The chairman of the Securities and Exchange Commission (SEC), Gary Gensler, is not letting up on enforcement. In a recent statement by Gensler, he said that crypto is full of “hucksters, fraudsters, and scam artists” and compared the industry with the 1920 stock market.
Gensler made the statement in a speech he delivered at the Piper Sandler Global Exchange & Fintech Conference on June 8, 2023. The remark has been published on the SEC website under the title We’ve Seen This Story Before.
Crypto industry needs cleaning up
According to Gensler, there are stark similarities between the crypto industry and the stock market of the 1920s, which he said was replete with frauds, scams, and ponzi schemes. Gensler said that the market needed cleaning up if the crypto industry was to be saved.
Gensler said that crypto sits at the intersection between the two key terms in the title of the conference: exchange and fintech. Gensler said that the reason the US market thrives is because it is regulated. He said that this has brought transparency for 90 years.
“The U.S. capital markets thrive because we’ve had rules of the road that have helped ensure investor protection, transparency, and competition for 90 years—since the signing of the Securities Act of 1933. A year after signing that law, President Roosevelt worked with Congress to pass the Securities Exchange Act of 1934 to regulate securities intermediaries, such as exchanges and broker-dealers. That law also created the SEC, and this past Tuesday was our 89th birthday.”
Making a quick reference to crypto, Gensler said that American investors in cryptocurrencies also need to be protected. He maintained that cryptocurrencies must be brought under the purview of the SEC based on the Howey test, saying that this has become expedient because Congress never limited the Securities Law to stocks.
Crypto tokens As investment contracts
In his reference to Howey, Gensler said,
“An investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. This test has been reaffirmed by the Supreme Court numerous times—the Court cited Howey as recently as 2019.”
Gensler, who said that he was speaking in his personal capacity as the Chairman of the SEC and not as a representative of the authority, reiterated his stance that most cryptotokens qualify as investment contracts. He said that the investor’s money is at risk regardless of the underlying technology behind the crypto asset.
Additional utility does not remove a crypto asset security
Gensler said that even though some crypto tokens have been argued to have some utility, the court settled the issue in the Telegram case.
“Some additional utility does not remove a crypto asset security from the definition of an investment contract. The investing public generally buys these crypto assets, at least in part, anticipating profit based on the efforts of those token issuers,” Gensler said. He maintained that crypto entities must comply with securities law, adding that they know what the rules say.
Again, these crypto entities know the rules. As Binance’s chief compliance officer put it bluntly to a colleague in 2018, “[w]e are operating as a fking unlicensed securities exchange in the USA, bro.”