SEC v Crypto, The Checkmate
“As to the people and the companies that you regulate as chairman of the SEC, do you consider yourself to be their daddy?” – asks Senator John Kennedy. “No, no,” says Gary Gensler, chair of the Securities and Exchanges Commission (SEC). “Then why do you act like it?” – retorts Kennedy.
Gensler’s first testimony to the Senate financial committee may well be summarized by this exchange with it made most clear on the matter of stable coins.
Asked directly by Senator Pat Toomey whether stablecoins are a security, Gensler said “they may be.” Toomey pushed back to say the Howey test for what is a security has the requirement of expectations for gain, there is obviously no such expectation when it comes to something like USDc.
Gensler said there’s the Reves case, referring to Reves v. Ernst & Young from a 1990 Supreme Court decision. The case concerned short term demand notes which carried fixed interest rates and were to be used to fund operations. “The notes were more in the nature of commercial loans than investment in capital,” the circuit court found.
The Supreme Court disagreed, stating the Securities Act listed a number of instruments as securities, including notes, so in effect overturning an understanding in the lower courts that the Howey test was what defines a security, Reves so limiting Howey to just ‘investment contracts.’ The Supreme Court said:
“Howey provides a mechanism for determining whether an instrument is an “investment contract.” The demand notes here may well not be “investment contracts,” but that does not mean they are not “notes.”
To hold that a “note” is not a “security” unless it meets a test designed for an entirely different variety of instrument “would make the Acts’ enumeration of many types of instruments superfluous,” and would be inconsistent with Congress’ intent to regulate the entire body of instruments sold as investments.”
Gensler translated this in his testimony as Congress intended a broad brush interpretation of securities back in 1934 when it passed the law. However there’s obviously a big difference between a demand note and a stablecoin. Stablecoins are tokenized actual dollars, they are not effectively corporate bonds that pay interest to the public for the public lending the company money to fund its operations.
As tokenized dollars, a stablecoin is backed 1:1 with fiat dollars, or its equivalent. There is no capital formation. There is no expectation of gains in buying the USDc itself, unlike in Reves where the Supreme Court said:
“The notes were sold in an effort to raise capital for general business operations and were purchased by investors in order to earn a profit.”
That’s obviously a crucial difference, and therefore any lawyer or court would find Gensler’s re-interpretation of this case as highly unreasonable. Something Gensler himself all but admits.
Asked by Senator Cynthia Lummis regarding remarks at the Aspen Security Forum where Gensler said Congressional authority was needed to cover some cracks in regards to what authority did he need exactly, Gensler said it was more about the relationship between the different agencies, specifically in regards to stablecoins whether it’s the jurisdiction of OCC or banking regulators or is it SEC.
That’s an incredible admission of effectively an abuse of power because Gensler is saying stablecoins ‘may be’ securities while also stating that Congress has to clarify whether they come more within banking regulations, and thus are not securities.
This ‘may be’ in the testimony has been translated to ‘is’ in SEC’s operations, with Coinbase recently revealing they were told by the Securities and Exchanges Commission that stablecoins are securities and if they facilitate interest on USDc deposits, like savings accounts have interest, they will be sued by the SEC.
This reveals something very fundamental to this generation that will likely have ramifications for decades to come as the generational transition of power continues.
The Buttcoiner v Cryptopunks
As someone straight from Goldman Sachs to the halls of power for some four decades, this may well be not the first time that Gensler has gotten away with an abuse of power, and as such he may well have become so used to it that he is forgetting an entire new generation is for the first time being introduced to how we are governed.
There are an estimated at least 200 million cryptonians globally, many of them in USA, and demographically most are likely of the smarter, more influential type.
They are learning that this unelected ‘daddy’ of the $100 trillion capitals market not only can abuse his power by taking action in the market on utterly unreasonable ‘may be-s’ that are contradicted by his own statements to ‘nots,’ but that there is also nothing anyone can do about it, including the Senate or Congress or the courts without the damage first being done and continue to be done for potentially years until some company is willing to go to court or Congress itself finds the time to take action.
