CFTC vs. SEC on Cryptos As Securities: Why House Committee’s Grilling of Gensler Is Crucial

When Gary Gensler was selected and confirmed as the latest chairman of the Securities and Exchange Commission in 2021, it was immediately clear that there would be implications for the crypto market. Initially, it was expected that Gensler’s selection would be good for cryptocurrency because of his previous experience with digital currencies.

However, two years since being confirmed as SEC chair, he has now come down firmly against the crypto market, raising much ire with his declaration that every cryptocurrency except bitcoin is a security. 

Gensler to Face Grilling by House committee

For the first time, Gensler is set to testify before the House Financial Services Committee on April 18. Rep. Patrick McHenry, the committee’s chairman, told Cointelegraph in an interview that Gensler will be grilled on his approach to the crypto market. 

He added that the testimony will be the first oversight hearing of the SEC and that it would focus on Gensler’s approach to dealing with crypto assets, including his rulemaking practices. McHenry also said the House committee would be “laying down a regulatory sphere for digital assets.” 

Many Democrats have expressed concerns about Gensler’s approach to the crypto markets. In fact, some crypto enthusiasts feel the party’s anti-crypto position could negatively impact its 2024 election campaign.

The SEC has already issued Wells notices to several major crypto-related companies this year, including crypto exchange Coinbase for “potential violations of securities law.” Not to be outdone, the Commodity Futures Trading Commission is also suing crypto exchange Binance. 

Regulators Disagree About Crypto Classifications

In fact, the CFTC’s case against Binance claims that ether, Binance USD, Tether and Litecoin are all commodities — like bitcoin. The lawsuit clearly pits the CFTC against the SEC, as Gensler has repeatedly stated that bitcoin is the only cryptocurrency that’s a commodity, while all others, including those listed by the CFTC, are securities rather than commodities.

Meanwhile, crypto advocacy group Blockchain Association has long maintained that Congress will have ultimate control over crypto-related regulations — and not financial regulators.

The SEC has been ratcheting up its attempts to police the crypto space since Gensler took over the helm. A study conducted by HedgewithCrypto earlier this year revealed that 105 crypto-related lawsuits had been filed with the SEC since 2018, including a record 41 cases filed last year — an increase of almost 50%. 

The Howey Test

Like his predecessors, Gensler continues to use the Howey test to justify his claim that all cryptocurrencies except bitcoin are securities. The Howey test is a legal test used to determine if something qualifies as an investment contract, thus subjecting it to U.S. securities laws.

The test dates back to a Supreme Court case in 1946 — long before cryptocurrencies were even a thought. As a result, the debate about whether this test can and should be applied to cryptocurrencies continues to swirl.

The Howey test requires transactions to contain an investment of funds in a group venture and the expectations that any gains from that investment will come from group efforts. The test establishes three criteria to decide whether an investment is a security.

The first is that the transaction must be a financial investment, meaning that those participating in it must be placing their own money or other assets at risk. The second criterion is that the transaction must be a shared enterprise, meaning that the financial success of those involved is connected in some way. 

Finally, there must be an expectation of profit from the efforts others, meaning the investor is relying on someone else to generate a return for them.

Running Afoul of Securities Laws

The SEC has filed numerous lawsuits based on Gensler’s argument that every cryptocurrency except bitcoin is a security, and the implications for the crypto industry will be sweeping. If the numerous firms accused of breaking securities laws are found to be guilty, it could virtually wipe out the crypto industry in the U.S. because the penalties can be enough to bankrupt the companies. 

While the SEC feels the Howey test is sufficient enough to rule that cryptocurrencies are securities, the CFTC’s claim that several well-known tokens are actually commodities illustrates that a consensus is needed among U.S. regulators. It’s mind-boggling to think that lawsuits filed by two different regulatory agencies claiming opposite things can both move forward. 

The House committee’s handling of Gensler’s testimony on cryptocurrencies set for later this month will be critical in terms of what the overarching consensus for the crypto market will become.