SEC Chair Gary Gensler Reiterates Stance on Tokens and Addresses Regulation of Intermediaries

On September 8, 2022, Securities and Exchange Commission (SEC) Chair Gary Gensler expounded his thoughts on cryptocurrency tokens (“Tokens”) and cryptocurrency intermediaries (“Intermediaries”) at the Practising Law Institute’s “SEC Speaks” program. Gensler focused on two points during his speech. First, Gensler reiterated his stance that most Tokens are subject to the securities laws. Second, he suggested that Intermediaries may commingle functions as exchanges, broker-dealers, and lenders. Gensler’s statements raise several important considerations for cryptocurrency industry participants as they continue to navigate the evolving US regulatory landscape.

Regulation of Tokens

Consistent with his prior remarks on Tokens, Gensler reiterated that he believes “the vast majority” of Tokens are securities and “are covered under the securities laws.” To Gensler, most Tokens assets are “investment contracts” under the Howey Test. The Howey Test is a test created by the Supreme Court of the United States to determine whether an investment asset is a security and thus subject to registration under U.S. federal securities laws.^[1] For an investment asset to be a security, four things must be present: (i) the investment of money; (ii) in a common enterprise; (iii) with an expectation of profits; and (iv) derived solely through the efforts of others.^[2] Gensler emphasized that his views were consistent with prior SEC findings, and although some have requested “greater ‘guidance’…[n]ot liking the message isn’t the same thing as not receiving it.”

Gensler noted that a small number of Tokens that “represent a significant portion of the crypto market’s aggregate value” might not be securities. Specifically, Gensler stated that Bitcoin, a prominent Token with nearly 44.76% of the Token market share as of the date of this writing,^[3] may function more like a “precious metal.” Additionally, stablecoins, or digital currency that is pegged to a “stable” reserve asset like the U.S. dollar or gold,^[4] may resemble money market funds. Gensler acknowledged that the Commodity Futures Trading Commission (CFTC) may have authority over such “crypto non-security tokens” and expressed his willingness to collaborate with the CFTC over Token regulation.

Ultimately, Gensler warned that the label of a Token or the legal and technical attributes of a Token are not dispositive of whether that asset will be under SEC regulation. Instead, if the Token is marketed to the investing public that buys it in anticipation of profits based on the efforts of others, Gensler believes it should be registered as a security under the Howey Test.

Regulation of Intermediaries

Gensler argued that because most Tokens are securities, Intermediaries that offer services related to those Tokens may have to register with government agencies in various capacities. Specifically, Gensler characterized businesses that facilitate Token transactions for the account of others and their own account as broker-dealers. Hence, these businesses could be subject to federal securities laws and the particular rules and regulations for broker-dealers. Gensler also focused on the various functions that Intermediaries perform, such as exchange, lending, and custodial functions that may require additional registration.

Gensler made two recommendations to address these amalgamation concerns. First, he implied that the SEC might compel some Intermediaries to register each of their various functions separately, “which could result in disaggregating their functions into separate legal entities.” This is consistent with Gensler’s prior remarks in April 2022 on insulating Intermediaries’ custodial and market-making services from their trading services and his concern for potential conflicts of interest.^[5] Second, Gensler emphasized that other governmental authorities, including the CFTC, may have parallel regulatory authority. Thus, Intermediaries may be required to register with the SEC and the CFTC to ensure compliance. Gensler did not comment what role the Financial Crimes Enforcement Network (“FinCEN”) would have beyond its current authority of requiring Token exchanges to register as money services businesses with FinCEN.

Conclusion

Gensler’s recent remarks reiterated his belief that Congress already provided the authority and framework for the SEC to regulate most of the cryptocurrency industry and he confirmed that the SEC will continue to play an important role in cryptocurrency regulation.

At the same time, his speech provided new insight for the industry. Gensler acknowledged that the CFTC has parallel regulatory authority over certain Intermediaries, such as broker-dealers and investment advisers that deal with Tokens deemed both securities and commodities. His statements corroborate that the federal government has been taking further interest in the cryptocurrency space, a trend highlighted in our prior articles on President Biden’s Executive Order on cryptocurrency, sanctions against virtual currency mixers, the role of cryptocurrency sanctions in foreign conflict, and recent SEC enforcement actions.

Gensler’s statements indicate that cryptocurrency industry participants should work with counsel knowledgeable in securities issues to navigate the changing landscape. Although Gensler stated that the SEC could adopt a flexible approach in cryptocurrency regulation and “fine-tune compliance” for the industry, he immediately warned against any high expectations: “I can’t make promises.”

Winston & Strawn has an interdisciplinary group of lawyers in trade, sanctions, financial services, and cryptocurrency and will continue to provide updates and client alerts on new developments. If you have questions about specific transactions, please contact the authors or your Winston relationship partner.

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^{[1] SEC v. Howey, 328 U.S. 293 (1946).}

^{[2] Id.}

^{[3] Bitcoin (BTC), Ethereum (ETH) Dominance, Statista (July 7, 2022), https://www.statista.com/statistics/1269302/crypto-market-share/.}

^{[4] What is a Stablecoin?, Coinbase (last visited Sept. 13, 2022), https://www.coinbase.com/learn/crypto-basics/what-is-a-stablecoin.}

^{[5] Gary Gensler, Prepared Remarks of Gary Gensler on Crypto Markets, U.S. Securities and Exchange Commission (Apr. 4, 2022), https://www.sec.gov/news/speech/gensler-remarks-crypto-markets-040422.}