On September 8, 2022, the said At the annual SEC Speaks conference, titled Kennedy and Crypto, SEC Chairman Gary Gensler announced:
Of the nearly 10,000 tokens in the crypto market, I believe the majority are securities. The offering and sale of thousands of these crypto security tokens is covered by securities laws.
Some tokens may not fit the definition of security – which I will call crypto non-security tokens. These may represent only a few tokens, although they may represent a significant portion of the aggregate value of the crypto market.1
Unfortunately, Chairman Gensler did not provide any guidance on how to tell crypto security from crypto non-security. However, he criticized those who asked for more clarity:
Some in the crypto industry are calling for greater “guidance”.2 about crypto tokens.
However, over the past five years, the Commission has spoken with a clear voice here: through the DAO Report, the Munchee Order, and dozens of Enforcement actions, all chosen by the Commission…
Disliking a message is not the same as not receiving it.
This sentence feels cheap because there is only one.3 This eliminates the concern of crypto investors, entrepreneurs, intermediaries, and issuers who are daily – in good faith – with the question of whether the SEC or the courts can find that certain digital assets are securities.
However, Gensler points us to it DAO report with Munchee matter, both involve ICOs. With few exceptions, “dozens of Enforcement actions” have begun involving ICOs, such as Kik, Telegramand Ripple cases, or offering scams masquerading as ICOs, for example Centra Tech and Block vest. In the latter case, technology is, frankly, irrelevant.4
SEC actions declaring certain tokens to be securities generally have serious and negative financial consequences for token holders. Gensler’s “guidance” appears caveat emptorif you have bought a token it is probably a security, as we have said many times before.
Gensler is right that there is no legal justification for treating capital raising differently under federal securities law simply because the investor’s interest is represented by tokens on the blockchain. But there is an important way for blockchain technology to, in fact, solve securities law questions. Gensler ignores this complexity altogether.
Gensler failed to address the fact that tokens that are securities when offered in the ICO can, over time, change to non-securities, generally because the governance of tokens has been sufficiently decentralized so that purchasers no longer depend on the efforts of others for profits.5 Is the SEC going to pursue action against issuers where tokens used to be but are no longer securities? Against the middleman? Investors?
Furthermore, if the guidance of the SEC staff is significant such as the Framework for “Investment Contract” Analysis of Digital Assets, in Gensler’s opinion, is currently illegal – and following the instructions could lead to an individual or entity breaking the law – it is not enough for him to be far from it. Rather, they should strive to have the directions withdrawn. If the opinion, “once a security, always a security,” so the guidance of the staff to the contrary to remain in effect poses a danger to well-intentioned investors and market participants.
Gensler also failed to acknowledge it it’s not either/or, i.e, either the token is a security or decentralized enough to be a non-security. A unique conundrum for crypto arises from the fact that some buyers can be motivated by investment, some by the desire to use or use tokens, and some by both. In fact, many of the most well-known tokens are held somewhere along this complex spectrum, an issue that is not addressed by existing case law.
What is the standard in a mixed case where some token holders buy for investment reasons, some for consumptive reasons, and some for both reasons? The federal district court asked the SEC this question, just a few weeks ago, in an action pending against him LBRY, Incat oral argument on the parties’ cross motion for summary judgment, and the SEC did not have a clear answer.
As Gensler noted, it has been more than five years since the DAO Report. By that time, crypto had become mainstream, bought by millions of retail investors that the SEC could harm by inaction; we have moved beyond the ICO paradigm to a more complex set of facts and circumstances; and, many tokens that were also securities when they were first offered and sold now resemble BTC or ETH more and more every day.
The market’s message to the SEC is clear: There are still questions to be answered, “guidance” to be provided. Disliking a message is not the same as not receiving it.
1 If this is a sign that Gensler believes that ETH is not a security, after all he is new waffles in the question, it would be nice to say it out loud.
2 Gensler added the scare quotes for “guidance” in the speech, not me.
3 After all, in his speech, Gensler asked Joe Kennedy, the first Chairman of the SEC, who said, “No honest business should be afraid of the SEC,” indicating that those who disagree with him are not honest brokers , not John Kennedy who sent it. the first rocket ship to the moon, stating, “We chose to go to the moon in this decade and do other things, not because it’s easy, but because it’s difficult, because that goal will be able to manage and measure the best of our energy and skills… sprinkled with “utility”, like so many bac-o-bits, in the face of security sacrifices visible. But painting the entire industry with the same brush can be seen as a gratuitous insult.
4 It is not relevant because it does not matter to the Ponzi victim what the fraudster promises to return from postal reply coupon discount or tokens.
5 This fact was recognized by the director of the SEC’s Division of Corporate Finance, William Hinman, in his famous work. speechDigital Asset Transactions: When Howey Met Gary (Plastic) and Strengthened by the SEC’s Framework for Digital Asset “Investment Contract” Analysis.