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In the aftermath of FTX’s spectacular fall from grace, the Securities and Exchange Commission (SEC) in the US has amped up its scrutiny of the entire crypto sector, and rightfully so. However, instead of providing clear-cut regulatory clarity, the apex financial regulator has opted for deliberate policy ambivalence as a cudgel to pummel crypto sector bigwigs, including Ethereum. More troubling still, the SEC’s chair, Gary Gensler, is now issuing public statements that directly contradict the agency’s position enunciated in the courts.
Recently, the SEC forced Kraken exchange to shutter its crypto staking program by alleging that the firm was dealing with “unregistered securities.” With a vast segment of the crypto sphere having turned toward the staking model as a viable transaction authentication mechanism, including Ethereum, the negative ramifications of such an interpretation from the SEC are obvious.
This week the NYDFS ordered US-based Paxos to stop issuing US dollar-denominated stablecoin BUSD and the SEC issued a Wells notice to Paxos. We don’t know what aspects of BUSD might be of interest to the SEC.
What we do know: stablecoins are not securities 🧵
— Coinbase (@coinbase) February 15, 2023
Moreover, the SEC has also gone after the Binance USD (BUSD), a stablecoin that is issued by Paxos under a license arrangement with Binance. In both instances, the SEC has taken a position that the parties involved were dealing in unregistered securities.
For the uninitiated, the famous Howey test is used in the US to determine whether a financial instrument constitutes a security. This test has four main elements:
- Investment of money
- In a common enterprise
- With the expectation of profit
- Where such profits are derived from the efforts of others
Experts, however, have rightfully panned SEC’s position in both instances. First, staking services for Ethereum and other coins do not constitute an investment of money. Instead, the stakers simply lock up a specific portion of their holdings in dedicated nodes with the understanding that they would forgo any claim to the staked coins if caught acting in bad faith. In return, these stakers win the opportunity to try to authenticate incoming blockchain transactions, receiving pre-determined staking rewards as consideration. As such, this consideration is not “profit,” nor is it derived from the efforts of others.
Similarly, the case for the classification of stablecoins as a security is even more flimsy, given that the value of these coins does not fluctuate and that there is no element of profit involved. Instead, these coins simply act as conduits for transferring money across the crypto sphere.
Gary Gensler, Ethereum, and the Liberal Application of the Howey Test
This brings us to the crux of the matter. The SEC’s Gary Gensler recently roiled the sentiment in the crypto sphere when he pronounced that “everything else other than Bitcoin” was a security.
Interestingly, however, the SEC just admitted in a court document that it has not yet made a determination as to the security status of Ethereum.
1/ There is an important crypto case brewing in Federal Court in San Diego.@freddyriz of Hodl Law has sued the SEC, asking the Court to declare that Ether and the Ethereum Network are Not securities.
Here is what you need to know.
— MetaLawMan (@MetaLawMan) February 27, 2023
As detailed in the thread above, in its motion to have Hodl Law’s suit dismissed, the SEC recently stated:
“Hodl Law’s own allegations make clear that the SEC has not reached a final decision about the Ethereum network or Ether.”
This newfound proclivity of the SEC to preach what it is not practicing is quite disturbing. This policy of deliberate obfuscation and ambivalence is hurting the perception of the rule of law in the US.
America risks losing it’s status as a financial hub long term, with no clear regs on crypto, and a hostile environment from regulators.
Congress should act soon to pass clear legislation. Crypto is open to everyone in the world and others are leading. The EU, the UK, and now HK. https://t.co/i9WeUZ7K6H
— Brian Armstrong (@brian_armstrong) February 16, 2023
More disturbing still, this policy is allowing Asia to emerge again as a crypto hub.
Gensler boycotts the “SEC Speaks” Conference.
For 50 years, this Conference has been an annual tradition where the SEC Chairman and Division heads explained the SEC’s objectives.
These SEC officials would typically answer a few tough questions from those of us in the securities… https://t.co/iGXCs5P36t
— MetaLawMan (@MetaLawMan) March 1, 2023
Perhaps, anticipating the adverse reaction that this policy is sure to garner, the Gensler has chosen to cancel this year’s SEC Speaks” conference.