If the SEC Isn’t Fit to Regulate Crypto, Let a new Digital Assets Commission Take Birth and Rule instead
Gary Gensler is the problem today in crypto, but there was a silver lining in his refusal to provide a straightforward answer to a seemingly simple question by Rep. Patrick McHenry: Is Ether security or commodity?
On the surface, it sounded like he was dodging the question and continuing to be himself, i.e. perpetuating the current SEC practice of confusing the market while maintaining their enforcement agenda.
Let’s pretend there could have been a Yes/No answer. Chair Gensler is no dummy. He knows that answering more precisely would have instantly obsoleted his crypto agenda and revealed the nonsensical, illogical path they are currently pursuing. And he would have shot himself in the foot by exposing the cracks in the conundrum his agency is facing.
Let me explain.
Damned if it is, Damned if it’s not
If Gensler had said that ETH is a security, then it would be allowed to trade on approved security exchanges such as the Nasdaq or NYSE, right?
Yes, but nonsensical.
Granted, it would be a boon for Ethereum because mainstream investors could buy it via the large and established broker-deal networks, but this would be bad for US crypto exchanges because they aren’t allowed to trade securities. They would need to de-list ETH and 99.99% of the other currently listed tokens on their platform. In one scoop, the whole industry would crumble. Gensler might be perceived as the villain here, but he doesn’t want to go down in history as the man who killed a trillion-dollar industry with one stroke (although he’s trying hard to kill it slowly by a thousand cuts).
Nonsensical scenario, of course.
Assuming Ethereum was a security and eligible to trade on the Nasdaq, the issue is that it doesn’t make money like a traditional company, so what kind of reporting disclosures would “investors” expect? Specifically, the Ethereum Foundation (who originally issued the ETH tokens) doesn’t generate revenue from the Ethereum Network and is not “in charge” of Ethereum’s Protocol/Network revenues. So, who is going to file for that security listing? And who is going to provide the regularly scheduled disclosures that public companies are subjected to?
Speaking of disclosures, what will be considered as Ethereum Network’s revenues? Are we talking about the protocol’s gas revenue? Or stakers revenue? Or staking pools? Or transaction fees? Wait, the protocol itself can’t generate quarterly reports nor conduct earnings calls with “investors”.
Now, let’s suppose the answer was that Ethereum is not security. Then, it would be officially sanctioned for trading on crypto exchanges, right? True, but Chairman Gensler is no dummy.
If he had declared Ethereum to be a commodity, then he would have opened two cans of worms at the same time. First, Ethereum would slip away from the SEC’s regulatory purview. His most visible bargaining toy would be taken away, and probably tilt toward the CFTC’s purview. [Now, you understand the essence of the ongoing turf war between these two commissions.] Second, every other token would start claiming they are similar in nature to Ethereum, hence deserving of the same classification. Then, the SEC would have their hands full dealing with a flurry of such inquiries. This would put them on the defensive, instead of remaining on the offense currently, which allows them to pick and choose which enforcement actions they wish to embark on.
If the Token Doesn’t Fit, You Must Acquit (and Not Regulate)
Although his predecessor’s staff via Director Hinman already stated that Ethereum would not be classified as a security, Chairman Gensler preferred to remain on the fence citing the proverbial “facts and circumstances” as a rider to any definitive conclusion.
It is true that in 2014, the Swiss-based Ethereum Foundation was the entity that issued the ETH token, and that event itself was a security offering. But when Ethereum was launched more than a year later, it suddenly caught fire and became decentralized very quickly, resulting in an overwhelming demand for its utility by thousands then hundreds of thousands then millions of users and developers worldwide. Ethereum became a commoditized utility. Its value accrued because of its decentralized status, not as a result of the efforts of the self-effacing Ethereum Foundation.
What this points to is that a traditional regulator may not be fit to regulate cryptocurrency. Although many tokens have security characteristics, several of them equally do not. Cryptocurrency and digital tokens represent a new asset class. With a new class, new rulings are expected.
It is now obvious the SEC has not been able to grapple with the idea that this new asset class deserves a different kind of regulatory treatment than constraining it within the confines of the existing system.
Since there is a turf war between the SEC (security side bias) and the CFTC (commodity side bias), why not let a new, impartial agency emerge and regulate these new tokens with clarity?
If that were the case, it would become a lot easier for each token to get classified either as security or utility accordingly. But only after that ruling clarity comes into light.
If the US Congress isn’t able to force the SEC to change its course quickly either by voting on a Bill or by convincing Chair Gensler to open up his mind, then US cryptocurrency activity as we know it is dead.
Of course, we are awaiting a proposal by Rep. Warren Davidson to limit the powers of the SEC Chair and replace that role with an Executive Director that reports to the Board.
In parallel, why not advocate for the creation of a new Commission to govern the regulation of digital assets? [It is an idea I already floated in October 2021, The US Needs a Dedicated Crypto Regulator.]
Let’s call it simply the DAC: Digital Assets Commission.
The DAC would be responsible for drafting new comprehensive regulations for the issuance, usage, and trading of digital assets. The DAC would take into account the existing Securities Act and the role of each existing regulatory body. It would also prescribe the interrelationships between these bodies and clarify where issuers, users, and traders stand with cryptocurrency-based projects, companies and organizations.
Let’s be realistic, the writing is on the wall. The crypto industry has clearly reached a deadlock with the SEC. It’s time to look for strong options, now.