Gary Gensler’s comments in an interview Monday (June 27) left little doubt that the power play for regulatory authority over the crypto industry against the Commodity Futures Trading Commission (CFTC) is far from settled.
In a big win for cryptocurrencies’ utility as a payments tool, the Securities and Exchange Commission’s chairman characterized top crypto bitcoin as a commodity — but what he left unsaid was just as important.
In what amounts to a break with his predecessors, Gensler refused to lump Ethereum’s ether, the No. 2 cryptocurrency, under the same label. That leaves the token used as a payments currency by the blockchain — on which more crypto and blockchain projects reside than any other — in a legal fog of uncertainty.
That matters for two reasons. From a payments perspective, the biggest problem is that if a token is a security, any sale — including using it to buy a cup of coffee — counts as a potential capital gain, requiring it to be reported to the IRS. If enforced strictly, which it hasn’t been so far, that would make it effectively unusable for small purchases.
It’s addressed in the bipartisan crypto regulation bill introduced recently by Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) with an exclusion for purchases up to $200.
See also: Senate Crypto Bill Debuts, and Crypto Industry Gets Big Wins
A bigger problem for the crypto and blockchain industry is that if a token is a security, it falls under the SEC’s regulatory control, with all of the restrictions that come with it.
Among many other things, that’s why cross-border payments firm Ripple is suing the SEC, which declared its XRP token a security and demanded a $1.3 billion disgorgment plus fines for what it called the company’s illegal sales of an unregistered security. It’s also how the SEC forced crypto lender BlockFi to pay a $100 million fine for offering interest on deposited tokens it lends out.
Read more: SEC’s New Top Cop: No Free Pass For Unregistered Crypto Lenders
These restrictions on selling securities could impact not only ether-using projects, but those built on Ethereum that issued compatible tokens — what amounts to a white-labeled version of ETH — for their own apps.
Settled Rule
Both former SEC Chairman Jay Clayton and former CFTC Chairman Heath Tarbert have said — informally but publicly — as far back as 2019, that bitcoin and ether are sufficiently decentralized and that they do not qualify as securities under the Supreme Court’s Howey test. Under that precedent, adopted in 1946, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”
That’s something Gillibrand noted earlier this month in discussing the bill, saying, “Bitcoin and ether would be, certainly, commodities. That’s agreed upon by Chairman Gensler, as well as the chairman of the CFTC.”
Which is something that Gensler — who has been cautiously critical of the bill because it cedes oversight for most cryptocurrencies to the CFTC — distinctly did not agree with in an interview with CNBC’s Jim Cramer on Monday.
Calling crypto a “highly speculative asset class” which the public invests in hoping for a return, Gensler said, “Some, like Bitcoin — and that’s the only one, Jim, I’m going to say because I’m not going to talk about any one of these [other] tokens — my predecessors and others have said, they’re a commodity.”
And while that doesn’t directly exclude ether, his refusal to include it is being taken as a sign of policy — and regulation — to come.
Making Waves
One reason for Gensler’s omission is the agency’s unsettled suit against Ripple. Attorneys for the payments network have have argued that XRP is enough like ether that it should not qualify as a security.
They and the SEC’s lawyers fought a long battle over Ripple’s desire to depose former SEC Division of Corporation Finance Director Bill Hinman, who first said ether was not a security on June 14, 2018. In a March 7 letter the next year to a congressman, SEC Chairman Jay Clayton said he agreed with the explanation Hinman gave.
Related: SEC’s Setback in Ripple Suit Adds Pressure to Define Crypto Assets
While Hinman’s testimony hasn’t been made public, the SEC is fighting to keep it that way, which certainly suggests Ripple got what it hoped for.
The CFTC’s Tarbert was even clearer on Oct. 10, 2019, saying, “It’s my conclusion as Chairman of the CFTC that ether is a commodity and therefore would fall under our jurisdiction.”
That would make it what the crypto industry calls a utility coin, meaning that is used for a purpose — generally making payments and facilitating transactions — that makes a blockchain-based project work, as opposed to something that is primarily a speculation vehicle.
But more to the point, Gensler — a former CFTC chairman and MIT cryptocurrency professor — is still battling for control of crypto, which he has called the “Wild West” of finance, from which the general public needs protection.
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