On Wednesday, Gary Gensler, Chairman of the Securities and Exchange Commission (SEC), reiterated his views of what he thinks qualifies as securities. He has often said that he views all cryptocurrencies as securities except Bitcoin.
In a media interaction following a committee vote that took place, Gensler doubled down his opinion on securities. The regulator’s vote was to make decisions on advancing three proposed rules aimed at tightening cybersecurity, consumer privacy, and system standards for the securities industry, including at some firms involved in digital assets.
He affirmed that proof-of-stake tokens could meet the definition of securities under the Howey Test, subsequently bringing them under the jurisdiction of the securities regulator. The Howey Test is used to determine whether an investment contract exists. As per the Howey test, an asset can be classified as security if there is an investment of money in a common enterprise and the expectation of profits derived from the efforts of others.
According to media reports, Gensler said securities laws could be triggered because investors anticipate a return when they purchase tokens underpinned by a proof-of-stake consensus mechanism. In his words:
The investing public is investing anticipating a return, anticipating something on these tokens, whether they’re proof-of-stake tokens, where they’re also looking to get returns on those proof-of-stake tokens and getting 2%, 4%, 18% returns.
In response to a question asking for his views on the latest statement of Rostin Behnam, Chairman of the Commodity Futures Trading Commission (CFTC) wherein he classified Ether to be a commodity, Gensler replied:
Whatever they’re promoting and putting into a protocol, and locking up their tokens in a protocol, a protocol that’s often a small group of entrepreneurs and developers are developing, I would just suggest that each of these token operators … seek to come into compliance, and the same with the intermediaries.
Although crypto assets are yet to be officially classified, the SEC chair has repeatedly implied that “everything other than Bitcoin” classifies to be a security. To this extent, he also received severe criticism for his views.
Prior to this, in September last year, after Ethereum switched to proof-of-stake on September 15, Gensler suggested that Ether-based staking would also be subject to U.S. securities regulations. The two regulators in the US i.e SEC and the CFTC have long been at odds over which agency should take precedence in regulating the crypto markets.
In the past weeks, the SEC has been carrying out several enforcement actions against crypto companies accusing them of selling unregistered securities. Recently, the regulator brought under its radar big names like Kraken and Paxos. The SEC issued a Wells Notice to Paxos over BUSD, the third largest stablecoins, and labeled them as an unregistered security. Paxos publicly acknowledged the notice but categorically disagreed. Later, it said that it was having talks with the regulator.