SEC Chairman Gensler Confirms ‘Everything But Bitcoin’ Is a Security: Implications and Analysis

The following is a guest post from Andy Lian.

SEC Chairman Gary Gensler reiterated that Bitcoin is not a security, but a commodity under the Commodity Futures Trading Commission (CFTC). He also stated that “anything but bitcoin is a security,” which has significant implications for the regulation of cryptocurrencies and digital assets in the United States.

Gensler’s statement reflects the SEC’s long-held view that many cryptocurrencies and digital assets are securities under US law. The SEC’s definition of a security is broad – it includes any investment contract in which a person invests money in a joint venture with the expectation of profit solely from the efforts of others. In other words, if an asset is sold as an investment with the expectation of profit based on the efforts of others, it is likely to be considered a security.

Gensler’s comments have sparked debate in the cryptocurrency community. Some argue that his view is far too broad and that many digital assets do not fit the SEC’s definition of a security. Others argue that the SEC’s approach is necessary to protect investors from fraudulent or manipulative activities in the cryptocurrency market.

One of the main implications of Gensler’s comments is that many digital assets may be subject to SEC regulation. This can include initial coin offerings (ICOs), a crowdfunding campaign where investors buy digital tokens in exchange for cryptocurrencies such as Bitcoin or Ethereum. Many ICOs have been criticized for their lack of transparency and accountability, and the SEC has taken enforcement action against several ICO issuers in recent years.

Another implication is that exchanges that trade in digital assets may be subject to SEC oversight. Under US law, exchanges that facilitate securities trading must register with the SEC and comply with various regulations. If the SEC considers many digital assets to be securities, exchanges that trade those assets may also be required to register with the SEC and comply with its regulations.

His comments suggest that the SEC may take a more aggressive approach to regulating the cryptocurrency market. This may include increased enforcement measures against issuers of digital assets that are considered securities and against exchanges that facilitate trading in these assets. It may also lead to new regulations to increase transparency and accountability in the cryptocurrency market.

The SEC’s approach to cryptocurrency regulation has been debated for several years. Some argue that the SEC’s current approach is too cautious and is stifling innovation in the cryptocurrency space. Others argue that increased regulation is necessary to protect investors from fraud and manipulation.

Gensler’s comments suggest that the SEC is likely to take a more assertive approach to regulating the cryptocurrency market in the coming years. This could include increased enforcement efforts, new regulations and closer scrutiny of digital assets and exchanges operating in the US

Maybe we can take a step back to look at a few things. First, it is important to understand the context of Gensler’s statement. As noted earlier, Gensler reiterated the SEC’s position in a July 2022 interview with CNBC that Bitcoin is not a security, but a commodity that falls under the Commodity Futures Trading Commission’s jurisdiction. He did not label other digital assets, and avoided answering the question directly. However, in a tweet by Jake Chervinsky in February 2023, it was suggested that Gensler may have prejudged that all digital assets except Bitcoin are a security.

So my question is: What exactly is a security? In the United States, the Securities Act of 1933 defines a security as any investment contract, note, stock, or any other type of investment in a joint venture with the expectation of profit solely from the efforts of others. Put simply, it means an asset that represents an ownership stake or a right to receive future profits or cash flows from a third party.

Suppose we consider Gensler’s statement that anything but Bitcoin is a security. If so, it means that most digital assets such as Ethereum, XRP and other cryptocurrencies will be considered securities under US law. This means they will be subject to SEC regulations and oversight. It is worth noting that this is not a new position for the SEC. For years, the SEC has warned cryptocurrency companies that their tokens could be classified as securities if they meet certain criteria.

The implications of this classification are significant. If a digital asset is classified as a security, the issuer must comply with SEC regulations, including registration and disclosure requirements. It must also follow strict rules for trading, reporting and investor protection. In addition, investors will be protected under federal securities laws, which could increase their confidence in the digital asset market. However, it can also lead to additional costs and regulatory burdens for the companies that issue digital assets.

My take on this matter is that while Gensler’s statement may have been taken as a blanket statement, the SEC’s approach to regulating cryptocurrencies is nuanced and fact-specific. The SEC has been clear that it will evaluate each token on a case-by-case basis to determine whether it meets the legal definition of a security. In other words, just because a digital asset isn’t Bitcoin doesn’t automatically mean it’s a security.

Furthermore, regulatory oversight is necessary for the cryptocurrency market to mature and gain mainstream adoption. The lack of clear regulations has been a major roadblock for institutional investors, who are hesitant to invest in a market that is perceived as unregulated and risky. Clear regulations will also protect retail investors who may not have the knowledge or resources to navigate the complex world of cryptocurrencies.

To conclude, while Gensler’s statement that “anything but Bitcoin” is a security may have caused some alarm in the cryptocurrency community, we believe it is important to view it in the context of the SEC’s broader approach to digital asset regulation. The SEC’s focus on investor protection and market integrity is critical to the long-term success of the cryptocurrency market.

As the market continues to evolve, we expect the SEC’s approach to continue to evolve, and we look forward to seeing how it evolves. In the meantime, I hope the SEC can be more precise and take a more responsible attitude when putting statements in the market.