- K Kim and M Bacina
Congress grills Gary on ETH
The Chair of US Securities and Exchange Commission (SEC), Gary Gensler refused to comment on whether ether (ETH) was a security or a commodity during a hearing before the House Financial Services Committee on 18th of April. Gensler avoided providing a clear response, saying it depends on the facts and the law, despite being told he knows exactly what the facts are and was there to give his opinion on the law.
Despite this, in his written testimony, Gensler emphasized that in his view a ‘vast majority of crypto tokens are securities’ and ‘it follows that many crypto intermediaries are transacting in securities and have to register with the SEC.’ but unfortunately there is no pathway for them to do so and all the projects which have tried to register have seemingly failed.
Jason Gottlieb, Partner at Morrison Cohen & Chair of the Digital Assets Department commented on podcast Unchained, explaining the reason behind this discrepancy was because:
[t]he SEC has a statute of limitations and ETH was first issued before five years ago. There is really very little that the SEC could do about that right now…Gary Gensler is facing an uncomfortable reality.
Jason further opined that if Gensler declared ETH was a security, it could have ‘terrible knock-on effects in the market' which could in turn cause a devastating effect on the consumers that the SEC is ‘purporting to try to protect’. If a token is declared to be a security under US law, its value would likely decline immediately due to ‘doubt in the marketplace’ arising from regulatory uncertainty.
On the other hand, Jason noted that if Gensler declined to call ETH a security, then there are concerns of '100,000 Crypto projects claiming ... we are just like ETH. What's the problem?’. This concern was echoed in Gensler's written testimony, where he alleged that the crypto market is ‘rife with noncompliance’ which places 'real people's life savings at risk'. Again, he did not expand upon what kind of compliance could occur, other than crypto-asset businesses abandoning the web3 models which bring their very innovation to the market.
The House Financial Services Committee’s Chair Patrick McHenry broadly criticized the lack of regulatory clarity in the crypto industry, pointing out Gensler's lack of a definitive answer to the question of whether ETH is a security as a prime example:
We’re finding out as we go, as you file suit, as people get Wells notices, on what is a security in your view, in your agency’s view.
There has been contradictory opinion produced previously on the legal classification of the second-largest cryptocurrency by market cap, with the former Director of the SEC's Corporate Finance Division and CFTC Chair stating that ETH is not a security and New York's Attorney General asserting that ETH is a security under US law in a claim against KuCoin.
While Gensler's position was not clarified in the recent hearing, it calls into the light the ongoing absence of a regulatory pathway in the USA, and highlights the sensible actions being undertaken in common law countries such as Australia, where consultation for a fit for purpose crypto-exchange regime continues, seeking to provide sensible protection for purchasers of crypto-assets without simply requiring compliance with regulation which is fundamentally incompatible with how crypto-exchanges operate.