Cryptocurrency enthusiasts have been keeping an eye on Joe Biden’s decision to head the U.S. Securities and Exchange Commission for advice on how he might regulate the technology. In his confirmation hearing today, candidate Gary Gensler suggested that stronger government oversight of cryptocurrencies was in sight.
He also indicated that the type of surveillance will depend on what form of cryptocurrency is being discussed. With crypto prices soaring in recent months, the hectic debate over whether the rapidly evolving market is a legitimate new asset class or a bubble ripe for abuse has become a regulatory conundrum as institutional and retail investors follow the rules to regulate ahead of the market.
As head of the SEC, Gensler would be responsible for cryptocurrencies, which are considered securities. During the Senate Banking Committee hearing, Gensler said that while the SEC should encourage innovation in blockchain technology, when it comes to securities that are traded on exchanges, “we want to ensure that there is adequate investor protection.”
This thinking is not new. The use of the definition of a security to determine the regulation of a financial instrument, known as the Howey test, goes back to a 1946 Supreme Court ruling designed to determine which transactions constitute an investment contract. That’s a rule Gensler knows well. Known in progressive circles as the tough reformer of the financial sector since his post-financial crisis post as head of the Commodities Futures Trading Commission, he is also hailed by the crypto crowd for his understanding of blockchain technologies as an MIT economics professor who teaches blockchain, digital Currencies and financial innovation.
Gensler’s comments during the hearing reflect his teachings about the Howey test. Following this logic, cryptocurrencies are generally defined either as utility tokens that act like some form of bidding, or security tokens that represent equity or shares in a company regulated by the SEC. If a coin offering is to give investors a stake, the company’s token should be subject to the regulations of a security, he told an audience at a 2018 MIT blockchain conference, even if it doesn’t offer a dividend or has the typical characteristics of an equity or bond . “The investing public is clearly hoping for a possible upgrade,” said Gensler. “If you quack like the duck, if you swim like the duck, if you walk like the duck … I think the bird is a duck.”
Bitcoin, the most ubiquitous virtual currency, is not considered a security, according to Gensler. “Bitcoin came about when mining began 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 offering and no joint venture. Ripple, on the other hand, “seems like an ordinary company,” he concluded.
The SEC has followed this logic ever since. In December, it sued Ripple over the sale of a Bitcoin-like digital asset called XRP, a high-profile case that Gensler will inherit if he is confirmed as the agency’s new chairman. Bitcoin’s value fell during the verification hearing of Jenser’s comments. But after the Howey Test, these investors should be clear.