Crypto-Senator Toomey Drives SEC Chair Gensler Into a Corner

U.S. senator Pat Toomey presses the SEC chairman Gary Gensler for clarity on the regulation of cryptocurrencies. Toomey says in a letter to Gensler: “For investors to benefit from a fair and competitive marketplace, regulators must proactively provide rules of the road to industry. Unfortunately, the SEC has instead adopted a strategy of regulation-by-enforcement in this area.”

As it is common knowledge, cryptocurrencies actually are regulated in the U.S. by FinCEN and the CFTC. But the SEC wants a piece of the pie and, through seemingly deliberate ambiguity, is creating a (quote Gensler) “Wild West,” as a pretext for the SEC to step in and control the highly promising, disruptive space.

Toomey voices concerns about the SEC’s lack of regulatory clarity – concerns that are shared by others, including SEC commissioners. In one recent enforcement action, SEC commissioners Hester Peirce and Elad Roisman stated they were “disappointed” by the SEC’s failure to explain which digital assets were securities. They stated this omission was “symptomatic of (the SEC’s) reluctance to provide additional guidance about how to determine whether a token is being sold as part of a securities offering or which tokens are securities.” Peirce spoke of an intentional “decided lack of clarity” by the SEC.

Gensler in a bind

Toomey requests Gensler to explain a wide variety of crypto-related issues to provide congress, industry and innovators clarity on the SEC’s regulation of cryptocurrencies. And the senator minces no words. He drives Gensler into a corner, forcing the SEC chairman to act on most basic yet important issues: Such as: providing a list with all guidance material.

Toomey’s questions for the record clearly highlight the failure of the SEC to provide clarity. In one question, Toomey requests Gensler to “specify what information is missing” while warning Gensler of fear mongering overreach: Gensler should “not address any potential effects” of, for instance, a stable coin “on the banking system or systemic risk implications.”

Here are the two main points relevant to the SEC enforcement action against Ripple:

SEC needs to provide all guidance material on crypto

Toomey asks Gensler to list all guidance materials posted to sec.gov or investor.gov since January 1, 2021 through the date of his response that reference cryptocurrencies, tokens, digital assets and similar items. Related, he asks Gensler to list all publicly-disclosed enforcement actions taken since January 1, 2021 as well as all exemptive orders and no-action letters.

Unfortunately, Toomey chooses a relatively recent cut-off date. A longer time frame would make it even clearer how the SEC fails in providing clear guidelines. Yet, the request puts Gensler in a tough spot. There is no published guidance material. Zero, zip, nil, zilch, null, nada.

Gensler asked to clarify conflicting statements

Then Toomey highlights the questionable decentralization of Ethereum (ETH). He wants to learn more about Gensler’s thoughts on the threshold for a token to be deemed decentralized. In a 2018 New York Times article, Gensler spoke about the decentralization of Ethereum. As the article lays out, “Mr. Gensler said Ether could have more problems because the first Ether tokens were sold in 2014, before the network was functional, by the Ethereum Foundation. Ether could get off the hook, Mr. Gensler said, because its development has been more decentralized recently, and new Ether tokens are now given out to so-called miners through a network.”

Meanwhile, Gensler also repeatedly said that he agrees with former SEC chair Jay Clayton’s statement that he has yet to see an initial coin offering that was not a security. So Toomey’s question arises: It appears that Gensler believes ETH transitioned from a security to a commodity. The concept that ETH can transition to acommodity because “its development has been more decentralized” appears to conflict with his past statements that all ICO tokens are securities.

What then follows is Toomey’s reference to the Ripple case: “I understand there are pending court cases that may address this very issue, but as we await decisions in these cases, can you clarify your position as to when a token is sufficiently decentralized in light of your previous statements?”

SEC’s house of cards

Gensler is obliged by law to respond to the altogether 25 questions. Toomey says in his letter, Gensler’s answers would give industry clarity on developing promising technologies, so that innovators have the guidance they need to ensure domestic investment and innovation.

Yet, by answering the questions in detail, Gensler risks to undermine the SEC’s enforcement policy. Gensler is in a bind. Evading clear answers was easier at the hearing. Is the SEC’s controversial power play in the crypto space about to collapse like a house of cards? As long as congress doesn’t step in, Gensler & Co. continue to overreach their authority. Expect more extortion attempts under the guise of investor protection.