This is the first of a three-part series based on Gary Gensler’s extensive past public statements about crypto. Links to Parts 2 and 3 will appear here as soon as they are published.
Like the heir to the chairman of the Securities and Exchange Commission, Gary Gensler’s most pivotal role in the future of crypto will be his thoughts on how cryptocurrencies intersect with securities regulation.
Where crypto complies with the SEC
The SEC has been a focus of the crypto world for a long time. While initial crypto enforcement actions were largely limited to outright fraud, the 2017 DAO report was access to even the best-intended projects. It was that report that determined that crypto pre-sales could fall into the securities offer category.
In the intervening years, however, the SEC has frustrated the crypto community with the lack of clear definitions as to which tokens should not fall into the category. This is a major problem because issuers of securities are subject to strict reporting requirements that, critically, make the path to decentralization difficult.
Real-time thoughts on SEC’s access to unregistered listings
While Gensler left public office in 2014 as Chairman of the Commodity Futures Trading Commission, in the years since he left an extensive body of work, he has been able to get at least some insight into his thoughts on initial coin offerings. Not the least of these the actual readings from his time at MIT, videos of which are from fall 2018, at the end of the ICO boom. Which Gensler noted:
“Most ICOs have already failed. And because they continue to fail so quickly – by the end of this year or at least halfway through next year, more than 90% or 95% of them will have failed if you take the whole total. So it’s pretty clear it’s going to come down “
Indeed, Gensler lectured on ICOs a few days after the SEC made clear that it was going to chase ICOs for not registering: “For the first time, they were really talking about illegal securities offers. So they used the word illegal. And they are starting to get to the place where they shut down some of these things that weren’t necessarily a scam or fraud, just saying you didn’t register. “
Bitcoin, based on its decentralized network and lack of an issuer – aided by the mystery behind Satoshi Nakamoto’s identity – is treated as a commodity across the US. It is a status that many others pursue networks.
Gensler had positive things to say about projects like Ethereum and Filecoin at the time, but acknowledged that Ether benefited from it because he was so early, and said he would consider it a security:
Ether: We’ll discuss later in the semester whether that was really a securities offering. I’ve said publicly that I think so, but that was in 2014. And in 2018, the Securities and Exchange Commission said, ‘Regardless of what it would have been in ’14, it’s now decent enough decentralized that we won’t consider it a security. ‘”
Likewise, Gensler was quick to point out that given the market dominance of Bitcoin and Ether, even during the rush to fund ICOs, the bulk of crypto investment was not in securities at all:
So we already know in the US and many other jurisdictions that 3/4 of the market are not ICOs or would be called no securities, even in the US, Canada and Taiwan, the three jurisdictions following something similar to the Howey Test what we’ve talked about. 3/4 of the market is not securities. It’s just a commodity, a money crypto. “
Whether Gensler agrees with predecessor Jay Clayton however, that every ICO he has seen is a security is questionable.
The saga of the SAFT
The Simple match for future tokens, or SAFT, was an important legal framework that many of the greatest ICOs of all time followed. The largest ICO to date, EOS in some ways led the charge by splitting the investment contracts it sold from the actual token distribution, but Block.one was not using an actual SAFT.
The largest SAFT ICO was Telegram, which raised $ 1.7 billion on its future GRAM tokens in the first half of 2018. In June 2020, the SEC won one final legal judgment to shut down distribution of those tokens before the network is even launched. At the time of the first case, Telegram and the SEC were trapped with arguments about how functionally the actual network had become independent of Telegram – a critical determination when it comes to decentralization.
While impressed with Telegram as a company, he was skeptical of what function the actual GRAM tokens would have to perform to earn their $ 1.7 billion valuation. Overall, he questioned the value of most of the ICOs, if they were, based on future ideas rather than written code: ‘How do you really get the value of a token when there is so little in these white papers about this specificity written? ? “
It seemed that Gensler was generally unimpressed with the SAFT framework and said of the authors of the first whitepaper, “I think they were wrong, by the way.” However, he had positive things to say about Filecoin, which was running an ICO using the SAFT framework to raise a quarter of a billion dollars.
“Filecoin seemed to be a good faith concept about using a token to motivate file storage exchange,” said Gensler, before becoming more skeptical, “They raised the money in October 2017. It’s 13 months later. still don’t have a live network. And the latest announcement says it will come in the first or second quarter of 2019. Some people might call that a scam. I wouldn’t do it. ”
The delays in launching Filecoin’s network became a running joke, but the network did indeed launch towards the end of 2020 and appears to be functioning just as well as anyone could hope, right away circulating market capitalization of more than a billion dollars and, theoretically, another $ 49 billion in value. Indeed, Filecoin appears to be the success story of the last days of the ICO market, which Gensler had identified two years ago foresight.
A settlement for Ripple
Ripple’s relationship with XRP has been historically very controversial, with the company managing what many consider to be an expanded ICO since 2013. two years before the SEC would take to court to fight for:
“Yes, I think it is non-compliant security. But this will not be resolved by the Securities and Exchange Commission alone. It will be resolved by some courts, be it courts of appeal or the Supreme Court. “
As Gensler will inherit the lawsuit against Ripple, his stance on the company is critical. In comparison, another former CFTC chairman, J. Christopher Giancarlo, supported XRP’s status as a currency last summer. Obviously, Ripple would prefer the committee to see it that way. Gensler, on the other hand, crippled Ripple’s lack of use case – a crucial part of proving that a token doesn’t depend on the third party behind it in the same way a stock does from the issuer:
“You haven’t used XRP for four years as I understand it’s zero use. Today it is the second highest rated cryptocurrency. It is over Ethereum with the decline in the value of Ethereum and Bitcoin. And at $ 18 billion, I can’t tell you what it’s worth. I can tell you that coinmarketcap.com says they are worth it. But in that case their revenue model sells XRP. “
Overall, Gensler’s mindset doesn’t seem to represent a sharp departure from what the SEC has already said. However, he is quite willing to identify specific points of interest for future ICOs, which seems like a strong foundation for future policy.