On the latter, the Securities and Exchanges Commission has snubbed Congress by failing to deliver two reports on facilitating capital formation as a law passed by Congress demanded, with them being long overdue.
Gensler provided no explanation for this failure to follow the will of the elected, which in this case was clearly stated rather than interpreted as he pleases.
Instead he found it fit to say that “it doesn’t sound” like cryptos are the path to financial inclusion, with that obviously revealing his bias.
He likes to mention that he taught blockchain at MIT, with that position presumably gained through some backroom deal of sorts as he is obviously not a coder and not a blockchain expert, so being more a rich bureaucrat, yet got to teach a field he most likely only superficially knows at a most prestigious institution.
Presumably so that he could get this position at SEC, in effect fake it until you make it, with that shallow knowledge so seemingly leading to him being more a buttcoiner than a bitcoiner.
That’s fine in some ways as everyone is entitled to his opinion, and everyone must have one, but the extension of such opinion to policy making by outright abusing ones position of trust in an unelected government function through gaming the checks and balances by knowing they would take forever to kick in, must have political ramifications and cultural ramifications.
The Rise of Liberalism?
Under the guise of a fake war that history will call an occupation, the United States has passed certain emergency legislations that have given the government emergency powers.
Two decades on, those coming out of university might not even know this, with the march of government authoritarianism continuing seemingly unabated as under the guise of another fake war, now against the air itself, they’ve passed new emergency powers so that we all forget about the previous emergency ones.
Those previous emergency powers include in some circumstances the exercise of executive power even over the media itself, known as B-notice in UK previously used about movements of troops but under the darkness of the ‘war’ on ‘terror’ expanded gradually.
The state of war and the state of peace are fundamentally different in substance and form. Though Americans mayhave not felt the war directly, the country was at war and now is in a new ‘war,’ which means the accountability of the government to the public has eroded.
Gensler knows perfectly well what he is doing. Now we do too because he has revealed, while others at least pretended the emperor was dressed, that the government thinks it has absolute power.
As students throughout these two decades of war we all have probably read something like the above many times, and about all the other problems. Now is the time to solve them.
That can be done two ways. Either by ignoring politics knowing it is wrestling with pigs, or by ignoring this inclination by appealing to one’s duty to engage politics, whatever the cost, because otherwise you’re at the other end of the abuse of power.
Better the third way which has two legs. First, engaging politics is not optional, at least not until we have a state of peace without emergency powers and we have a restoration of functioning checks and balances.
The Senate testimony revealed for the first time that the Democrats were almost collectively biased against crypto, while Republicans were in favor.
This division may appear surprising at first, showing that somewhat slowly but now quite suddenly the criticism in the 2000s that there’s no difference between them all has now become they’re the polar opposites in everything.
The center seems to have been lost and that’s perhaps because liberalism has almost been killed by two decades of war.
Yet neither nationalists nor communists like crypto because they both like authoritarianism, total control. Although there’s many fine Senators in the Republican party, if nationalist Trump runs again then there is no Republican party, but a nationalist party.
On the other hand, Biden wants to pass a new bill that will raise taxes by $3 trillion. That’s effectively doubling taxes, with the government currently receiving about $3 trillion a year in all taxes.
This 100% increase in the government’s power over the economy at the expense of the free market is a sudden jump with unknown consequences towards the road to communism.
In the mid-term therefore we’ll see what the judgment of the American people is, but they are denied the option of a party that is both socially liberal and economically liberal. What’s worse, in the Presidential election, they may be chained to only the option of a nationalist Trump or a communist Biden.
If one looked ahead two decades ago, they would say the unthinkable has happened, and they would say precisely what they thought would happen has happened. The march to war in short has regressed liberty, with no left or right party any longer but two authoritarian parties that do not quite have competition.
The task from the political angle therefore is to provide such competition. This can be done either by coopting one party to campaign on a clear message of limiting government power both over the market and over the people as it has clearly gone way too far, or through some meme power disrupting the two party system to put in front what obviously must be called the liberal party with a manifesto based on classic liberalism.
