When Michael Corleone ordered hits on rival bosses in The Godfather, he had Don Cuneo locked inside a revolving door and shot. Getting whacked while trapped behind a barred door appears to be the treatment United States Securities and Exchange Commission Chair Gary Gensler has in mind for U.S. crypto projects based on recent SEC enforcement activity and comments by the chair.
The SEC should not be left to wage an unsupervised dirty war on crypto. Congress must both defend its oversight authority and give American crypto developers, entrepreneurs and users a clear path to lawfully carry on their business. Providing a common-sense disclosure framework for asset-backed stablecoins is the place to start.
Gensler’s SEC appears to be attempting to settle “all family business” with crypto. On Feb. 9, the SEC settled allegations that Kraken’s “staking-as-a-service” program (a way to earn rewards for helping to maintain crypto networks) constituted the illegal sale of unregistered securities. Later in the month, news emerged that the SEC sent a Wells notice to stablecoin issuer Paxos, indicating a potential future enforcement action over its Binance USD token (a Binance-branded asset designed to keep a 1:1 peg with the U.S. dollar), which the commission apparently also alleges is an unregistered security. And Gensler indicated in a recent interview that basically every crypto project — “everything other than Bitcoin” — could have an SEC target on its back.
The SEC maintains it is merely enforcing existing registration and disclosure requirements on crypto tokens and services it considers securities. But this is misleading for two reasons.
One, the applicability of securities laws to the projects at issue — Kraken’s staking service and Paxos’s BUSD stablecoin — is, at the very least, contestable. Even more so if the idea is that every crypto token other than Bitcoin is to be considered a security. And two, a regulator interested in getting consumers the best disclosures about new products, including stablecoins, would provide clear guidance on how to do so. The SEC hasn’t.
With Kraken, the SEC alleged its staking service involved a type of security known as an investment contract. In broad strokes, these securities cover an investment with an expectation of profit based on others’ managerial or entrepreneurial efforts. Whether Kraken’s service was is debatable. With Paxos, we don’t yet know what type of security the SEC thinks describes the BUSD stablecoin and why, but generally speaking, it’s harder, although not necessarily impossible, to see how an asset that a buyer does not expect to generate a profit is a security.
Troublingly, Gensler’s comments also could imply that he views even highly decentralized tokens, like Ether, as securities. This is inconsistent with previous comments by SEC officials, as well as the idea that securities laws are to address managerial risks — hallmarks of centralized bodies, not decentralized software protocols.
Moreover, even if one assumes that a particular token or service were a security, there’s still the matter of registration. And this is where the SEC looks like the hitman bolting the door.
It was entirely disingenuous when Gensler declared the process for registering a crypto security is “just a form on our website.” As Michael Corleone might have scowled, Gensler’s line “insults my intelligence and makes me very angry.” Because as SEC Commissioner Hester Peirce explained in her dissent against the Kraken action, “in the current climate, crypto-related offerings are not making it through the SEC’s registration pipeline.”
Lawmakers have a vital role in restoring administrative accountability. In a Feb. 14 Senate Banking Committee hearing, Republican Senator Tim Scott told the hearing, “If Chairman Gensler is going to take enforcement action, Congress needs to hear from him very soon.” Across the aisle, Democratic Senator Kirsten Gillibrand has voiced similar sentiment: “I have many concerns about Chairman Gensler and his approach to this space.”
Oversight would be most welcome. Congress should go a step further by legislating, first providing a practical registration path for stablecoins.
Ostensibly, the SEC wants issuers to disclose stablecoin risks to consumers. The main risk is a stablecoin will “break the buck,” losing 1:1 redeemability with the asset it’s pegged to, such as the U.S. dollar, because the issuer doesn’t have the reserves it claims to. Basic requirements around collateral and disclosures subject to antifraud authority would directly address this.
Some, however, including the President’s Working Group, have argued more is needed and only insured depository institutions should issue stablecoins. But limiting stablecoin issuance to banks is just another way of barring the door to new market entrants. Straightforward rules enabling competition, not protectionist restrictions, are the path to continued financial leadership.
The SEC shouldn’t be left in the shadows to try to snuff out Americans’ work on and access to a new class of technology. As House Financial Services Committee Chairman Patrick McHenry has recognized, the future of digital assets “is a major political and economic question that must be decided by Congress.”
That decision should include initiating straightforward stablecoin legislation and democratic accountability. After all, a regulator is in no position to demand of Congress, “Don’t ask me about my business.”