This week’s oversight of the SEC meeting went off as scheduled on Sept 24th at 10 am EST. The meeting included a bipartisan group of representatives and all 5 SEC commissioners. This open forum discussion was not an official meeting because the debate didn’t represent official SEC plans for the future. Rather, it was set up to give representatives and the public a glimpse into the SEC’s recent actions and considerations. Here is what you need to know.
Digital Assets Take Center Stage at SEC Oversight Meeting
The commission covered many topics, but digital assets were revisited time and again. The commission was questioned regarding various digital assets, the market, its structure, consumer protections, and future influence. This is how the SEC responded to the inquiries and what it could mean for the market in the future.
Digital Asset Terminology
Digital asset terminology was a topic of focus for the commission and representatives. Representative McHenry questioned why the committee used different terms and if that was on purpose. The commission responded that the terminology was purposely ambiguous in an attempt to cover the legal ambiguity provided by lawmakers. The commission then stated that regardless of the terminology used, the Howie test would ultimately determine if a token fell under securities regulations.
Source – YouTube
Pierce responded to the question by stating that the committee had shifted its views from its previous stance, which was that tokens were securities alone without regard for whether they were coupled with investment contracts. Previously, the SEC had made statements that stated that all tokens were securities. However, Pierce explained that the SEC didn’t consider the tokens themselves as securities currently unless they were part of a larger investment scheme that failed the Howie test.
The term “crypto asset security” was brought up specifically. This term was created by the SEC and has many confused as it has no previous representation, leading some representatives to accuse the commission of using the language to purposely confuse people.
The commission also described how they were putting forth a disproportionate amount of time surrounding digital assets due to this ambiguity and terminology. Lastly, they were careful to state that they would follow any guidelines that lawmakers put forth but stopped short of asking lawmakers for a statutory definition.
Cryptocurrencies
Many points were made on both sides of the discussion regarding cryptocurrencies. In one instance, a representative spoke on the importance of not tying the technology down with bureaucracy. They also spoke on how these extra steps stifle innovation and add extra costs to new investors while the technology is still attempting to build a local base.
Representative Sherman discusses how the SEC must protect investors. He stated that capitalism is built on the premise that those with the capital get to make the decisions. The commission also discussed how the topic of digital assets has been on the table for over a decade.
There were also some talks on a legal framework for cryptocurrency moving forward and the role of the SEC in the digital economy. To this point, several projects that achieved approval were discussed before the commission explained that it felt confused about its role in the market as well.
Representatives spoke on how the SEC’s approach could be seen by many as overreaching. They asked commissioners why the SEC would attempt to regulate the secondary market when competing countries that are ahead of the US markets don’t require it. Many explained that this maneuver would cause the US to fall behind in the deployment of this game-changing financial tech.
In one heated debate, Representative Mr. Emmer discussed the SEC’s past anti-crypto behavior. He pointed to the “debt box case” in which the SEC lost and had to pay $2M for misrepresentation. He then went on to discuss how this behavior was negative, but no one lost their job or retired from it.
SEC on Stablecoins
Stablecoins also made the commission’s list of important topics. Ms. Water specifically asked the commission about their thoughts on stablecoins and if they were able to get legislation passed by the end of the year. She explained that she has worked since 2022 to provide some form of legal framework for this digital asset class. These protections would include regulated and secured backing for reserves, KYC compliance, and additional registration of stablecoin providers, among a long list of other requirements.
SEC on Tokenization
Tokenization came up in the meeting as well. A representative asked about tokenization and pointed out the major firms using the tech to improve efficiency. She then asked if the savings they enjoyed were passed on to investors. The commission responded by saying that the ledger the investment was held on doesn’t add any value to the investment and that each person needs to review the investment based on merit as “putting something on ledger doesn’t change the economics.”
SEC on Market Structure
Representative Lynch brought up an interesting point regarding the crypto spaces stack. He described how in traditional finance it would be illegal for the NYSE to also act as a broker or issue stocks. However, in the crypto market, this type of behavior is common. He pointed out that this stack leaves the door open for fraud and suggested that some legislation should be in place to prevent this risk.
Fraud is Fraud
The commission was also questioned on celebrities and social media’s influence on the market. They explained that celebrities must state when they are getting paid and by who in traditional securities, but not when dealing with crypto projects. Representatives pointed to celebrities promoting crypto projects without disclosure. Many of these projects resulted in investors losing funds in pump-and-dump schemes.
