Will Gary Gensler be the Hero who ends the War on Crypto?
By Thomas Hodge
The crypto world was not sorry to see SEC Chairman Jay Clayton leave his post. Most in the industry considered him hostile to the sector and trigger-happy on enforcement; instead of attempting to nurture innovation. His tenure was seen as a “crypto cold war” led by a friend of Wall Street’s biggest banks. For the more than 50 crypto project leaders who were hit with Clayton’s enforcement hammer, it was a blitzkrieg. Industry powerhouse Ripple, which markets payments software using the XRP token, was Clayton’s final target, sued for allegations — seven years after the fact — that XRP was sold as an unregistered security even though the agency doesn’t seek to have the U.S. District Court establish that the token is actually a security. In short, Clayton left a mess for American developers, coin holders, policymakers, and the courts to sift through.
While SEC leadership under a Democratic presidency might typically raise significant concerns for innovators, news that President Joe Biden has nominated MIT professor Gary Gensler to replace Clayton has many in the space suddenly hopeful. Once called the “Crypto Great-Grandfather” by “Crypto Mom” SEC Commissioner Hester Peirce — the most pro-crypto member currently on the SEC — Gensler’s leadership could be pivotal as the sector’s pioneers cannot afford four more years of open hostility. Rival financial markets in Tokyo, London, Dubai and Singapore have set up friendly regulatory frameworks and rolled out the red carpet for American developers to take their innovations there. Most notably, China is stealing the geopolitical thunder with the rollout of the digital yuan. In the last week, one of the four-largest state-owned banks has been testing the digital yuan throughout its ATMs in the city of Shenzhen. Gensler may need to catch up, after Clayton’s left U.S. interests well behind.
By just acknowledging that cryptocurrency technology goes far beyond the vagaries of the Securities Act of 1933, Gensler will raise hopes. Clayton stubbornly looked at any excuse to threaten crypto projects, dismissing any “catering” to the technology in one interview:
“We are not going to do any violence to the traditional definition of security that has worked for a long time… We’ve been doing this a long time, there’s no need to change the definition.”
The basis on whether an asset is a security or not refers to the Howey Test, rooted in a 1946 U.S. Supreme Court ruling that classified a security as an investment contract in a common enterprise with the seller in which an investor can expect to receive a profit. Many strongly argue that this shouldn’t include open source ledgers where a digital currency operates to perform specific functions for each developer’s project, and a consensus model allows for a variety of validators to influence decisions
At a recent webinar held by Real Clear Policy on U.S. crypto regulations in the Biden Administration, J.W. Verret, a law professor at the Antonin Scalia Law School of GMU, found the Howey test a bit outdated. “I could right now write an interpretation of the Howey test, consistent with the Supreme Court’s view from its initial analysis in this Howey case — from I think at this point — 70 years ago, that I think would provide a lot more clarity, just by going back to that word ‘solely’ and making it more of a real restriction on the definition of security,” Verret said. In summary, the Howey Test is certainly arcane and likely unworkable as a crypto regulation. We are long overdue for regulatory clarity that can keep up with our nation’s evolving fintech. Gensler’s perspective will hopefully be made clear in his confirmation hearings.
