The entire crypto world is focused on Gary Gensler, the Chair of the Securities and Exchange Commission. His critics believe he is incorrectly painting cryptocurrencies with too broad a brush. They argue that he is encouraging entrepreneurs to “come in and register” knowing that his process is set up for them to fail, and is thus effectively stifling the industry. The SEC recently filed an enforcement action against Coinbase for their issuance of top coins such as Polygon’s MATIC (MATIC) and Solana’s SOL (SOL), claiming they are securities due to capital formation, even though they are necessary for the underlying networks.
As a result, the U.S. is losing its lead in venture capital investment in the crypto industry, with the EU outperforming them. It is speculated that Gensler’s positions are politically motivated in order to support the agenda of Massachusetts Senator Elizabeth Warren, who is leading an “anti-crypto army” for President Joe Biden’s administration. In response, lawmakers are introducing bills to fire Gensler, such as the “SEC Stabilization Act” from Representatives Warren Davidson and Tom Emmer.
However, Gensler’s positions are not necessarily wrong under current law. The U.S. relies on the Howey test to determine whether an asset is a security, asking if buyers have an “expectation of profit to be derived from the efforts of others”. This means that factors outside of the issuer’s control, such as market trends and groupthink, can influence whether a token is classified as a security. The EU’s Markets in Crypto-Assets (MiCA) legislation, on the other hand, defines securities based solely on the issuer’s control, such as the structure of the instrument and how it is marketed. This allows for more clarity and practical requirements for disclosure and behavior.
In conclusion, firing Gensler might be a temporary solution, but it will not solve the underlying lack of clarity and adaptability in the U.S. approach to securities law. The only comprehensive solution is new legislation that refines the definition of a security, or creates a separate framework for digital asset issuers and exchanges. Until then, the U.S. crypto space will remain at risk of facing severe consequences if the political winds change direction.
Mark Lurie is the co-founder and CEO of Shipyard Software. He is a serial entrepreneur and investor who previously founded two venture-backed startups, including Codex, a blockchain-based title registry for art and collectibles. He was an investor at Bessemer Venture Partners, and currently works as a venture partner at FJ Labs, as well as a board member of GMO Trust and the Foundation for Art and Blockchain. He holds an MBA from Harvard Business School and a BA in Economics from Harvard College.
