This post is an expanded version of comments delivered by the author during a webinar entitled, “Is Crypto Legislation Coming?” the entirety of which can be viewed here. The author is writing in his private capacity and not on behalf of any firm, institution, or group.
Critics on the left typically depict the Federalist Society as if its members were all of one mind. But those of us who belong to FedSoc know that it’s just not so. Some of us are libertarians. Others are conservatives. We often disagree with one another. And we are open to lively engagement with the left—also, with moderates—believing as we do in the virtues of free speech. Fundamentally, our Federalist Society is a debating society.
Public policy about crypto assets—and the broader category of digital assets—is fodder for lively and wholesome debate. Debate about public policy is a core feature of the representative democracy that we cherish. Debate with and about administrative agency leadership is part of our constitutional system.
In that connection, the SEC is part of a vast and ever-growing administrative state whose very legitimacy in our system of government depends largely upon its accountability to Congress.
No federal agency has been more dismissive of digital asset innovation—no agency has been less helpful in providing actionable guidance to blockchain technology entrepreneurs—than the SEC. I hasten to add that SEC staff lawyers are not to blame for this. Policy is set not by the staff, but by the Commission, and rightly so, as only the Commissioners are nominated by the President and confirmed by the Senate.
SEC leadership had little need to explain itself in the last Congress as Democrats held all the gavels on Capitol Hill. But today, Republicans hold gavels, too. So SEC leadership can be held accountable again by all elected representatives—left, center, and right. Questions that need to be answered can be asked.
Some on the left regard this as a threat, but there is no evil in it. Only because agency heads can be called to Capitol Hill—only because Chairmen McHenry and Hill, Representatives Emmer and Huizenga, and our other elected representatives—can ask probing questions in public view, and insist on answers—only because of this, is the exercise of power by the SEC legitimate.
With that in mind, I’d like to suggest a few lines of inquiry for questioning SEC Chair Gensler in appearances before the House Committee on Financial Services and its newly-created Subcommittee on Digital Assets, Financial Technology and Inclusion.
I would begin with a few questions about the SEC’s securities offering disclosure program.
Back in 2017, when the industry and the Bar first began asking the SEC for guidance about crypto assets, Corporation Finance Director Bill Hinman gave a speech titled “When Howey Met Gary (Plastic).” The Bar relies on Hinman’s speech and the so-called “FinHub Framework” that followed it.
I would ask this binary question and press for an answer:
Do you agree, or disagree, Chair Gensler, with Hinman’s judgment (concurred in by his Chairman) that Ether is not a security? That question, which you repeatedly sidestep when asked, is more pressing now that the New York State Attorney General is asserting in court that Ether is a security. The CFTC and the NFA both state unequivocally that Ether is not a security. Is the New York AG right, the CFTC wrong? (They can’t both be right.)
Ether’s status is important not only because it’s the second largest crypto asset by market cap, but also because Chair Gensler’s predecessors made it clear that Ether is not a security, and the industry has been relying on that understanding in rolling out Ether-like products.
If I were a member of the Committee or Subcommittee addressing Chair Gensler in sworn testimony, this is what I’d say next:
You testified in the Senate, and you have reiterated, that you believe the “vast majority” of crypto assets are securities. In a recent op-ed, you walked that back to “most” crypto assets. OK. Maybe you’re right. Maybe you’re wrong. But even if you are right, you aren’t telling us anything useful about any particular asset. The wind might blow along the Chicago lakefront “most” days, or even the “vast majority” of days, but that doesn’t mean it’s windy in Chicago today.
Chair Gensler, why don’t you take the top 25 crypto assets and software protocols by market capitalization and publicly identify which ones you believe are securities (and why)? Better yet, why don’t you ask your dedicated staff to publish a list of crypto assets and protocols that are not securities, so the public and the exchanges will know that the securities laws don’t apply to those assets?
