GRILLED BY CONGRESS, GENSLER REMAINS ADAMANTLY AMBIGUOUS ABOUT ETHER AND OTHER CRYPTOS

The Republican controlled House Financial Services Committee tried to extract plain answers last week from SEC head Gary Gensler regarding government suppression of the crypto sector, and cryptic “regulation by enforcement” actions by the SEC.

The hearing made clear that the committee is preparing to try to provide clarity that Gensler, on behalf of an administration that seems intent to hobble the sector while edging closer and closer to issuing a “Digital Dollar” CBDC, refuses to do.

Perhaps the biggest headline from the hearing was Gensler’s refusal to say whether he believed the second largest market cap crypto, Ethereum, constituted a security.

Committee Chairman Patrick McHenry (R-NC) tried to pin down Genlsler on the issue, though he perhaps betrayed his own limitations of understanding concerning the scope of Ethereum.

Coindesk reported that some crypto industry observers believed Gensler’s ambiguity was actually a good thing for the sector. (“SEC Chair Gensler Declines to Say if Ether Is a Security in Contentious Congressional Hearing,” 19 Apr 2023.)

“This was the best we could possibly hope for, and it gives some cover to not just ETH but also other cryptocurrencies,” the outlet quoted Joshua Ashley Klayman, head of Fintech and head of Blockchain and Digital Assets at Linklaters.

But that view, in light of the SEC’s concrete actions under the Biden administration, seems overly optimistic.

Gensler could’ve plainly signaled that legislation was needed to address the unique novel technology that cryptos represented. But he didn’t, and has consistently painted most cryptos into the “securities” box. 

That he was adamantly ambiguous during hearing testimony could easily be construed as a tactical move, not a crypto friendly signal.

The “Securities” Regulatory Question Persists

Whether the Ethereum token is a security—i.e., primarily a financial instrument with a monetary value—needless to say, was not settled during the hearing.

Many argue crypto tokens like Ethereum represent a fundamentally new paradigm that encapsulates purposes and functions that go well beyond what securities laws developed a century ago could envision.

The Ethereum network ecosystem obviously allows a wide range of digital asset and transaction services and commodity creation activities that go well beyond any sensible traditional understanding of a “financial security.”

There are thousands of Ethereum based tokens and projects. Some broad areas of the technology include:

• NFTS: Ethereum tokens can take the form of digital assets like artworks or concert tickets, with programming features  
• Payments: Ethereum tokens can be used to make payments for goods and services.
• Governance and Network: Ethereum tokens can be used to vote on decisions concerning the Ethereum blockchain, and can be staked to ensure accurate and secure validation of network transactions.
• Crowdfunding: Ethereum tokens can be used to raise funds for projects and businesses.
• Investments: Ethereum tokens can be invested in, just like stocks or other assets.

Though Gensler provided nothing regarding Ethereum during the hearing, a statement by the SEC concerning his Congressional appearance sounded a different tune. It declared:

“The investing public generally is buying crypto tokens because those investors are anticipating a profit and hoping for a better future. These thousands of tokens often are supported by websites and social media accounts, and generally there are entrepreneurs backing them. The public generally is counting on the efforts of other humans behind these tokens to generate profits on their investment.

“Given that most crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC.”

The statement marked a decidedly reductionist view of what many crypto networks and their tokens represent.

In his opening statement, Committee Chair McHenry did hammer home the point that the Biden administration was on the wrong side of innovation and history, concerning crypto technology, and was losing out:

“Congress must provide clear rules of the road to the digital asset ecosystem because the regulators cannot agree. Regulation by enforcement is not sufficient nor sustainable. Your approach is driving innovation overseas and endangering American competitiveness.”

TRENDPOST: The hearing was preparation for Congressional action, which is coming in the form of new legislation, regardless of Gensler’s views or non-statements.

That legislation likely won’t pass as long as Joe Biden holds the White House and Democrats hold the Senate. But it will set the stage for 2024, and the generational divide that crypto represents—seen much more favorably by younger demographic groups—may be a potent election issue.

Democrat candidate Robert F. Kennedy Jr. is already staking out a decidedly pro-crypto and skeptical CBDC position at odds with Biden and Democrat politicians like Senator Elizabeth Warren. (See “RFK JR WARNS AGAINST U.S. CBDC, WHILE SPEAKING POSITIVELY ABOUT CRYPTOS,” 18 Apr 2023.)

On the Republican side, Trump has warmed up to cryptos—or at least NFTs, issuing collections that have sold very well.

BLOCKCHAIN REGULATORY CERTAINTY ACT WOULD PROTECT DEVELOPERS AND SERVICE PROVIDERS WHO DON’T CUSTODY FUNDS

A bill introduced in late March would provide so much needed clarity and reassurance for blockchain developers and many companies providing various crypto related tech services.

Titled the Blockchain Regulatory Certainty Act (BCRA), the bill isn’t exactly new. It was first introduced in 2019 by Representative Tom Emmers (R-MN).

But the re-introduction of the bill comes with Emmers now in a more powerful position as Majority Whip, and vice-chair of the House Financial Services Committee.

The bill also has the bi-partisan sponsorship of Rep. Darren Soto (D-FL).

Emmers and Soto currently serve as co-chairs of the House Blockchain Caucus, a pro crypto group of lawmakers from both major parties.

Emmers said regarding the bill:

“Crypto and blockchain technology, by nature, does not easily fit into the frameworks policymakers have considered when crafting regulations in the past. For too long, federal regulators and lawmakers have jammed the blockchain ecosystem into statutory definitions that just do not make sense. It should be simple: If you don’t custody consumer funds, you aren’t a money transmitter. My bill provides that necessary confirmation for the blockchain community.

“The longer we delay providing this commonsense clarification, the greater risk that this transformative technology is driven overseas, depriving domestic users and investors. This bill will help America remain a technological leader in the crypto space.”

Lack of understanding of crypto technology on the part of many politicians—and perhaps animus—has led to legislation and calls on the sector that in some cases are literally impossible to impose, or effectively destroy the sector.

One example is asking crypto miners to do something like establish and collect “KYC” (Know Your Customer) information.  

“Custody is an incredibly important issue that needs to be considered when defining which regulations apply to who,” Congressman Darren Soto commented in a press release about the legislation. “I’m a proud supporter of Rep. Tom Emmer’s bill because it is a step in the right direction policy-wise and provides helpful regulatory clarity for innovators in the ecosystem.”