Senator Toomey Criticizes SEC Chair for Regulating Digital Assets by Enforcement

Senator Pat J. Toomey (R-PA) criticized SEC Chair Gary Gensler for his "uncompromising refusal to give regulatory clarity to the cryptocurrency community and consumers."

In a letter to Chair Gensler, Senator Toomey stated that the SEC is regulating cryptocurrencies through enforcement, an approach that is "chilling financial innovation and contributing to significant financial losses for unsuspecting American consumers." He further asserted that "the SEC's continued refusal to give regulatory clarity to the crypto community, combined with a haphazard and an apparently sluggish enforcement pace harms not only investors, but also innovation."

Senator Toomey pointed to a recent enforcement action in which the SEC brought insider trading charges against a former employee of a cryptocurrency exchange. The SEC alleged that the employee engaged in insider trading in "securities" with respect to nine digital assets, yet did not assert insider trading cases with respect to 16 other digital assets the employee is alleged to have improperly traded (see related coverage). In the letter, Senator Toomey poses a series of questions to Chair Gensler, most significantly as to the basis on which the SEC decided that nine of the digital assets at issue were "securities," while the other 16 were not. Senator Toomey also charged that, had the SEC made clear that these nine digital assets were securities, the exchange could have adjusted its product offerings accordingly.

Senator Toomey questioned the relevance of applying traditional definitions of a security - whether it passes the Howey or Reves tests - to digital assets. He asked: "How does a decentralized open-source network compromised solely of software code meet the 'common enterprise' and 'efforts of others' prongs of the Howey test?"

Senator Toomey emphasized the need for regulatory clarity to resolve the questions as to the legal status of digital assets. IHe requested answers to the questions raised in the letter by August 9, 2022.