(Article from Registered Funds Regulatory Update, July 2023
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In a June 8, 2023 speech, SEC Chair Gary Gensler reiterated his belief that cryptocurrencies are investment contracts and crypto security issuers and intermediaries must register with the SEC or meet the requirements for an exemption. His comments were made days after the SEC filed lawsuits against Binance and Coinbase for, among other things, operating as unregistered securities exchanges, brokers and clearing agencies.
Gensler stated that cryptocurrency meets the definition of an investment contract under the so-called “Howey test,” which refers to the U.S. Supreme Court case for determining whether a transaction qualifies as an “investment contract.” The Supreme Court has held that an investment contract exists when there is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. He opined that the digital nature of cryptocurrencies does not change the way in which they should be regulated and thus, issuers of cryptocurrencies should register with the SEC. Gensler rejected claims by crypto asset issuers that they lacked fair notice that their conduct could be illegal. Gensler went on to state that investors are deprived of critical protections when crypto asset intermediaries fail to register and disagreed with industry claims that it is impossible for crypto platforms to register with the SEC and comply with SEC regulations, asserting that failing to implement separate lines of business or put in place appropriate safeguards against fraud does not provide intermediaries with “a free pass to put investors at risk.”
With regards to the risks and uncertainties related to crypto assets, Gensler identified several measures taken by the SEC, including (i) reissuing a release stating the applicability of existing rules to crypto asset trading platforms; (ii) proposing amendments to qualified custodian requirements that would cover all crypto assets; and (iii) SEC staff statements on public company accounting and disclosures relating to crypto assets.
Gary Gensler, SEC Chair, Speech, “We’ve Seen This Story Before” Remarks before the Piper Sandler Global Exchange & Fintech Conference (June 8, 2023), available at: https://www.sec.gov/news/speech/gensler-remarks-piper-sandler-060823.