For two and a half years, Securities and Exchange Commission (SEC) Chairman Gary Gensler has told anyone who will listen that SEC has crypto covered. He consistently opines almost all digital assets, barring Bitcoin, are securities. In his view, any sale of such digital assets constitutes a securities offering and existing securities laws sufficiently regulate them. Consequently, the SEC perceives no need for new legislation and believes market participants just need to comply.
Despite Mr. Gensler’s consistent efforts to project an air of certainty, his legal theories were put to the test in the U.S. District Court of the Southern District of New York and came up short, potentially creating a ripple effect across the industry. District Court Judge Analisa Torres’ summary judgment delineates the complexities in categorizing digital assets and exposes the inadequacies in the current regulatory framework and Mr. Gensler’s assertions.
The court held that Ripple’s token, XRP, is not a security in and of itself, and the determination of whether a sale of XRP constitutes a securities offering depends on the totality of circumstances surrounding its sale. Certain sales of XRP, such as those made to institutional investors directly solicited by Ripple, were made as part of investment contracts and therefore classified as securities offerings. Conversely, sales of XRP through anonymous listings on digital asset exchanges and distributions to employees and third parties for no consideration were not deemed securities offerings.
These holdings directly counter Mr. Gensler’s position that “most” digital assets are inherently securities and lend credence to a growing bipartisan view that the Howey test for determining securities is unclear.
If other courts adopt Judge Torres’ reasoning and conclude that certain digital assets are not securities and their sale or “airdrop” are not securities offerings, the digital asset market will continue operating outside the SEC’s regulatory framework and leave consumers without the protections they deserve.
While the court’s ruling certainly damages Mr. Gensler’s approach, it is by no means a slam dunk. For many, the ruling has elicited even more confusion. Legislation from Congress is the only solution.
That is why we joined Chairman Glenn “GT” Thompson (R-Pa.) in introducing the Financial Innovation and Technology (FIT) for the 21st Century Act to establish a comprehensive regulatory framework for digital assets. The bill addresses the sales of such assets as part of an investment contract, on an exchange, or those distributed via airdrops. It crucially fills the regulatory void for the digital asset spot market that the SEC does not oversee.
The FIT for the 21st Century Act provides distinct rules for digital asset trading platforms and intermediaries, offering much-needed regulatory clarity. This bill stipulates a digital asset is subject to the securities laws based on the totality of circumstances regarding its sale. However, under our bill, a digital asset subject to a securities offering must comply with securities laws until the blockchain network supporting the digital asset becomes decentralized and is certified by the SEC. After decentralization, the digital asset can be traded as a digital commodity on a digital commodity exchange. Additionally, recipients of earned or airdropped digital assets can trade them as digital commodities.
The Ripple decision represents a critical juncture for the digital asset ecosystem in the United States. The judgment underscores the problem with Mr. Gensler’s regulation-by-enforcement approach and highlights regulatory gaps only legislation can resolve.
The FIT for the 21st Century Act is the legislative solution we need to ensure both crypto-native and traditional finance companies can responsibly innovate in this market while establishing consumer protections that do not currently exist. This legislation is also a direct response to the Financial Stability Oversight Council’s own recommendation for legislation to create a digital asset regulatory framework, which both Treasury Secretary Janet Yellen and Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam testified in favor of before our committees. As Digital Assets Subcommittee chairs on the House Committees on Financial Services and Agriculture, we are committed to passing this legislation into law.
French Hill represents the 2nd District of Arkansas and Dusty Johnson represents South Dakota in the U.S. House of Representatives.