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  • J McGlynn and M Bacina

Stablecoins as securities? Gensler continues to "crack down" on crypto without clear reason

Updated: May 3

During a recent hearing before the Senate Banking Committee, Securities and Exchange Commission Chairman Gary Gensler has continued to ruffle feathers in the crypto community as he refuses to rule out regulating stablecoins as securities - without a reason.

Less than a month ago, Gensler called on Congress to grant the SEC more authority over cryptocurrencies, touting that mostly all crypto-assets are securities and therefore must be subject to SEC oversight. Back then we questioned his lack of clear legal justification as to why this variety rich asset class should be painted with the same broad brush. If all digital currencies fall so easily under the definition of securities - as Mr Gensler seems to suggest, what further authority does the SEC need that it does not already have?

Nevertheless, the Commissioner continues to publicly 'crack down' on the "wild west" of crypto without clarity, providing little more justification than the tired myth that cryptocurrency "is rife with fraud, scams, and abuse in certain applications". It seems Mr Gensler thinks this a sufficient reason alone to testify to the Banking Committee that the US "can do better" in consumer protection if the SEC could just have jurisdiction over:-

  • The offer and sale of crypto tokens

  • Crypto trading and lending platforms

  • Stable value coins

  • Investment vehicles providing exposure to crypto assets or crypto derivatives

  • Custody of crypto assets

It's unfortunate that this complete myth - that cryptocurrency is only used for crime, continues to be repeated despite it being well debunked (for those who disagree we highly encourage a read of the 2021 Chainalysis Report). It also makes little sense that the Commissioner continues to argue that the SEC should have more authority over cryptocurrency, without providing clear guidelines as to when a digital asset will be considered a security and therefore under the SEC's umbrella in the first place.

This further need for clarity was made clear when, during Genlser's testimony to the Banking Committee, Senator Pat Toomey, a Pennsylvania Republican, pressed the Commissioner about whether he believes stablecoins are securities under the Howey Test (the Supreme Court’s test for determining a security), saying:-

To me a stablecoin doesn’t meet the second prong of the Howey Test, that there has to be an expectation of profits from the investment ... [i]f it doesn’t meet the Howey Test, it looks to me like it’s not a security.

Unfavourably, Gensler didn't properly address Toomey's question, vaguely replying that stablecoins "may as well be securities" without providing any real explanation or justification for his position.

Gensler argued that the definition of securities is broad enough to include many different types of instruments including those that don't need not meet the Howey test, but without providing the very vital information on how that renders digital assets, like stablecoins, as securities.

In our view, despite trying to defend his demands, Gensler has not provided 'a full picture' or an understandable basis for his claims that most digital assets are securities, and until the SEC provides proper clarity as to their regulatory perimeter, the US should and will continue to be viewed as a jurisdiction which is warning away, rather than welcoming, digital assets.


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