On the first, the Republican party is at a crossroads of sorts. Trump, whose task was to end the war on the gamble all else would be limited by those checks and balances, has completed his task but while leaving a somewhat confused Republican party that in some ways does not quite know what it stands for in grand vision.
This chocking hand over the party has seemingly sedated the base which otherwise would have been outraged at this unthinkable expansion of government power by doubling the tax intake overnight.
Someone in that party has to rise to put the economy first as that is in everyone’s mind, not petty culture ‘wars,’ and so campaign for the government to get its hands off the market which in many ways they have already chained.
The more difficult option would be to launch a new party in the image of millennials. This can succeed, though what a mountain to climb, especially if Trump goes for re-election as he is unfathomable to independents now and thus plenty of good men and women may well defect to the liberal party.
The two party system is brutal as well all know, but not too difficult to overcome when the time is right, and the time may well be right to give the people the option to effectively reject the two party system as they have gone too far to the extremes to the point the government now is unelected bureaucrats where it really matters, rather than the elected.
To do so first of all crypto needs a think tank, or the courting of an established one. Then which option to take is the decision of those far more informed and with far more resources, but the main point is that all political means have to be utilized fully and not necessarily to win, but to at least hold the line.
The Real Politics
To hold the line is necessary so as to give cover to the political battlefronts that actually matter and where change is not only possible, but unfolding at speed.
After much debate, often one way, it now appears somewhat clear what the lines are. The government wants control over any and all cryptos with the intention that any and all cryptos fall within government directions.
The free market thus is an anathema to them. Cryptos must do what the government says. Now which part of the government is less relevant than some part of the government does so order.
The only thing unclear in SEC’s, and presumably Biden’s mind, thus is whether it or another regulator should have say. That one of them should is to them out of the question.
Thus although SEC knows perfectly well stablecoins are not a security, they think stablecoins most probably fall under the jurisdiction of some other regulator, and since they’re both regulators SEC may as well subvert the law and abuse its power, for the greater good, while waiting for whatever other regulator to gain legitimate oversight.
Arguing with SEC thus is pointless when it comes to real politics, as engaging all political means is obviously necessary, because they think everything has to be controlled by the government. That’s what two decades of war and sleepingly walking into authoritarianism wakes you up to.
There is however one exception, and not because SEC wants to give it, but because SEC and the government has no choice.
By the letter of the law, bitcoin is illegal because no one may issue a currency except the Federal Reserve Banks. This monopolistic claim on monetary power, however, is unenforcable because bitcoin does not have someone or some group you can arrest and so shut it all down.
Bitcoin thus is legal, even by the letter of law, with it now a commodity, with CFTC having oversight but only over bitcoin derivatives like futures.
Thus the government wants control only over what it can control, and over what it can control it will enforce itself, but it will not effectively try to chase windmills by going after what it can’t control.
That means there is only one test, and it is not a Howey test or a Reves test, but this test:
“Is the project so decentralized that you can not arrest or fine an individual or a group controlling the project to shut it down?”
If that test fails, then someone within the government wants to have a say. If it doesn’t, then it is a commodity which means you don’t need permission from the government.
Asked by Senator Elizabeth Warren, who wanted to play on the pioneering frontlines of decentralized finance (defi) with $100, whether she had to pay a fee to a decentralized exchange, Gensler said it depends on what it says in the user agreement.
Many of these projects are “decentralized in name only, there is a user agreement,” he said, hence his new moniker of buttcoiner.
He is not too wrong however for some projects. Solana for example had some problems and the blockchain was frozen, but some level of centralization at the beginning is a risk mitigation method to protect investors.
A smart contract may have bugs that can lead to hundreds of millions in losses as the DAO taught us, yet usage and time may prove there aren’t. Gradually therefore the project becomes more and more decentralized until no one controls it.
SEC has accepted as much, saying a token or crypto can start off as a security, but then reaches a certain level of decentralization where it is no longer a security.
Thus the only way to protect investors for a project that plans to be decentralized is to start off with anonymous developers, which itself can have investor protection problems, and then openly reveal once the project does become decentralized.
