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SEC Chair Gensler Reacts to Proposed Regulatory Scheme on Digital Assets

Steven.Lofchie@friedfrank.com's picture
Commentary by Steven Lofchie

Responding to recent legislative efforts which would empower the CFTC with primary regulatory oversight over crypto-assets, SEC Chairman Gary Gensler argued that crypto assets being offered to the public have characteristics of an investment contract and are subject to securities regulation and enforcement.

In remarks at a Wall Street Journal CFO Network Summit, Chairman Gensler expressed concern that a bill to establish a comprehensive scheme for the regulation of digital assets, sponsored by Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY), could undermine the regulation of stock exchanges or mutual funds. (See also, Fried Frank memo.) Chair Gensler stated that: "we don't want to undermine the protections we have in a $100 trillion capital market. Like behaviors should have like treatment." He also argued that the urgency for establishing regulation over digital assets is not new and that "we're not looking to extend our jurisdiction."

Commentary

Chairman Gensler is correct that investment assets that are sold to the retail public should be subject to some form of regulation and that, in the absence of such regulation, there will be fraud. He concludes, however, with the aphorism that "like must be treated as like." While it may be correct to conclude that identical financial products must be regulated identically, it is not at all clear that similar financial products must be regulated identically. (Shouldn't one be asking how they are similar or in what ways they are different?)

In the real world of financial regulation, similar financial products are not necessarily treated identically. There are different types of regulation for U.S. government securities, agency securities, municipal securities, corporate bonds, commercial paper, preferred debt, preferred equity, convertible bonds, investment company securities, corporate equities, asset-backed securities and on and on. Like is not identical.

The reality is that certain digital assets have features that really are distinct from other types of securities. This does not mean that they ought to be free from regulation. It does mean that the SEC should be obligated to consider the unique characteristics of certain of these assets, rather than falling back on "like must be treated as like."

In this regard, SEC Commissioner Hester M. Peirce and Senators Lummis and Gillibrand each deserve credit for grappling with the substantive issues, even if there is not yet consensus as to the solution.

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