Critics worry Gensler of the SEC is pursuing ‘unlimited powers‘ in cryptocurrency regulation

Chairman of the Securities and Exchange Commission Gary Gensler raised eyebrows in the cryptocurrency industry on Tuesday when he refused to rule out regulating stablecoins as securities during a Senate Banking Committee hearing. However, if reformers have their way, stablecoin issuers will face greater regulatory hassles than the SEC.

Republican Senator Pat Toomey of Pennsylvania questioned Gensler on whether he believes stablecoins, or cryptocurrencies designed to maintain their value in relation to the US dollar DXY, are securities under the Supreme Court's Howey Test. Gensler failed to provide a definitive answer, stating that "they could very well be securities."

While stablecoins such as Tether and USD Coin, have become integral to the market for cryptocurrencies, facilitating trading between popular digital assets such as bitcoin, and ether, financial regulators have expressed concern that they pose a threat to financial stability. Investors treat them similarly to bank deposits or money market mutual funds, while they remain loosely regulated.

Treasury Secretary Janet Yellen convened the President's Working Group on Financial Markets in July to address the threat stablecoins represent to financial stability, emphasising "the critical need to act swiftly to ensure an effective regulatory framework is in place."

However, Gensler's critics believe that the SEC chairman is hastily asserting his agency's authority over these instruments without adequate legal grounds.

“Gensler has made it abundantly apparent that he wants the SEC to have unrestricted authority over crypto,” Dean Steinbeck, general counsel for the blockchain platform Horizen, told MarketWatch in an interview. Steinbeck continued by agreeing with Toomey's explanation of the Howey Test: because those who purchase a stablecoin do not have a reasonable expectation of profit, stablecoins fail the Howey Test and are not securities.

While Gensler stated that the Howey Test is a critical criterion for assessing whether some cryptocurrencies are securities, he highlighted that there are dozens of other financial products that qualify as securities under federal law that are not covered by Howey.

“When Congress defined the area of the market it sought to regulate, it used a broad brush,” Gensler said. “It actually encompassed perhaps 35 distinct items within that concept of a security.”

Rohan Grey, an assistant professor of law at Willamette University and the president of the Modern Money Network, stated in a tweet that stablecoins may be deemed evidence of debt, a note, or a certificate of deposit — all of which are considered securities under federal law.

Gary Gorton, a finance professor at Yale School of Management, has conducted research indicating that the debate over whether a stablecoin is a security is likely moot, and that regulators at the Treasury Department and Federal Reserve will likely intervene to regulate these instruments in a way that transforms them.

“Cryptocurrencies are all the rage, but privately manufactured money is nothing new,” Gorton wrote in a July study coauthored with Jeffery Zhang, an attorney with the Federal Reserve Board of Governors.

Stablecoins, according to Gorton, are analogous to private bank notes that circulated as the major form of currency in mid-nineteenth-century America prior to the establishment of national banks during the Civil War. This system of competing private currencies was economically unproductive because the divergent valuations of numerous private currencies complicated the execution of transactions and legal obligations. “There was frequent haggling and disputing over the denomination of notes used in transactions,” Gorton wrote. “Private bank notes were notoriously difficult to use.”

A unified national currency was born out of the necessity of financing the Civil War, when Congress began issuing so-called greenbacks that were not backed by gold and eventually taxed private bank notes to extinction. In the decades that followed, the federal government established the Federal Reserve system to handle a new national currency and to insure deposits against bank runs that intensified financial panics. Gorton contends that stablecoins must undergo a similar evolution if policymakers are to avoid the mistakes of private currencies in the past.

If cryptocurrency fans believe Gensler is a thorn in their side, wait until the Federal Reserve and the Treasury Department begin developing new guidelines. Yellen's statements, as well as those of Fed Chairman Jay Powell and his top Board of Governors lieutenants, show that these prominent authorities agree that stablecoin regulation is necessary, and urgent, regardless of whether the SEC classifies them as securities.

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