Legislative Coverage: House Republicans Slam SEC’s Regulation of Digital Assets at Oversight Hearing; SEC Chair Gensler Refuses to Say Whether Ether Qualifies as Security

Gensler Testimony
Committee Memorandum
McHenry Opening Remarks
Waters Opening Remarks

Securities and Exchange Commission Chair Gary Gensler faced a barrage of criticism from Republican members of the House Financial Services Committee in connection with the agency’s recent enforcement actions and regulatory posture toward the cryptocurrency industry.

Gensler defended the agency’s recent enforcement actions in the crypto industry, arguing that “given that most crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC.” “Calling yourself a DeFi platform, for instance, is not an excuse to defy the securities laws,” he continued. Gensler also called on Congress to provide additional resources for the SEC to pursue additional enforcement actions against cryptocurrency markets that are “rife with noncompliance.”

Ahead of the hearing, Chairman Patrick McHenry, R-N.C., and all other committee Republicans sent a scathing letter to Gensler criticizing the SEC’s approach to regulating digital assets and rejecting Gensler’s operating principle that the “vast majority of crypto tokens are securities.” They wrote that the SEC has “forced digital asset market participants into regulatory frameworks that are neither compatible with the underlying technology nor applicable because the firms’ activities do not involve an offering of securities,” (emphasis added).

Additionally, the SEC has not provided adequate guidance during its push to have digital asset trading platforms “come in and register” under the national securities exchange, or NSE, framework, according to the letter. Many digital assets are “being used within a developing system,” the letter continues, and the “lack of clarity provided by the SEC as to what digital assets are considered securities also limits what an NSE can list.”

During the hearing, McHenry said “the Administration has said it, the Fed has said, and I’ll say it again: Congress must provide clear rules of the road for the digital asset ecosystem.” He noted that he has been working with Ranking Member Rep. Maxine Waters, D-Calif., to pass legislation to that effect.

McHenry also grilled Gensler on whether Ether, the second largest cryptocurrency after Bitcoin, should be classified as a security. Gensler repeatedly declined to specify, saying that he did not want to “pre-judge” the “facts and the law.” McHenry pointed out that “you have pre-judged on this” by taking over 50 enforcement actions related to cryptocurrencies and sending Wells Notices to exchanges like Coinbase. McHenry said that he intends to pass legislation that would provide certainty on Ether’s status as a commodity or a security, in order to resolve whether the SEC or the Commodity Futures Trading Commission will have primary oversight of the digital asset.

Responding to a question from Waters on whether cryptocurrencies should be classified as securities, Gensler argued that most qualify under the four-factor Howey test and affirmed that the SEC has the necessary statutory authority to oversee cryptocurrencies. Waters agreed, adding that “since the recent bank failures and the fall of FTX and various crypto platforms bankruptcies, it’s more important than ever that the SEC has the resources it needs to go after non-compliance.”

Rep. Stephen Lynch, D-Mass., criticized Republicans’ arguments that the SEC has not provided enough guidance to crypto companies, arguing that recent litigation outcomes and policy statements show “there’s a fair amount of guidance out there and clarity, it’s just not the clarity that the crypto industry wants.”

Gensler agreed, noting the SEC’s recent proposed revisions to its best execution rule, an update to the investment advisor custody rule regarding crypto assets, SEC staff’s accounting bulletin on public company accounting related to crypto assets and a recent reopening of the comment period on a proposal related to crypto market trading platforms demonstrate that the agency has provided the industry with guidance and the opportunity to comment on changes in policy.

Gensler said the SEC is trying to stop crypto companies from commingling exchange, broker-dealer, custodial, clearing and lending functions - noting that such practices pose serious risks for investors and wider financial markets. Gensler noted that both Silvergate and Signature Bank were deeply involved in cryptocurrencies and that Silicon Valley Bank’s failure resulted in the temporary depegging of Circle, a major stablecoin.

Rep. Andy Barr, R-Ky., argued that the SEC staff’s accounting bulletin “effectively precluded” large banks from offering customers the “safety and security of segregated digital asset custody services,” thereby forcing customers to turn to offshore institutions. Gensler defended the policy statement, saying that the Celsius bankruptcy and other crypto bankruptcies demonstrated that “crypto assets held in custody today are not segregated, are not bankruptcy remote in bankruptcy and should appropriately be put on public company financials.”

Rep. Ritchie Torres, D-N.Y., asserted that the SEC should prioritize enforcement actions against companies like FTX that are offshore, underregulated and overleveraged. He said the SEC should focus enforcement efforts on offshore companies like Binance and Tether instead of U.S.-based companies like Coinbase and Paxos. Gensler said that the SEC has authority to target offshore companies, but that doing so takes “more time” and it is “frankly more challenging” to issue subpoenas.

Rep. Warren Davidson, R-Ohio, also criticized the SEC for sending Coinbase a Wells Notice, and questioned why the SEC has allowed pension funds and retail investors to invest in the company since 2021 if the agency considered its business practices illegal. Davidson also rebuked Gensler’s assertion that the agency has provided clear guidance, noting that the chair failed “to answer the question of whether Ether is a security.” Davidson said that he intends to introduce legislation that would remove Gensler as SEC Chair - an action alluded to in a conversation with Coinbase Chief Legal Officer Paul Grewal on Twitter earlier this week.

Rep. Bill Huizenga, R-Mich., berated Gensler and the SEC for not providing committee members with internal documents related to the SEC’s enforcement action against FTX founder Sam Bankman-Fried. McHenry and Huizenga last week sent a letter to Gensler asserting that the agency’s failure to comply with a February document request was “unacceptable.” Gensler said today these were “very broad requests” and that the SEC was obliged to keep certain investigative matters confidential. Rep. Andy Ogles, R-Tenn., later remarked that “you’re either intentionally obstructing or you’re not a good manager.”

Rep. French Hill, R-Ark., Chair of the Subcommittee on Digital Assets, Financial Technology and Inclusion, asked Gensler if he supported Congress creating a comprehensive framework to regulate stablecoins. Gensler said he supported such efforts but that it was important to ensure the safety and stability of wider financial markets and to preserve the SEC and CFTC’s authority to enforce fraud and manipulation. The subcommittee will hold a hearing tomorrow, Wednesday, April 19, at 10 a.m. ET that will examine the role of stablecoins in the digital asset ecosystem.