Malaya Ruiz
The term “digital asset security” has recently come under scrutiny, with critics questioning its origins and legitimacy. They argue that this term, seemingly conjured by the Gary Gensler-led Securities and Exchange Commission (SEC), may have emerged more from a desire to regulate than from any well-defined legal basis.
This raises a critical question: did the SEC fabricate a term to tighten its grip on digital assets or is there a substantive legal framework that supports this classification? As regulators seek to impose structure on a sector that requires more regulation, the implications of such terminology could have far-reaching consequences for the future of digital assets.
Rep. Ritchie Torres: “The SEC invented the term out of thin air.”
An unvarnished comment by Rep. Ritchie Torres (D-N.Y.) during a recent congressional hearing, aptly titled “Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets,” marked a crucial milepost in this scrutiny. He said the term digital asset security does not appear anywhere, challenging the SEC to explain where it came from. He categorically asked, “If it appears nowhere, neither in rule nor statute, did the SEC invent the term out of thin air?”
In a post on X, the Democratic Congressman went all out and doubled down on the issue at hand.
The term ‘digital asset security’ does not appear anywhere in any law enacted by Congress or in any rule promulgated by the SEC or in any decision rendered by the Supreme Court. It appears nowhere in the 2 million pages of the Federal Register. If it comes from neither statute… pic.twitter.com/ucSaCzEvOU
— Rep. Ritchie Torres (@RepRitchie) September 19, 2024
Cato Institute’s Jennifer Schulp: Inefficient “enforce first, make rules never” Strategy
Jennifer Schulp, Director of Financial Regulation Studies at the Cato Institute’s Center for Monetary and Financial Alternatives, did not mince words either during her testimony regarding the SEC’s misguided strategy for regulating cryptocurrency. She discussed how the SEC’s registration requirements do not align well with digital assets. She said the same applies to the regulations being enforced on exchanges. Furthermore, she strongly asserted that enforcing existing rules can be effective when they provide clear guidance. Yet the SEC’s current strategy leaves much uncertainty around digital assets. This lack of clarity essentially results in a ban on crypto activity in the United States.
“This strategy simultaneously exceeds the agency’s authority and abdicates the agency’s role in overseeing the securities markets,” Schulp added.
Yesterday, I testified about the SEC's flawed approach to crypto regulation in front of the @FinancialCmte.
— Jennifer J. Schulp (@jenniferjschulp) September 19, 2024
Catch up on my testimony here: https://t.co/NbIIgtqIcp https://t.co/jKfRd4LMh4
Robinhood’s Daniel Gallagher: Contending with “innovation-killing federal regulatory uncertainty”
Daniel M. Gallagher, former SEC commissioner and incumbent chief legal officer at Robinhood, pointed out the ongoing federal regulatory uncertainty in U.S. digital asset markets. This has hindered innovation and affected millions of Americans wanting to engage. He testified that the SEC’s stance on which digital assets qualify as investment contracts remains unclear. In contrast, instead of clear rules, the SEC continues to impose regulations through enforcement.
“… millions of Americans who wish to participate in them have had to contend with innovation-killing federal regulatory uncertainty,” Gallagher said. He characterized the agency’s strategy as a “scorched earth” approach. He said this is detrimental to innovation in the blockchain and digital asset industries.
Michael Liftik: “No other statutory authority besides assets transacted in investment contracts”
According to Michael Liftik of Quinn Emanuel Urquhart & Sullivan LLP, the SEC’s authority over digital assets is limited to transactions involving “investment contracts.” The agency lacks other legal grounds for control over such assets. The Howey test, a key precedent, is an old approach that focuses on varied circumstances.
“The only reason the SEC arguably has authority over digital assets is when they are transacted in ‘investment contracts.’ There is no other statutory authority the SEC can point to over digital assets,” he testified.
Bitwise’s Teddy Fusaro: “Americans deserve the freedom to make investment decisions for themselves”
In his testimony, Teddy Fusaro, president of Bitwise Asset Management, Inc., explained that many investors who have registered on cryptocurrency exchanges lack the consumer protections provided by federal securities laws. He emphasized the need for sensible regulations and guidance for these platforms. He said clear oversight and approvals should fit within existing regulatory frameworks, highlighting that this will help guide investors who are seeking to engage with these markets, such as through ETFs.
“Americans deserve the freedom to make investment decisions for themselves, and should have the right to choose which services they use to buy all different types of products and services,” Fusaro stated.
Excited to see progress on this – options on bitcoin ETFs r something that the market wants, needs, and should have.
— Teddy Fusaro (@teddyfuse) September 20, 2024
However, there are more steps that need to take place before they can begin trading, including green light from both the OCC and CFTC which may take some time. https://t.co/UIG6Jedfj2
Duke University’s Lee Reiners: “There remains a gap in crypto spot market regulation”
In a slightly more favorable tone, Lee Reiner, a professor at Duke University, recognized the SEC’s efforts in applying the Howey test to safeguard crypto investors. However, he also asserted that there is still a gap that only Congress can close for the protection of investors. While he supports Gensler’s view that most cryptocurrencies are securities, he believes some are commodities. The Commodity Futures Trading Commission (CFTC) regulates commodity derivatives but not spot markets, leading to unregulated U.S. crypto exchanges. Reiner believes that this issue requires immediate attention from Congress.
“In my written testimony before this Subcommittee last March, I noted that the best way to close the gap in cryptocurrency spot market regulation is to have Congress carve out cryptocurrency from the definition of a commodity in the Commodity Exchange Act and recognize cryptocurrencies as securities under a special definition to the securities laws,” he explained.
In light of these testimonies, the SEC faces a critical inquiry into the legal validity of the term “digital asset security.” At the same time, it raises important considerations regarding how platforms can enhance investor experiences in the cryptocurrency market without impeding innovation.
Read More
- Kamala Harris Mentions ‘Digital Assets,’ but Crypto Industry, Feeling Bruised, Wants More Than Words
- Robinhood CLO Accuses SEC of ‘Scorched Earth’ Crypto Policy, Calls for Regulatory Clarity
- The Chainsmokers Speak Out Against Gary Gensler at Stand with Crypto Day
Malaya has positions in SHIB, ETH, USDT, MATIC, etc. This article is provided for informational purposes only and should not be construed as financial advice. The Shib Magazine and The Shib Daily are the official publications of the Shiba Inu cryptocurrency project. Readers are encouraged to conduct their own research and consult with a qualified financial adviser before making any investment decisions.
