didn’t mince words. “Everything other than Bitcoin. You can find a website, you can find a group of entrepreneurs, they might set up their legal entities in a tax haven offshore, they might have a foundation, they might lawyer it up to try to arbitrage and make it hard jurisdictionally or so forth,” Gensler said. 

Gensler continued, “They might drop their tokens overseas at first and contend or pretend that it’s going to take six months before they come back to the U.S., but at the core, these tokens are securities because there’s a group in the middle and the public is anticipating profits based on that group.” 

Gensler contends that the SEC’s jurisdiction over most cryptocurrencies is based on a 1946 Supreme Court ruling in the case SEC v. W.J. Howey Co. According to Investopedia, the W.J. Howey Co. sold citrus groves to Florida buyers. Those buyers would lease the groves back to the company. The company cultivated the trees and sold the oranges on behalf of the Florida buyers. Both would share in the profits. W.J. Howey Co. subsequently failed to register with the SEC, arguing that its transactions were not investment contracts. 

W.J. Howey Co. lost the case when the court ruled that the leaseback arrangements were investment contracts, thus establishing the Howey test wherein four criteria are used to determine whether something constitutes an investment contract: An investment of money, in a common enterprise, with the expectation of profit, to be derived from the efforts of others.

Is Gensler right that most cryptocurrencies meet the Howey test?

Mark Bini, an attorney at Reed Smith, says “no.” Bini is a former state and federal prosecutor who now represents corporations and individuals facing civil and criminal charges of crypto fraud, securities fraud and other crimes.

“I think that the Howey test is not clear, and using this 1946 case about orange groves to decide whether a crypto is a security or not […] I’m not sure that they don’t need to update that,” Bini says. He also finds it surprising that a stablecoin pegged to the U.S. dollar might qualify as a security under the rule since there is no expectation of profit. 

Bini asks, “Would Chairman Gensler say, if the United States launched a digital currency, as they’ve at least thought about doing, let’s say that there was a crypto that was a pure digital dollar, would that be a security?”

Congresspeople Jesús García and Stephen Lynch agree with Gensler. In a recent opinion piece for The Hill, they argue that participants in the crypto ecosystem must “come into compliance with existing securities laws.” 

The lawmakers wrote, “According to the SEC Chair Gary Gensler and recent court decisions, the vast majority of crypto assets are securities because they meet the Howey Test […] An investment contract exists when money is invested in a common enterprise with the expectation of profit resulting from the work of others. We agree with Chair Gensler that nothing about the crypto markets is incompatible with the securities laws.”

With all the media coverage of Gensler’s recent statements, many in the crypto community might think that this is a new position for Gensler. Kevin Werbach, a professor at the University of Pennsylvania who leads the Wharton Blockchain and Digital Asset Project, tells Magazine otherwise. 

“Both Chair Gensler and his predecessor, Jay Clayton, have repeatedly stated that the vast majority of digital assets are issued and purchased primarily for investment purposes and should be treated as securities,” says Werbach. 

Werbach continues, “There are tens or hundreds of thousands of tokens out there — anyone can create one. The real issue relates to the projects that accumulated significant capital through the issuance of tokens. I think it’s fair to say that most of them would meet the Howey test in that issuance process […] But what does that mean today for ongoing trading and use of the tokens?”