Gensler grilled over SEC ‘crypto’ regulatory overreach

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All five United States Securities and Exchange Commission (SEC) commissioners, including Chair Gary Gensler, faced a fierce grilling from representatives of the House Financial Services Committee on September 24 during a heated hearing on SEC oversight. Stablecoin legislation was also up for discussion, with Ranking Member Maxine Waters (D-CA) calling for a “grand bargain” and warning that time is running out to get a deal done.

The much-anticipated hearing saw testimony from Gensler and Commissioners Hester Peirce, Caroline Crenshaw, Mark Uyeda, and Jamie Lizarraga—the first time all five commissioners had testified together since 2019.

Critics amongst the Representatives, chiefly Republicans, ensured they took this rare opportunity to take the witnesses to task over the SEC’s handling of digital asset regulation.

Committee Chairman Patrick McHenry (R-NC) set the tone from the start, calling out Gensler for what he saw as regulatory overreach.

“Chair Gensler’s legacy will be defined by turning the once proud institution of the SEC into a rogue agency,” said McHenry, who went on to accuse the SEC of enforcing regulations “often without adequate justification, economic analysis, or public engagement.”

The SEC’s supposedly heavy-handed ‘regulation by enforcement’ approach has been the subject of sustained criticism throughout Gensler’s tenure as SEC chair. Meanwhile, Gensler has consistently argued that existing regulations are sufficient to account for digital assets and that the Howey Test is sufficient to establish whether an asset is a security.

According to the Howey Test, an asset can be classified as an “investment contract” and, therefore, subject to U.S. securities law if it is: an investment of money; in a common enterprise; with an expectation of profits solely from the efforts of others.

However, during the September 24 hearing, Representative Ritchie Torres (D-NY) questioned Gensler’s interpretation of the test as applied to non-fungible tokens (NFTs), calling it “idiosyncratic.” He argued that the SEC’s logic could turn “just about any collectible or any consumer good or any piece of art or any piece of music” into a security.

“It’s so open-ended that it blurs the line between collectible and security, between art and security,” said Torres, demonstrating that concerns about the SEC’s approach are not limited to the Republican side of the fence.

However, it was from a Republican that the hearing’s most vociferous criticism was levied, as Representative Tom Emmer (R-MN) accused Gensler of being the most “destructive” and “lawless” chair in the regulator’s 90-year history.

Specifically, he argued that Gensler had coined the term “crypto asset security.”

“This term is nowhere to be found in statute, you made it up [and] you never provided any interpretive guidance on how crypto asset security might be defined within the walls of your SEC,” said Emmer.

The Minnesota Republican, who has been dubbed “the crypto king of Congress,” went on to suggest that the term had served as the basis for Gensler’s supposed “enforcement crusade” against the digital asset industry—despite the fact SEC lawyers added a footnote to a September 12 filing in its case against Binance that clarified the term was “not referring to the crypto asset itself as the security,” rather as a “shorthand.”

However, a tough day for Gensler was made worse when SEC Commissioner Hester Peirce admitted that the SEC’s move to retract the term’ crypto asset security’ in court last week should have happened “a long time ago.”

“[By] tucking into a footnote, we admit that now actually the token itself is not a security. That’s something that we should have admitted long ago,” she said.

Pierce, often called “Crypto Mom” for her industry-friendly stance, testified that the agency was failing in its duty as a regulator by not being precise.

“By using imprecise language, we have been able to suggest that the token itself is a security apart from that investment contract, which has implications for secondary sales, which has implications for who can list it. I think we are falling down in our duty as a regulator not to be precise,” said Pierce.

When asked whether digital assets need a statutory definition to ascertain how securities laws should apply to them, Peirce suggested that “it’s always helpful to have Congress weigh in, but there certainly are some guidelines we could provide in this area that we have chosen not to provide.”

In terms of guidelines that have been provided, the SEC’s Staff Accounting Bulletin No. 121 (SAB 121) was also a topic of discussion after 42 Republican Party senators and representatives signed a September 23 letter to the SEC requesting the regulator rescind the “disastrous” bulletin.

SAB 121 advised financial institutions, such as centralized exchanges and banks, that if they hold digital assets on behalf of customers, they should report the assets as a liability on their balance sheets and include, in notes to their financial statements, a clear disclosure of the nature and amount of the digital assets that they are holding for users. In other words, these firms would need to publicly disclose the amount and nature of digital assets that they hold on behalf of their customers.

When Representative Wiley Nickel (D-NC) asked whether the SEC would rescind the bulletin, Gensler responded: “No, it’s a good accounting bulletin.”

He argued that SAB 121 helps public companies understand the risks associated with holding digital assets, highlighting FTX, Terraform Labs, and other bankruptcies as examples.

Nickel disagreed, claiming that SAB 121 made the digital asset ecosystem “less safe” and also argued that the SEC Office of the Chief Accountant’s recent exempting of the Bank of New York Mellon (BNY Mellon) from the balance sheet reporting requirement would lead to “different rules for different folks.”

Gensler maintained that “it’s actually the same rules for different folks.”

Waters urges stablecoin bill compromise

The hearing didn’t entirely revolve around another exhaustive grilling of Chair Gensler. Ranking member Maxine Waters (D-CA) took a more diplomatic approach, instead underscoring the need for legislative action outside of the SEC’s purview.

“Before the end of this year, I want us to strike a grand bargain on stablecoins and other long-overdue bills,” said Waters, reemphasizing a previously stated desire to get legislation over the line in this Congress.

“We’re running out of time to pass this,” she added.

Committee Chair McHenry responded positively, stating that he still hoped “we can come to terms on stablecoin legislation,” while admitting that “the nature of how we do that is where things get a little tougher and the votes are a little tougher.”

McHenry authored the Clarity for Payment Stablecoins Act of 2023, which is currently languishing in the House of Representatives after passing a Committee stage vote in July of last year.

Waters was firmly against some aspects of the bill, criticizing it for allowing state regulators to unilaterally expand the list of suitable stablecoin reserve assets based on what they deem “appropriate.”

“Strong reserves are what ensure a stablecoin remains stable,” argued Waters when the legislation was being debated in Committee, pointing out that delegating authority to state-level ‘payment stablecoin regulators’ meant that the bill lacked support from the Federal Reserve or the Treasury Department.

It’s such criticisms, shared by many Democrats in the House as well as President Biden, that are keeping the Stablecoin bill from a full vote. Despite a desire for a compromise from both Waters and McHenry, it remains to be seen if and how much either side is willing to bend to get one, and time is running out.

Watch: Stablecoins with Daniel Lipshitz