The chairman of the US Securities and Exchange Commission (SEC), Gary Gensler, stated during a hearing before the House Financial Services Committee on September 27, 2023 that he looks forward to giving testimony to the committee. That day, he enjoyed that pleasure for well over four hours, spending most of them decrying the rules and practices of his agency.
One of the more specialized complaints on the lengthy list of grievances was the U.S. Representative Ritchie Torres, who grilled Gensler during an oversight hearing about the agency’s regulatory developments, rulemaking, and other activities over the last few years.
Torres expressed his concerns regarding the term “investment contract”, that, in his words, now implies whatever Gensler personally decides it should, given it is so infinitely flexible and manipulable.
“And I worry that when it comes to crypto, your interpretation of the term investment contract has no limiting principle and therefore is acquitted by arbitrary and capricious enforcement action,” he stated .
Torres asked Gensler if any investment is necessary for an investment contract, is a contract required for an investment agreement?
Even though Gensler tried to avoid answering the question, he finally answered it’s an investment of money in a common enterprise, and you’re anticipating profits based on the efforts of others.
Torres stressed that there’s nothing in the Supreme Court’s jurisprudence that suggests that a scheme or transaction means the absence of a contract and went on elaborating so-called Howey test, that, Bitcoin doesn’t meet as well and is still continuously being spared by Gensler and the SEC.
Torres explained that when examining the landmark case of SEC vs. Howey, there were not just one but actually two contracts involved. There was a land sales contract with the Howey company and a service contract between Howey and the Hills. The court determined that when considering the combination of these two contracts, the overall scheme, transaction, and economic reality constituted an investment contract.
And so, a scheme or transaction does not mean the absence of any contract at all, said Torres adding that this means as it did in Howey a multiplicity of contracts.
Gensler tried to answer that the SEC has been in front of multiple courts but finally said:
“Whether it’s whiskey caskets, whether it’s crypto, if the public is investing based upon the efforts of other – that’s a security.”
When asked about a Second Circuit case that found an investment contract in the absence of a contract, Gensler again avoided answer and said that this can be called “Howey, it’s called Reaves, it’s called many cases at the Supreme Courts are eight or nine times it’s been affirmed by the Supreme Court.”
Torres went further by making his question even more simplified: Suppose I would have purchased a Pokémon card. Would doing so constitute a security transaction?
“That’s not as secure,” said Gensler while Torres went on to ask another question:
“Okay, if I were to purchase a tokenized Pokémon card on a digital exchange via a blockchain? Is that a security transaction?
“I’d have to know more,” Gensler said.
The core of the Howey test, according to Gensler, is when the investing public can predict profits based on the efforts of others. Torres then described Gensler’s “evasions” as “deafening and damning.”
Gensler later bowed to pressure and said that Bitcoin didn’t pass the Howey test when asked whether it is a security by Patrick McHenry, the chairman of the U.S. House Committee on Financial Services.
Gensler stated that Bitcoin does not meet the Howey test, which is the national legislation, meaning that it is not a security.
Gensler declined to respond when McHenry subsequently asserted that Bitcoin must be a commodity, claiming that the criteria for determining that are outside the purview of U.S. securities laws.
Henry said that Gensler intended to “choke off the digital asset ecosystem” and that he hid from Congress information about the SEC’s ties to FTX and its previous CEO, Sam Bankman-Fried.
Additionally, Gensler didn’t have the opportunity to refute McHenry’s assertions.