The five commissioners of the United States Securities and Exchange Commission (SEC), including Chairman Gary Gensler, faced fierce criticism from representatives of the House Financial Services Committee on September 24 during of a heated hearing on SEC oversight. Stablecoin legislation has also been up for discussion, with Ranking Member Maxine Waters (D-CA) calling for a “big deal” and warning that time is running out to make a deal.
The highly anticipated hearing saw testimony from Gensler and Commissioners Hester Peirce, Caroline Crenshaw, Mark Uyeda and Jamie Lizarraga – the first time all five commissioners have testified together since 2019.
Critics among the representatives, mainly Republicans, claimed to have seized this rare opportunity to take witnesses to task on the SEC’s handling of digital asset regulation.
Committee Chairman Patrick McHenry (R-NC) set the tone from the start, calling out Gensler for what he saw as regulatory overreach.
“Chairman Gensler’s legacy will be defined by transforming the once-proud institution of the SEC into a rogue agency,” said McHenry, who then accused the SEC of enforcing regulations “often without adequate justification, economic analysis, or commitment audience”.
The SEC’s allegedly heavy-handed “regulation by enforcement” approach has been the subject of sustained criticism throughout Gensler’s tenure as SEC chairman. At the same time, Gensler has consistently maintained that existing regulations are sufficient to accommodate digital assets and that the Howey Test is sufficient to establish whether an asset is a security.
Under the Howey Test, an asset may be classified as an “investment contract” and, therefore, subject to U.S. securities law if it is: an investment of money; in a joint enterprise; with the expectation of profits solely through the efforts of others.
However, during the September 24 hearing, Rep. Ritchie Torres (D-NY) questioned Gensler’s interpretation of the test applied to non-fungible tokens (NFTs), calling it “idiosyncratic.” He argued that the SEC’s logic could turn “just about any collectible or consumer good or any work of art or any piece of music” into collateral.
“It’s so open that it blurs the line between collectibles and security, between art and security,” Torres said, demonstrating that concerns about the SEC’s approach are not limited to Republican side of the fence.
However, it was a Republican who received the most strident criticism during the hearing, with Rep. Tom Emmer (R-MN) accusing Gensler of being the most “destructive” and “anarchic” president in the 90 years of regulator history.
Specifically, he argued that Gensler coined the term “crypto asset security.”
“This term is nowhere in the law, you invented it (and) you have never provided interpretive guidance on how the security of crypto assets could be defined within the walls of your SEC,” said Emmer.
The Minnesota Republican, who has been dubbed “the crypto king of Congress,” went on to suggest that the term served as the basis for Gensler’s so-called “enforcement crusade” against the digital assets industry, despite the fact that SEC lawyers added a footnote to a September 12 filing in its case against Binance that clarified that the term “does not refer to the crypto asset itself as a security ”, more like a “shortcut”.
However, Gensler’s tough day was made worse when SEC Commissioner Hester Peirce admitted that the SEC’s decision to remove the term “crypto asset security” in court last week should have happened “it a long time ago.”
“(By) inserting a footnote, we admit that now the token itself is not a security. This is something we should have admitted a long time ago,” she said.
Pierce, often nicknamed “Crypto Mom” for her pro-industry stance, testified that the agency was failing in its duty as a regulator by not being specific.
“By using imprecise language, we were able to suggest that the token itself is a separate security from the investment contract, which has implications for secondary sales, which has implications for who can list it. I think we are failing in our duty as a regulator, to not be specific,” Pierce said.
When asked whether digital assets require a statutory definition to determine how securities laws should apply to them, Peirce suggested that “it’s always helpful for Congress to have a say, but it There are certainly guidelines we could provide in this area that we have chosen not to consider.” provide.”
In terms of the guidelines that have been provided, the SEC’s Staff Accounting Bulletin No. 121 (SAB 121) has also been a topic of discussion after 42 Republican Party senators and representatives signed a September 23 letter to the SEC asking the regulator to rescind the “disastrous” bulletin.
SAB 121 advised financial institutions, such as centralized stock exchanges and banks, that if they hold digital assets on behalf of clients, they should report these assets as a liability on their balance sheet and include, in the notes to their statements financial, clear information of the nature and amount of digital assets they hold for users. In other words, these companies should publicly disclose the quantity and nature of digital assets they hold on behalf of their clients.
When Rep. Wiley Nickel (D-NC) asked if the SEC would rescind the bulletin, Gensler replied, “No, it’s a good accounting bulletin.” »
He argued that SAB 121 helps public companies understand the risks associated with owning digital assets, citing FTX, Terraform Labs and other bankruptcies as examples.
Nickel disagreed, saying SAB 121 made the digital asset ecosystem “less secure” and also argued that the SEC’s Office of the Chief Accountant’s recent exemption from Bank of New York Mellon (BNY Mellon) balance sheet reporting requirement would lead to “different rules for different people.”
Gensler argued that “these are actually the same rules for different people.”
Waters calls for compromise on stable bill
The hearing did not entirely revolve around another exhaustive questioning of Chairman Gensler. Ranking Member Maxine Waters (D-CA) took a more diplomatic approach, instead emphasizing the need for legislative action outside the SEC’s purview.
“Before the end of this year, I want us to reach a big deal on stablecoins and other long-overdue bills,” Waters said, reiterating a previously expressed desire to push legislation through Congress.
“We are running out of time to adopt this measure,” she added.
Committee Chairman McHenry responded positively, stating that he was still hopeful “that we can come to an agreement on stablecoin legislation,” while admitting that “the nature of how we do this is where things get a little tougher and voting gets a little tougher.”
McHenry is the author of the Clarity for Payment Stablecoins Act of 2023, which is currently languishing in the House of Representatives after passing a committee vote in July of last year.
Waters was strongly opposed to certain aspects of the bill, criticizing it for allowing state regulators to unilaterally expand the list of suitable stable reserve assets based on what they deem “appropriate.”
“Strong reserves ensure the stability of a stablecoin,” Waters argued during debate on the legislation in committee, noting that delegating authority to state-level “stablecoin regulators” meant the proposed Act lacked support from the Federal Reserve or Treasury. Department.
It is such criticism, shared by many Democrats in the House as well as President Biden, that is preventing a full vote on the Stablecoin bill. Despite the desire for a compromise on the part of both Waters and McHenry, it remains to be seen whether and to what extent both sides are willing to bend to achieve one, and time is running out.
Watch: Stablecoins with Daniel Lipshitz
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