Former SEC Chairman Jay Clayton has reiterated his position that many cryptocurrencies could be defined as securities, even as the crypto industry continues to combat the U.S. Securities and Exchange Commission over the regulator’s prohibitive stance toward the industry.
“I’ve said this for a long time: I think the market has evolved, but many, if not the vast majority, of the tokens that were sold for cash would fall within the definition of a security in America,” Clayton, now a senior policy advisor and counsel at Sullivan & Cromwell LLP, said at the R3 CordaDay conference on Wednesday.
The definition of a security is “intentionally broad and flexible,” Clayton noted. But, he added that there’s a chance that something once labeled a security, “might not always be a security.”
So what could cause that shift? Present utility versus future utility, Clayton said.
Clayton pointed to Broadway tickets as an example: If someone bought 1,000 tickets for $10 and told their friends and family they would be able to resell those tickets for $100 or $1,000, then it’s a security, he said. “But if you just buy the ticket 10 years later, it’s just a ticket.”
“The confusion around that, and the horrible legal advice [that’s been] given has led to bitter, emotional fights over classification,” Clayton said.
For the former SEC chair, the bigger question is how to trade those tickets when they’re not securities. For example, Taylor Swift tickets, which have caused a bit of chaos for fans and Ticketmaster in recent months, can resell for thousands of dollars more than initially bought, but that would not be securities trading, Clayton said. “But we should have a digitized market for it.”
Last week, the SEC sued Binance and Coinbase for different reasons, but both lawsuits alleged the two crypto exchanges were violating U.S. securities laws. Both filings listed a handful of tokens as securities, with 12 assets mentioned in the Binance suit and 13 in the Coinbase one, though the SEC did note that the classification of certain cryptocurrencies as securities was “not limited to” those mentioned.
The two suits listed SOL, ADA, MATIC, FIL, SAND and AXS as crypto asset securities. The two largest cryptocurrencies by market capitalization, Bitcoin and Ethereum, were not mentioned.
It’s worth noting that current SEC chair, Gary Gensler, has called bitcoin a commodity in the past. And in March, the U.S. Commodity Futures and Trading Commission (CFTC) claimed in its own Binance lawsuit that bitcoin, ether, tether and the Binance USD (BUSD) were commodities.
But the SEC recently called BUSD a security, in yet another instance of the diverging stances toward crypto assets from the two agencies.
Some firms behind the cryptocurrencies mentioned in the suits have spoken out against the claims. “The Solana Foundation strongly believes that SOL is not a security,” the Solana Foundation told TechCrunch+ last Thursday. “SOL is the native token to the Solana blockchain, a robust, open source, community-based software project that relies on decentralized user and developer engagement to expand and evolve.”
Last week, Gensler said his agency believes that the crypto industry’s business model is “built on noncompliance with U.S. securities laws” and many are “commingling various functions that in traditional finance we don’t allow.”
Siloed agencies with diverging stances
While the SEC has been fairly vocal about its stance on cryptocurrencies, the CFTC has a “very different approach to the subject matter,” J. Christopher Giancarlo, executive chairman of Digital Dollar Project and a former CFTC Chairman, said during the panel. For context, the Digital Dollar Project, per a quote from Giancarlo on its website, was built to “catalyze a digital, tokenized U.S. currency.”
In the commodities world, someone hedging risk doesn’t need to disclose to the market what they know or don’t, Giancarlo said. “If a farmer sees there’s going to be a shortage of wheat, they might run to the market to hedge themselves, but they don’t need to tell the world or register the trade with an agency,” he said.
When it comes to the Howey Test, which is used to determine whether an investment contract exists and deems an asset as a security, and other regulatory agencies’ rules and frameworks, Giancarlo said he believes “it’s not true to say the rules we have are adequate for this new innovation.”
“The U.S. needs to stop being an outlier and come up with a bespoke regulatory framework that builds upon the entities, but also recognizes the unique aspects of this innovation [ … ] where value will no longer be held in a silo of an institution, but held on a blockchain.”
The standard rebuttal to this line of argument, TechCrunch+ has observed, is that securities are securities, regardless of how they are formed, and crypto-based securities should therefore operate under existing laws.
Given the greater regulatory scrutiny in recent months, many people have agreed that there’s more need for clarity in the crypto industry around securities law. The SEC has provided some clarity with its most recent lawsuits, but it’s not the outcome that crypto market players want.
The crypto-securities debate has been dragging on for quite a while now, and the outcome is as unclear today as it was years ago. As someone who has been reporting on this space and the regulations around it, I understand market players’ frustrations given the conflicting messages they’ve been getting.
The U.S. financial system is extremely siloed, with a number of governing bodies that all have different functions in providing rules and guidelines, and these diverging regulatory stances aren’t unique to the crypto industry. But we’ve seen other financial sectors and industries successfully be regulated by multiple agencies, so the regulators need to find some common ground in order for this space to move forward.
All in all, there’s plenty of room for nuance in the security assets marketplace, Clayton said. “The regulatory sector needs to come to grips with the fact that we are going to have interoperability,” Clayton added. “We are going to have programmable assets operate much more efficiently. That’s going to happen.”