It seems the more opaque and arbitrary the administrative state is, the more determined people will be to evade it.
It is not clear, as a matter of law, whether crypto is a security or a commodity, and Gary Gensler isn’t clearing anything up.
W hen FTX exploded, voracious bureaucrats at the Securities and Exchange Commission and the Commodities Futures Trading Commission were soon exploiting the scandal as a crisis to do what progressives always like to do — subject everything to government regulation.
“Everything” in this context includes cryptocurrencies. The problem, as we observed at the time, is that it is not clear, as a matter of law, whether crypto is a security or a commodity.
In theory, securities are investment contracts. Whether something qualifies as a security is determined by application of the so-called Howey test — derived from the Supreme Court’s 1946 ruling in SEC v. W.J. Howey Co. The question the test poses is whether there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” Stocks and bonds are the common example, but the definition is broad, empowering regulators to cast a wide net. A commodity, by contrast, is a tangible article of trade or commerce — e.g., agricultural or mining goods, often in raw-material form. Such articles can be traded because they are interchangeable with other articles of the same type.
The laws governing securities and commodities were enacted decades before the first big cryptocurrency, Bitcoin, was established. Naturally, most of its aficionados do not want crypto to be regulated at all: A big part of the project is to provide an alternative form of money that governments cannot manipulate as they do with their own fiat currencies. Under the law, money is not a security or commodity. Regulators do not want crypto to be deemed money. Because the law lacks clarity, they seem to spend much of their time pleading with Congress for legislation to give them sweeping regulatory authority over crypto, and the rest of the time insisting that crypto is already covered by the laws that give them sweeping regulatory authority. The latter strategy calls for administrative agencies to resist any acknowledgment that existing law limits their reach.
The issue is important because SEC regulation of securities is very extensive. The regulation of commodities is less extensive. Though they’d obviously prefer no regulation at all, most in the biz would rather crypto be deemed a commodity than a security.
This background set the stage for some painful exchanges Tuesday at a House Financial Services Committee hearing, between the committee’s Republican chairman, Patrick McHenry of North Carolina, and the SEC’s aggressive and often slippery chairman, Gary Gensler, a Biden-appointed Democrat and Goldman Sachs alum (he was CFTC chairman during the Obama years and a Clinton administration Treasury official). At issue was Ether, the popular cryptocurrency produced by Ethereum, a blockchain technology. McHenry tried up, down, and sideways to make Gensler answer a simple question: Is Ether a security or a commodity? Gensler served up many word salads but no answers.
As McHenry recounted, in 2018, the SEC said Ether was not a security. Last month, CFTC chairman Rostin Behnam opined that Ether is a commodity. At the same time, New York State Attorney General Letitia James asserted in a court submission that Ether is a security. But McHenry could not get Gensler even to concede that an asset cannot be both a commodity and a security.
Instead, the SEC chief offered the cutesy retort, “All securities are commodities under the Commodity Exchange Act.” It’s just that securities are “excluded commodities,” you see. From that premise, the smirking Gensler would agree only that a security cannot be both “an excluded commodity and an included commodity.” Naturally, this bold admission did not mean Gensler was willing to say which one Ether is.
McHenry’s exasperation (evident at the hearing) is that Gensler won’t explain himself to Congress, on the grounds that — other than having said Bitcoin is a security — he does not want to “prejudge” questions about which cryptocurrencies qualify as securities; yet he clearly has prejudged the matter because he has filed some 50 enforcement actions on the assumption that various cryptocurrencies are securities. It is only by these opportunistic enforcement actions that lawmakers and markets learn what Gensler has decided is within his regulatory domain.
Gensler would not even tell McHenry whether he thinks it disserves markets, financial soundness, product safety, consumer protection, and innovation to abide a situation in which the same asset is “viewed by the commodities regulator as a commodity and the securities regulator . . . as a security.”
It is maddeningly simple: Gensler wants to keep investors and industry in the dark so they’ll calculate that the only safe course is to comply with the SEC reporting regimen; he doesn’t want to answer questions from congressional Republicans because clearing up ambiguity could restrain his regulatory reach; and he is pushing resolution of complex questions to the forum of SEC enforcement action because he completely controls that forum.
Maybe this brand of hardball works. I’m more inclined to the conclusion that the more opaque and arbitrary the administrative state is, the more determined people will be to evade it — whether that means developing currencies and other assets that are arguably outside the clutches of capricious regulators, or finding business and investment opportunities outside the United States.