That would not mean “no protection for the public.” Investors in commodities are protected by the CFTC. Depositors in banks are protected by bank regulators. Not every investment is a security. Do you acknowledge that SEC jurisdiction is limited to investments in securities?
Rather than observe that limit and rather than give guidance (which is the age-old role of the SEC), you routinely suggest that blockchain entrepreneurs should “come in and register” with the SEC. But only two companies have ever been able to do that, and one of them deregistered speedily.
I ask you: How is it even possible for a software protocol to register when it’s not a legal entity? What “business” would be described in its registration statement? What financial statements would it include? Who is the “management” that would prepare the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”?
It is an impossible situation that you have backed into by refusing to propose rules and forms to fit the token industry. When you say, “come in and register,” don’t you actually mean “close up shop and go away”?
Mind this: The SEC has the legal power to create new kinds of registration forms for nontraditional registrants and has done precisely that for asset-backed securities. The SEC promulgated Regulation AB and bespoke registration forms for asset-backed securities in 2004. It did this because the proliferation of ABS as a nontraditional asset class required a nontraditional approach to disclosure. The SEC proposed and adopted new rules “to clarify the regulatory requirements for asset-backed securities in order to increase market efficiency and transparency and provide more certainty for the overall ABS market and its investors and other participants.”
Chair Gensler, you could do the same thing for crypto assets. Why don’t you?
Next, I’d ask a few questions about the SEC’s current securities trading and markets program:
How is it that the SEC can purport to require crypto asset exchanges to register as securities “exchanges” when…
· The existing rules require exchanges to list only registered securities, but the SEC has registered no crypto asset securities? and
· The existing rules would require exchange members to be registered broker-dealers authorized to trade crypto assets, but the SEC has authorized no broker-dealers to trade crypto assets if they also trade stocks?
SEC rules also impose on exchanges duties relating to record-keeping, order book management, order trail, trade reporting, linkage to clearing, SRO responsibilities, compliance, reporting, and disclosure. But no interpretations of these rules exist relating to crypto asset trading, and no models for them exist.
Would it not be more accurate to say that, rather than requiring registration, your position, Chair Gensler, is that crypto exchanges should either shut down or stop serving U.S. customers? Again, it does not need to be this way. You could use the SEC’s broad rule-making authority to promulgate rules on every topic that I’ve mentioned, enabling exchanges and broker-dealers to register to facilitate trading of crypto assets under SEC oversight. It would be challenging work, but I know from my tenure within the SEC that your excellent staff is up to that challenge.
Finally, I would suggest a few questions about how the Gensler Commission makes rules and decisions and its ever-expanding enforcement program:
Why do you typically give the public the shortest possible time permitted by the Administrative Procedure Act to respond to your rule proposals? Put another way, why is the least amount of time for public review and input OK with you? Shouldn’t you want more, rather than less, public awareness and input?
Along the same lines, why did you issue more than 1,000 pages of proposed regulations and analysis that would redefine core concepts like “securities dealer” and “securities exchange” in ways that are plainly contemplated to apply to the digital assets industry—without spending more than ten words on digital assets?
You came to Congress to get more money, claiming to be under-resourced in your fight with the crypto industry. But the pleadings and briefs in your existing crypto cases are signed by as many as 12 or 15 lawyers. Who is “under-resourced”—your SEC, with 15 lawyers on one brief, or the newly-arrived migrants that you chose to sue in Seattle recently?
I might end with this question:
Are you concerned about what might happen when the Supreme Court reviews your overly zealous enforcement program? You’ve got one case there now and another on the way. In both cases, the Court of Appeals held that the SEC’s in-house courts violate the constitutional rights of your targets. Should you not exercise restraint in pursuit of your agenda before you are restrained by the Supreme Court?
I would ask these questions respectfully, knowing that Chair Gensler has given an oath to uphold the Constitution, and I would ask them in furtherance of the SEC’s rightful mission of protecting securities investors.
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