Securities and Exchange Commission Chairman Gary Gensler ruffled the cryptocurrency community when he refused to exclude the regulation of stablecoins as securities in a hearing before the Senate Banking Committee on Tuesday . But stablecoin issuers will have bigger regulatory problems than the SEC, if reformers are successful.
Republican Senator Pat Toomey of Pennsylvania asked Gensler if he believed in stablecoins or cryptocurrencies designed to maintain their value against the U.S. dollar DXY,
are securities according to the Supreme Court’s definition of an investment contract called the Howey test. Gensler declined to give a specific answer, saying “it could well be headlines.”
Stablecoins have become staple in the cryptocurrency market like Tether USDTUSD,
and coin in USD USDCUSD,
that facilitate trading between popular digital assets, including bitcoin BTCUSD,
and ETHUSD ether,
but financial regulators have expressed concern that they pose a threat to financial stability. Investors use them as cash substitutes, like bank deposits or money market mutual funds, although they remain poorly regulated.
In July, Treasury Secretary Janet Yellen convened the President’s Task Force on Financial Markets to address the threat posed by stablecoins to financial stability, stressing “the need to act quickly to ensure implementation. place of an appropriate regulatory framework ”.
Gensler’s critics, however, argue that the SEC chief is rushing to assert his agency’s authority over these instruments with little legal justification.
“Gensler very clearly wants the SEC to have unlimited powers when it comes to crypto,” Dean Steinbeck, general counsel for blockchain platform Horizen, told MarketWatch. Steinbeck added that he agreed with Toomey’s analysis of the Howey test: because those who buy a stablecoin do not have a reasonable expectation of profit, stablecoins fail the Howey test and are not not a security.
Gensler, however, noted that while the Howey’s test is an important doctrine in determining whether certain cryptocurrencies are securities, there are dozens of other financial instruments that count as securities under federal law. which are distinct from Howey.
“In defining the scope of the market that Congress wished to regulate, Congress has brushed a broad brush,” Gensler said. “It actually included about 35 different elements in this definition of a title.”
Rohan Gray, Assistant Professor of Law at Willamette University and Chairman of the Modern Money Network, suggested in a tweet that stablecoins could be viewed as, among other things, proof of indebtedness, a note or certificate of deposit – all securities under federal law.
Gary Gorton, professor of finance at the Yale School of Management, has conducted research which shows that the debate over whether a stablecoin is a security is likely moot and that regulators at the Treasury Department and the Federal Reserve will probably intervene to regulate these instruments. in a way that could transform them.
“Cryptocurrencies are all the rage, but there is nothing new about privately produced money,” Gorton wrote in a July newspaper, co-authored with Jeffery Zhang, attorney at the Federal Reserve Board of Governors.
Gorton compared stablecoins to private banknotes that circulated as the dominant form of money in mid-19th-century America before the creation of national banks during the Civil War. This system of competing private currencies was economically inefficient because the divergent values of various private currencies made transactions and legal contracts difficult to execute. “There was constant haggling and arguing over the value of the tickets in transactions,” Gorton wrote. “Private banknotes were difficult to use. ”
A uniform national currency emerged from the need to finance the Civil War, when Congress began issuing so-called greenbacks that were not backed by gold and eventually taxed private banknotes. In the decades that followed, the federal government created the Federal Reserve system to manage a new national currency and deposit insurance to eradicate the bank runs that exacerbated the financial panics. Gorton argues that a similar development must be forced on stablecoins if policymakers are to avoid the private currency traps of the past.
If crypto enthusiasts think Gensler is a thorn in the side, just wait for the Federal Reserve and the Treasury Department to start making new rules. Statements from Yellen, Fed Chairman Jay Powell, and his top Governing Council lieutenants suggest these powerful officials agree that stable coin regulation is necessary and swift, whether the SEC calls them securities or not. .