Showdown: Gensler v. McHenry

There may not be any "news" coming out of the House Finance Committee Tuesday morning. But the contentious hearing between Republicans and SEC Chair "Generic" Gary Gensler did not disappoint.

Apr 18, 2023

Editor’s Note: We are making this story free for all as what happens in Congress belongs to everyone. And, who can resist someone who appears unafraid to push back on the SEC and Gary Gensler. Enjoy! As always, if you have news of your own drop us a note at “editors@cefiwire.com”.

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Today’s confrontation between Patrick McHenry and Gary Gensler on Capitol Hill went mostly as expected. McHenry pressed Gensler to say whether Ether is a security. Gensler demurred. Neither gave an inch. Gensler has his own definition of a security. McHenry wants to write a new one for crypto.

The confrontation took place Tuesday morning during an oversight hearing of the Securities and Exchange Commission in front of the House Financial Services Committee, which chaired by McHenry (R-North Carolina).

McHenry noted that Gensler’s SEC has brought more than fifty enforcement actions against digital assets firms, adding that the SEC had failed to clarify how the firms could comply with existing laws. He called that situation “nonsensical.”

“Congress must provide clear rules for the road for the digital assets ecosystem because the regulators can’t agree,” said McHenry. He added that the uncertainty risks driving digital assets and innovation overseas. He also pushed Gensler for creating 53 new rules – twice as many as either of his predecessors over the same time period.

When Gensler finished reading his prepared remarks, McHenry raised the issue that last month the CFTC said it considers Ether as a commodity while New York State’s Attorney General had called it a security in a court filing. McHenry then pushed the SEC chair to tell him whether Ether is a security or a commodity. Gensler repeatedly tapped dance around the question, falling back on citing generic law. The back-and-forth laid out both sides in a nutshell.

McHenry: How would you categorize Ether then?”
Gensler: I think that the general sweep of what Congress did not just in the thirties but as amended …
McHenry: I am asking you, sitting in your chair now, to make an assessment under the laws as they exist is Ether a commodity or a security?
Gensler: Without speaking to any one, it is a matter of facts …
McHenry: I know you have repeatedly said you are not going to speak to one, except that you have spoken to one: Bitcoin. So, I am asking you to speak to a second one. The second largest market cap here.
Gensler: And speaking to the tokens, there is 10-12,000 thousand. If there is a group of entrepreneurs involved with the public …
McHenry: I am asking about one …
Gensler: … is a anticipating a profit based on the
McHenry: I am asking you a specific question Chair Gensler. I said this in private … this should be no shock to you I am asking this question … is Ether a commodity or a security?
Gensler: … and again it depends on the facts and the law and if there is a group of individuals …
McHenry: I am asking you about the facts and the law sitting in your seat and the judgement you are making.
Gensler: And so, Mr. Chair, you would not want me to prejudge because I am also …
McHenry: But you have prejudged on this. You have taken fifty enforcement actions. We are finding out as we go, as you file suit, as people get Wells notices on what is a security in your view, in your agency’s view. I am asking you a very simple question about the second largest digital asset: What is your view?
Gensler: And my view is that if there is a group of individuals in the middle, that the public is anticipating a profit based on those efforts …
McHenry: Alright, so let me just ask a second question. Do you think it serves the market for an object to be viewed by the commodities regulator as a commodity and from the securities regulator to be viewed as a security? Do you think that provides safety and soundness for the product? Do you think it provides consumer protection? Do you think it serves the value of innovation? I think “no” should be a very simple answer for you here. That uncertainty is bad, is it not?
Gensler: And I think that Congress has said that there is one agency, the Securities and Exchange Commission, under this committee…
McHenry: And you won’t answer my question and you are the head of that agency. So, give me a break. C’mon.
Gensler: I am answering it in the generic because you would not want me to speak about any one set of facts and circumstance …
McHenry: O.K. But you have already spoken. Have you said anything about Bitcoin?
Gensler: My predecessors and the agency itself have spoken to that case.
McHenry: But you are not willing to do the same about Ether?
Gensler: I think …
McHenry: O.K. Let me just step back. There is a lack of clarity here in the marketplace. Can you at least agree to that?
Gensler: I think that the clarity is there. The law is clear that if there is a group of individuals …
McHenry: Alright, let me be explicit about this. The market doesn’t see it. Your regulatory actions and the CFTC’s regulatory actions say that there is a great deal of uncertainty here. It is the intention of this committee to fix that uncertainty and actually provide sound legal basis for this.

In follow-up, Rep. Maxine Waters (D-California) asked Gensler to provide the definition of a security as it applies to crypto.

Gensler said that Congress has defined a security with more than 30 terms, but that it is an investment contract. He added that Supreme Court rulings and about 130 past actions taken by the SEC have provided a definition in his view.

“Basically, if the public is putting their hard-earned funds with an entrepreneur or promotor and anticipating a profit there is a four-part test … is there a group of entrepreneurs in the middle that are working on that project? Promoting that project? Have a website that the public looks to? Do they have Twitter accounts and handles? Do they upgrade the software and is the public sort of reading about them anticipating a profit … and in fact is there somebody that’s even visiting you and they are hiring lawyers and sending them in to talk to us? …Is there something there that the public is anticipating a profit based upon those efforts?”, he said.

Waters followed up by asking Gensler if he had the rules and authority he needs to oversee the crypto market.

“Yes, I do believe that we have the authorities we need and the laws to protect investors,” said Gensler. He later added that he has been around finance for forty years and has never seen a “field that is so non-compliant” as the crypto field.

Asked by Waters if he needs more resources, Gensler said that “We could use more resources, but I do think we have the authorities.”

Gensler also warned Congress not to undermine the nation’s $100 trillion of capital markets when it writes stablecoin legislation.

“Do not undermine $100 trillion capital markets, money market funds or the ability of the SEC to go after fraud and market manipulation,” he said.

While McHenry has control of legislation written in the House, the Senate is evenly divided and President Joe Biden would have to sign any legislation. In short, this standoff may continue for another couple of years.

Sources: Gensler Prepared Remarks