Contentious Financial Services Update Chairman Gensler

US Securities and Exchange Commission Chairman Gary Gensler gave testimony before the United States Senate Committee on Banking, Housing, and Urban Affairs on 15 September 2022 where he expressed some interesting views as to the regulatory status of crypto-assets. See here

Gensler commented that US securities laws apply to all corners of the securities markets and that investors and issuers in crypto markets ought to benefit from those protections. He expressed the view that "Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities. Offers and sales of these thousands of crypto security tokens are covered by the securities laws, which require that these transactions be registered or made pursuant to an available exemption".

Accordingly, Gensler told the Committee that he had asked SEC's staff to work directly with entrepreneurs to get their tokens registered and regulated, where appropriate, as securities.

He also observed that stablecoins have features similar to, and potentially competing with, money market funds, other securities, and bank deposits. Depending on their attributes, such as whether they pay interest, what mechanisms are used to maintain value and how they are offered, sold, and used within the crypto ecosystem, they may be shares of a money market fund or another kind of security. If so, they too would need to be registered and provide important investor protections.

Given his view that most crypto tokens are securities, it followed that many crypto intermediaries are transacting in securities and have to register with the SEC in some capacity. Gensler says he has asked SEC staff to work (i) with crypto intermediaries to ensure they register their functions — e.g. as an exchange or broker-dealer, and (ii) with firms that have been operating in other well-regulated markets that want to enter the crypto market. Those traditional financial intermediaries had expressed an interest in providing services to investors in the crypto market and doing so in compliance with time-tested investor protection rules.

Gensler did acknowledge that a small number of tokens are likely to be crypto non-security tokens, although they may represent a significant portion of the crypto market’s aggregate value. He said he now looks forward to working with Congress on various legislative initiatives related to crypto markets, "while maintaining the robust authorities we currently have".

Commentary

The regulatory taxonomy of cryptoassets has for long been a subject of contention. the UK has not adopted a comprehensive definition of cryptoassets that sits relative to and in the context of existing categories of regulated financial instruments and investments. consequently there is a considerable degree of uncertainty as to how different cryptoassets are classified for regulatory purposes. Arguably the most advanced approach to this topic is the one adopted by the EU under the soon to be adopted Markets in Cryptoassets Regulation which creates a comprehensive framework to either classify certain cryptoassets in line with existing categories of instruments or services or designate new categories and corresponding level of regulation at disclosure and intermediation level.

Authors: James Levy, Partner; Etay Katz, Partner; and David Capps, Senior Consultant