Cryptocurrency enthusiasts are eyeing Joe Biden’s choice to head the United States Securities and Exchange Commission for clues as to how he can regulate technology. At his confirmation hearing today, nominee Gary Gensler suggested that more government oversight of cryptocurrencies was underway.
He also hinted that the type of supervision will depend on which form of cryptocurrency is under discussion. With cryptographic prices on the rise in recent months, the frantic debate over whether the rapidly evolving market constitutes a new legitimate asset class or a ripe bubble for abuse has become a regulatory puzzle as institutional and retail investors rush ahead of the rules for governing space.
As head of the SEC, Gensler would be responsible for cryptocurrencies considered bonds. During the Senate Banking Committee hearing, Gensler said that while the SEC should promote innovation in blockchain technology, if securities are involved that are traded on the exchanges, “we want to ensure that there is adequate investor protection.”
This thought is not new. The use of the definition of security to determine how a financial instrument should be regulated, known as the Howey test, goes back to a Supreme Court decision of 1946, designed to help define which transactions constitute an investment contract. It is a rule that Gensler knows well. He is known in progressive circles as a tough financial reformer of his post-financial crisis days as head of the Commodities Futures Trading Commission, but he is also greeted by the crypto crowd for his understanding of blockchain technologies, as an economics professor at MIT who teaches about blockchain, digital currencies and financial innovation.
Gensler’s comments during the hearing echo his teachings about the Howey test. By this logic, cryptocurrencies are generally defined as utility tokens, which act as a form of offering, or security tokens, which represent equity or interest in a company that would be regulated by the SEC. If a currency offer aims to give investors a stake, then the company’s token must be subject to the regulations of a security, he told an audience at an MIT 2018 blockchain conference, even if it doesn’t offer a dividend, or has the typical attributes of an asset or title. “The investing public is clearly waiting for a possible appreciation,” said Gensler. “When you quack like a duck, when you swim like a duck, when you walk like a duck … I think the bird is a duck.”
Bitcoin, the most ubiquitous virtual currency, does not qualify as a security, according to Gensler. “Bitcoin emerged when mining started as an incentive to validate a distributed platform,” he said at the conference. Unlike other cryptocurrencies offered by companies like Ripple, bitcoin had no initial token offer and no joint venture. Ripple, on the other hand, “looks like a joint venture,” he concluded.
Since then, the SEC has followed that logic. In December, she sued Ripple for selling a bitcoin-like digital asset called XRP, a prominent case that Gensler will inherit if confirmed as the agency’s new president. Bitcoin’s value fell with nervousness over Gensler’s comments during the confirmation hearing. But, according to Howey’s test, these investors must be clean.