Gary Gensler, the chairman of the US Securities and Exchange Commission (SEC), argued that a vast majority of crypto assets are likely to meet the investment contract test and are therefore considered to be securities.
The SEC head also reiterated skepticism regarding crypto service providers and their lack of compliance with the existing financial laws overseeing the US capital market. His comments came during a speech made at the 2023 Securities Enforcement Forum, where he shed light on the regulatory body’s enforcement actions over the course of the year.
Speaking on the economic perspective of the securities watchdog’s actions, Gensler noted that the SEC filed more than 780 enforcement actions, including 500 standalone cases, in 2023. Its actions led to judgments and orders totaling $5 billion, of which $930 million were paid out to affected investors.
Gensler noted that the SEC filed lawsuits against 40 firms since December 2021 for violating various federal financial rules and regulations that led to the agency amassing more than $1.5 billion in penalties. In the last fiscal year, the financial regulator settled recordkeeping-related charges with 23 companies.
SEC Chair Gary Gensler Says Cryptocurrencies Should be Regulated as Securities
While speaking about cryptocurrencies, the SEC chairman reiterated his earlier stance, claiming that most tokens circulating in the crypto market fall under the securities bracket and must be regulated under the same law. To support his statement, Gensler claimed that a majority of cryptocurrencies would pass the investment contract test, which legally brings them under regulations that are applied to securities.
He then went on to draw parallels between the crypto ecosystem and the financial landscape from the 1920s when federal securities laws were not in place. He said the crypto industry currently faces the exact same situation as 100 years ago when the financial market was littered with scams, frauds, and bankruptcies, where rules on a federal level were necessary to bring it under control.
Responding to Gensler’s comments on crypto, Stuart Aldertory, the chief legal officer of Ripple Labs – creators of the Ripple blockchain and XRP token – said he was “factually incorrect” and that the SEC head’s underlying suggestion regarding crypto companies retaining legal advisors could possibly be viewed as opposing the rights instilled by the US Consitution.
In an X post made on Monday, Aldertory said Gensler’s comments were a “not-so-subtle” and “courageous” threat to everyone’s right to “consult with counsel”.
Over the years the SEC has filed several litigations against crypto companies that it considers to be non-compliant with its rules and regulations. Ripple Labs encountered a similar situation with the agency when it was sued in 2020 for offering unregistered securities to investors in the form of its XRP token.
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However, the lawsuit ended in a partial victory for Ripple after a Judge ruled that the sale of XRP through secondary exchanges did not violate the federal securities laws and in the case, the tokens did not qualify as securities.
The SEC recently suffered a major blow in its lawsuit against digital asset manager Grayscale. In August, a three-panel judge asked the Commission to review Grayscale’s bid to convert its $17 billion Bitcoin Trust fund (GBTC) into a spot Bitcoin ETF, which the SEC had been declining for a while now.
Market experts believe that it is only a matter of “when” and not “if” the SEC will approve a spot Bitcoin ETF for the US market. Currently, there are over a dozen Bitcoin spot ETF proposals that are awaiting a decision from the agency. The list includes prominent Wall Street firms such as BlackRock, Fidelity, Franklin Templeton, and VanEck.
A decision from the securities regulator on the first batch of Bitcoin-focused spot ETFs is expected in January 2024.