SEC Chairman Gary Gensler came under fire during a congressional hearing yesterday over the agency’s approach to regulating cryptocurrencies, despite omitting any mention of digital assets in his written testimony. Lawmakers and SEC commissioners questioned the effectiveness and clarity of current strategies, highlighting concerns about “regulation by enforcement” and the lack of explicit guidance.
Patrick McHenry, chairman of the House Financial Services Committee, noted that the House passed FIT 21 to establish clear rules and strong consumer protections in the digital asset ecosystem. “More than two-thirds of the House, including 71 Democrats, rejected Chairman Gensler’s approach to digital assets by supporting clarity and consumer protections,” McHenry said during the hearing.
The FIT 21 law’s definition of decentralization has been a point of contention. Some lawmakers have questioned whether setting a 20% ownership threshold and allowing anonymous self-hosted wallets could hamper law enforcement efforts and regulatory oversight.
Commissioner Hester Peirce criticized the SEC’s use of enforcement actions without providing clear regulatory guidance. “It’s a very poor approach to trying to regulate an industry if you’re trying to protect investors,” Peirce said. She noted that the approach is ineffective, leaving market participants uncertain about the SEC’s authority and the limits of compliance.
Commissioner Mark Uyeda echoed the need for the SEC to explain how existing securities laws apply to digital assets. “The Commission, for example, could have explained, particularly in the context of cryptoassets and digital assets, how to apply that test,” Uyeda noted, referring to the Howey test used to determine whether an asset qualifies as a security.
Despite these criticisms, Gensler maintained that current laws regarding digital assets are sufficient and explicit. Gensler asserted:
“Regardless of where someone stores their ledger if they tokenize a security (a stock, a bond, or an investment contract), it’s important to make sure that investors and the investing public have the information they need.”
He argued that tokenization does not change the fundamental economics of an asset as a security.
Concerns have also been raised about the influence of celebrity endorsements and potential “pump and dump” schemes in the crypto space. Rep. Bill Foster questioned whether the SEC has sufficient authority to address issues where influencers promote investments without disclosing their compensation. “I have heard concerns from industry participants about influencers, bloggers, celebrities, and others who are using their celebrity status to promote investments without disclosing that they are, in fact, being paid to do so,” Foster said.
Gensler responded by saying:
“I would say I think the laws are strong. I mean, there are still resource gaps and we get on average 40,000 to 50,000 reports, complaints and referrals a year. That’s about 4,000 a month.
And, uh, we need to prioritize those reports, those complaints, and those referrals.
THE The disconnect between the SEC’s current regulatory approach to cryptocurrencies and the desire for more specific guidance became evident throughout the hearing. While some commissioners believe that statutory definitions from Congress are necessary, others argue that the SEC could use its existing authority more effectively to provide clarity to the cryptocurrency industry.
The SEC’s written and oral testimony focused on topics such as cybersecurity incidents, conflicts of interest in securitization markets, and improvements to public reporting and data transparency. However, the agency’s omission of any direct reference to cryptocurrencies in its testimony highlights the tension between its priorities and the concerns of lawmakers and industry participants seeking regulatory clarity in the rapidly evolving digital asset landscape.
The call for clear rules of conduct and strong consumer protections remains a pressing issue, with stakeholders arguing for a regulatory framework that fosters innovation while safeguarding investor interests.
