SEC Chair Gensler continues to push broad SEC authority over digital assets

During September, SEC Chair Gary Gensler has continued to focus on the SEC’s ability to police a wide range of blockchain activities related to the offer, sale and trading of digital assets.  At PLI’s Annual SEC Speaks conference, Chair Gensler devoted his opening remarks to “crypto tokens,” stating that he believes that the vast majority of the 10,000 tokens in the crypto market are securities, although he conceded that a “small number” of crypto tokens may not be securities. His remarks addressed both token issuers and intermediaries. Emphasizing that the definition of a security under US securities law is broad, he noted that tokens generally meet the definition of a security under the Howey test – buying or selling “crypto security tokens”  –  because the investing public is expecting profits derived from the efforts of others in a common enterprise. 

Chair Gensler also responded to requests for greater guidance by noting that the SEC has been clear in its views as expressed in the DAO report, the Munchee Order, and “dozens of Enforcement actions.” Chair Gensler emphasized the need for protection against fraud and manipulation. Tellingly, he also suggested that it may be appropriate for the SEC to be flexible in applying existing disclosure requirements and noted that tailored disclosures exist elsewhere. He did not, however, provide any specifics on how a tailored disclosure regimen would work for token issuers. 

He also cautioned that stablecoins might be securities, depending on their attributes, including whether they pay interest directly or indirectly through affiliates or otherwise, the mechanisms used to maintain value, and how the stablecoin is offered, sold, and used. He suggested that stablecoins might be shares of a money market fund or another type of security for which registration is required. Labels applied to a crypto token are not controlling; rather, the facts and circumstances of the product determine whether it is a security.

As to intermediaries, Chair Gensler stressed that since many crypto tokens are securities, many intermediaries that are transacting in securities must register with the SEC in some capacity. The registration requirements apply whether the intermediary is centralized or is decentralized.

He further noted that many intermediaries are engaged in a variety of activities that implicate different securities law obligations, including those applicable to exchanges, brokers, dealers, and custodial functions. He specifically commented about crypto intermediaries providing lending functions for a return, stating, “[m]ake no mistake:  If a lending platform is offering and selling securities, it too comes under SEC jurisdiction.” He noted that he has asked the SEC staff to try to address ways to allow investors to trade crypto security tokens alongside non-security tokens and also noted that in some instances dual registration with the CFTC might be required.

A week later, Chair Gensler reiterated these remarks in written testimony before the US Senate Committee on Banking, Housing and Urban Affairs. He added that he has asked the SEC staff to work with traditional financial intermediaries who want to provide services to investors in the crypto market in compliance with SEC investor protection rules and reiterated that the SEC staff is also working to recommend a path to allow both crypto security and non-security tokens to trade versus or alongside each other. His oral testimony before the same Senate Committee also echoed these themes.

Most recently, Chair Gensler has reportedly stated that permitting token holders to “stake” their coins is another indication that, under Howey, the investing public expects profits based on the efforts of others. Chair Gensler reportedly opined that staking looks very similar to lending, a point he made earlier this month in his SEC Speaks remarks. From the SEC’s perspective, as outlined in its BlockFi enforcement proceeding,[1] such lending activities are subject to US securities laws and those who engage in them must register with the SEC.

All of this signals increased SEC enforcement activity, particularly related to staking activities and intermediaries in the crypto market.