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Gensler on the Defensive as Senate Republicans Slam SEC Overreach

Published September 12, 2023 5:41 PM
James Morales
Published September 12, 2023 5:41 PM
Key Takeaways
  • During a hearing, SEC Chair Gary Gensler defended his agency’s approach to crypto regulation.
  • Republic Senators were especially critical of the Gensler’s chairmanship.
  • Meanwhile, “Crypto Queen” Senator Cynthia Lumis called out an SEC rule.

Reporting to a Senate Committee on Tuesday, September 12, Gary Gensler, the head of the US Securities and Exchange Commission (SEC), defended his agency’s treatment of cryptocurrencies as securities.

Reiterating the SEC’s opinion that “most crypto tokens are subject to the securities laws,” Gensler implied the commission has no intention of backing down over its classification of major cryptocurrencies. However, he declined to comment on ongoing court cases.

Gensler Maintains Tough Stance on Crypto Regulation

Speaking to the Senate Committee on Banking, Housing, and Urban Affairs, Gensler stuck to the line he has pursued throughout his chairmanship.

In a prepared testimony  shared prior to the hearing, he stated that “the vast majority of crypto tokens likely meet the investment contract test.” 

As such, he argued that crypto sales should be subject to SEC oversight. “Most crypto intermediaries have to comply with securities laws,” he added.

Gensler then compared today’s American crypto sector to the unregulated securities market prior to the establishment of the SEC in 1934.

He said that, “given this industry’s wide-ranging non-compliance with the securities laws, it’s not surprising that we’ve seen many problems in these markets.”

“We’ve seen this story before. It’s reminiscent of what we had in the 1920s before the federal securities laws were put in place,” he continued. 

He insisted that “the vast majority of crypto tokens likely meet the investment contract test.” As such, he argued that crypto sales should be subject to SEC oversight. “Most crypto intermediaries have to comply with securities laws,” he added.

Republican Senators Criticize SEC Overreach

Across the range of topics discussed by the Senate Committee, a strong bipartisan division emerged.

On the Republican side, from crypto regulation to new rules governing investment firms’ use of predictive data analytics, Senators called out what they perceive as the SEC’s overreach.

Among the agency’s fiercest critics, the Republican Presidential candidate Senator Tim Scott accused Gensler of a “power grab to regulate emerging and existing technologies,” which went “beyond the SEC’s scope and will ultimately stifle innovation.”

Reminding Gensler of the SEC’s responsibility to promote American growth, he said, “your goal should be to fuel competition and innovation in the marketplace and expand the ability of Americans from all walks of life […] to access a wide spectrum of investment options for their hard-earned dollars.”

However, “under your leadership, the SEC has failed to implement […] pro-growth rules. Instead, your agency has churned out a seemingly endless assembly line of new and unneeded regulatory hurdles to capital formation and market access,” Scott remarked.

Echoing Scott’s objections, Senator Mike Rounds said the regulator has cultivated a “hostile attitude to technology.”

Meanwhile, Senator Bill Hagarty lamented that “by applying a different standard for emerging tech, the SEC is not acting as a neutral party.” 

“Indeed, the SEC seems to be targeting many of the newer entrants that are actually expanding Americans’ access to investments,” he added.

Besides bearing witness to an onslaught of Republican criticism of the SEC’s policy direction during his chairmanship, Gensler conveniently sidestepped a question by Senator Haggarty, who asked what the SEC would need to see in an application for a spot bitcoin Exchange-Traded Fund (ETF) in order to approve it.

Rather than answering the question, Gensler pointed out that the SEC is currently reviewing several such applications and will provide its response to each of them in due course.

Senator Lumis Objects to SEC Crypto Custody Rules

Senator Cynthia Lumis has often been dubbed the Senate’s “Crypto Queen.” And she is one of the few Republican lawmakers who has reached across the aisle in a bid to foster bipartisan support for crypto regulation.

In fact, Democrats’ resistance to Republican efforts to introduce crypto legislation in Congress means that a Bill  Lumis co-authored with the Democratic Senator Kirsten Gillibrand is one of the prospects most likely to actually receive Congressional approval.

In Tuesday’s committee hearing, Lumis interrogated Gensler over the SEC’s Staff Accounting Bulletin  121, a rule that means firms can place crypto assets they hold on behalf of their customers on their balance sheets. 

Referring to the Celsius bankruptcy, she asked, “Isn’t it true that placing custody assets on the company’s balance sheet could result in consumer assets being seized by creditors in the event of a bankruptcy, and that that would hurt consumers?”

In his response, Gensler explained that in the case of Celsius, the SEC’s rules didn’t apply, as the company was not publicly listed.

Moreover, he said, “The laws in the US right now tend to be that you can’t readily, easily segregate crypto assets.”

“That’s also happened at Voyager, at Terra Lunar, at FTX, at each of these various bankruptcies,” he added.

In response, Senator Lumis noted that while Celsius may not have been bound by Bulletin 121, large banks are.

She went on to argue that the rule prevented banks from offering crypto custody services because it requires the assets to be backed one-for-one by US dollars.

“That prevents the most heavily regulated institutions in the country from offering custody,” she observed.

“If your ultimate goal is to provide real consumer protection, shouldn’t the SEC withdraw staff accounting bulletin 121?”

In his response, Gensler argued that banking regulators are free to write their own rules for crypto custody. He said that the rule Senator Lumis was referring to was about creating transparency into corporate assets and liabilities, but did not prevent other authorities from enforcing consumer protections.

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