In response to a question from Senator Pat Toomey, SEC Chair Gary Gensler said that stablecoins may be securities during the US Senate Banking Committee, which at the time of writing is still ongoing.
The SEC chair went on to say that he believes there are only “a small number” of cryptocurrencies which are commodities, whilst “very many”, including Stablecoins may be securities, and as such, he implied, these should be more heavily regulated.
However, when asked why there was little regulatory clarity around digital assets, Gensler said it was up to the US Congress to change the laws, or at least clean up the definition of a security in relation to crypto.
This Congress could change the laws, but the laws that we have right now have a very broad definition of a securitySEC Chair Gary Gensler, 14 Sept 2021 to US Senate Banking Committee
Gensler went on to say that he wasn’t negative about crypto, but clearly wanted to see more “investor protection”….which we all know means more regulation. And on the basis that he thinks Stablecoins may be securities, it’s clear to see that he is going after them. This could mean, as many crypto enthusiasts have been expecting, that the regulator will be taking a much closer look at crypto exchanges, which almost all make use of some form of Stablecoin or other.
Stablecoins may be securities as they meet the Howey Test
In his judgment, Genser said that other non-traditional investment vehicles, such as Scotch Whiskey could also be regarded as securities. This is in reference to the Howey Test, which refers to the US Supreme Court ruling for determining whether an asset or transaction qualifies as an investment contract, and is therefore a security. If so, it is subject to the disclosure and registration requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934
The original case refers to SEC v. W.J. Howey Co., which reached the Supreme Court in 1946. Howey Company sold tracts of citrus groves to buyers in Florida, who would then lease back the land to Howey. Company staff would tend to the groves and sell the fruit on behalf of the owners. Both parties shared in the revenue. Most buyers had no experience in agriculture and were not required to tend to the land themselves.
Howey had failed to register the transactions and the U.S. Securities and Exchange Commission (SEC) intervened. The court’s final ruling determined the leaseback arrangements qualified as investment contracts.
This established 4 core criteria to determine whether an investment contract exists, and defines one as:
- where there has been an investment of money
- In a common enterprise
- With the expectation of profit
- Where the profit is derived from the efforts of others
Because Digital Currencies are difficult to categorize, mainly because of their decentralized properties, it could be argued that they do elude the requirement for regulation, but the SEC has taken more and more of an interest in them, and has recently sought to clarify with the sale meets the definition of an investment contract. Some high profile cases have taken place recently, with one of the most notable being the case against Ripple Labs, and its founders Brad Garlinhouse and Christian Larsen, which is still ongoing to date.
In June 2018, the former SEC Chair Jay Clayton clarified that Bitcoin was not a security, stating that it was a replacement for sovereign currencies, and therefore did not qualify as a security.
Sugarwired will continue to monitor what’s said in the US Senate Banking Committee hearing as it continues and will of course report all the latest here.