In response, the common respondent responded that “fraud is fraud” no matter what platform and it’s their job to protect consumers. Gensler agreed that more protections could be implemented in this instance and that it would make sense to have requirements that mirror the current securities obligations and disclosures.
Keeping the US competitive in the Cryptomarket
There was a moment when the discussion of the US’s role in the market was brought up. The representatives explained that, for the first time in recent history, the US is not the technological leader. There was expressed concern that if the US didn’t dominate the tech, it could also give up some security. Specifically, the commission was asked about using Chinese investment firms and how their data was saved. The commission responded that as long as the guidelines are met, any nation’s company can participate.
Robin Hood / Gamestop Debacle – SEC Response
Interestingly, Ms Waters brought up the Robin Hood Gamestop fiasco. This scenario occurred when an online group of traders outsmarted hedge funds that were naked short-selling stocks. This term refers to borrowing money to short stocks. For expert traders, it provides added exposure and ROI opportunities alongside higher risk. In this instance, Gamestop traders figured out hedge funds were over-extended and had to fulfill their short sale orders. As such, they began buying up the stock.
At first, the investors made lots of money before the trading apps, such as Robinhood, froze their actions. Later research revealed that the freeze was done to protect the hedge funds that were partners with the platform. Speaking on what has been done since then, the commission explained that it introduced several pieces of legislation to prevent this occurrence in the future. The new rules deal with the clearing house relationship and closing cycle, speeding it up by a day. Specifically, securities sold on Monday get paid on Tuesday 24 hours faster than the previous method.
Crypto Influence on SEC’s future
There was a discussion regarding cryptocurrencies’ growing influence among lawmakers and regulators. A representative asked the commission if there were any guidelines for SEC officials taking jobs at crypto markets after they had left their positions. In his exaggerated example, he stated that a firm could offer an ex-chairman a $50M a year job to help influence future decisions. He proposed some pay limits and other transparency methods to prevent this issue.
SEC Bad Response to Crypto Firms
Another interesting debate occurred when the commissioners were questioned on their delayed and often non-responsive behavior when dealing with crypto firms. Specifically, Coinbase, the largest exchange in North America, was used as an example. Coinbase has attempted to register with the SEC +30x and submitted multiple petitions for clarity. All of which were ignored.
AI in Financial Markets
Artificial intelligence was another interesting topic. There was a discussion on how these algorithms could one day become the premier decision-maker for markets. In response, Gensler pointed out that there are currently 3 large cloud providers that dominate the market. He noted they are also major players in the AI markets. He went on to describe how 75% of banks use 2 of the 3 cloud providers. As such, they will be heavily reliant on AI assistance moving forward, increasing the risk of an AI financial implosion.
Climate-Related SEC Issues
Climate taxing and credits were discussed. Representatives asked for standardized climate disclosures to help ensure uniformity and fairness across the market. They asked the commissions to not allow ecoactivists to drive them to pursue companies that are following the guidelines.
Spoke on SEC Accomplishments
The group spoke to the sheer volume of complaints they get yearly. They described how the US has the deepest liquidity and outpaces global markets continuously. They also shared some interesting statistics. For one, 58% of US citizens own stock directly or indirectly.
There was also discussion on why some of the best investments are only available to accredited investors. Accredited investors or traders that can show at minimum $1m in liquid assets. Sadly, the average person is far from achieving this goal, which means they are left out of the most lucrative opportunities.
One commission responded by saying that he agreed that this restriction was not right. He explained that the portfolio he currently has is much different than what the average person would ever be able to acquire due to his accredited status. In the future, the SEC will work to help open the door for more investment opportunities according to the commission.
Should the SEC Regulate Cryptocurrencies
The main point to take away from this meeting is that the SEC would like to regulate cryptocurrencies but many prefer they don’t. Currently, their position in the crypto space is purposely vague, allowing for further innovation without resending the ability to implement laws when needed. This approach has been successful in fostering innovation but falls behind pro-crypto legislation, which is necessary to become a global leader in the sector.
What to Expect Next from the SEC
There has been some definitive growth in terms of the ECS understanding of digital assets, however, they still have fallen short of the technology’s purpose. There were many statements made by representatives during the meeting that demonstrated a lack of knowledge regarding the technology’s capabilities. As such, it’s obvious there is still a lot of learning to be had on both sides of the discussion.
For now, the crypto market is in full swing and investor interest is at an all-time high. Consequently, it’s more important than ever for the market to gain some legal framework to promote startups and adoption. As such, the SEC and lawmakers need to determine their role and approach moving forward to provide investors with confidence and ensure startups have access to the tools and capital they need to succeed.
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