Another way is to spend countless of time and resources to get through all of SEC’s permission slips, and then once you’re finally out of SEC’s jurisdiction see your project forked into a thousand pieces because at that point anyone forking your project would not be under SEC’s jurisdiction as it is decentralized.
This goes directly against SEC’s mandate to facilitate capital formation without achieving its aim of protecting investors because devs in Europe or other places won’t have such high upfront costs, and anon devs won’t either, while those that submit to SEC may well get forked off because the act of submission itself means by definition the project is not decentralized.
Alternatively devs can risk launching a fully decentralized project upfront, or better still, they can fork from get go a project that has gone through SEC time and costs and launch it after removing all the centralized aspects.
This and many other wholistic considerations is one reason why this abuse of power is insidious, and why we legitimately give such power to the elected to consider all the issues in debate and under the judgment of voters.
Because while it is easy for SEC to say they want more money after grabbing jurisdiction without debate or a vote as Gensler will leave in a couple of years with a fat paycheck, it is not easy for the public to see the consequences of labour not being rewarded or acknowledged thanks to a bureaucrat’s impressions that nuances don’t matter.
They don’t matter to him, but something like Uniswap for example is ‘centralized’ in as far as someone coded it and who coded it is known with the project also able to have say over the interface, but it is provably decentralized because it can be forked and has been forked and the interface can be put on IPFS.
SEC therefore could ask Uniswap Labs to be subject to all sorts of requirements, but Uniswap can either put the interface on IPFS or someone can fork it and do so, with the result being they’re outside SEC’s jurisdiction ad initio.
This is what is meant by picking winners and losers, and this lack of consideration of nuances is what is meant by the criticism that SEC has provided no clarity. Gensler says they’re fully clear and now from a real politics angle one can understand what he means in regards to gov wants control over anything it can control, but from a political angle he is not clear himself just which agency has jurisdiction or how SEC applies its jurisdiction exactly in complex areas like just what is decentralized.
If we take the example of this user agreement, if a project is fully decentralized but in its interface wants people to accept such agreement perhaps to limit forking, does that make the project centralized?
These questions obviously are for Congress to consider and debate, and not unelected bureaucrats to impose. But SEC is obviously and very openly abusing its power, so coders in this space have no choice but to go the Nakamoto way.
That means if your project is not decentralized and you are in US, you might have to register with SEC. If it is largely decentralized but you want to start off with some training wheels to mitigate any potential bugs, either go to Europe for a few years and launch from there or go Nakamoto style. If it is decentralized from get go, then there’s no one upon which SEC can enforce anything and therefore you can openly launch it.
Most of the crypto space therefore does not have to worry about SEC at all as whatever Gensler may say, they do not have de facto authority or jurisdiction upon most of this space.
SEC thus can and perhaps should be ignored, and while they say come talk to us, it is far better to ask for forgiveness than permission because this is a power hungry regulator that is unreasonably interpreting cases in an open abuse of their position of trust.
Coders and entrepreneurs should just keep launching projects without fear, and if SEC reaches out to them they should perhaps completely ignore SEC because this regulator is playing dirty, and therefore should not be aided or in any way responded in their enquiries or investigations or whatever else.
SEC should instead launch a class action lawsuit so that the judiciary interprets the law not SEC, and in the absence of it, this space should shut the door to this regulator that aims to enforce the discriminatory law on investment prohibitions that imposes one law for the rich and another for the rest.
If he wants to so openly breach all constitutional considerations of checks and balances, then this space should claim its jurisdictional freedom through the right and power of decentralization to close this one way debate and so finally give them our answer.
Cryptos are its own jurisdiction, ruled by the law of open source code, governed by the people through decentralization. This space therefore can no longer hear you for you have shown yourself to act in bad faith.
This space also doesn’t need you. It does not need your abuse of power, or the corruption of your boss, with both you and your boss so replaced by the code we can all read and write.
Your job, we have automated. Your investor protections, your disclosure requirements, your regulations to minimize abuse of trust, are now codified in an unmanipulatable way with 24/7 disclosure, with a trust machine, and with full transparency for any and all investors that care to read code.
You’re obsolete therefore, as is your nearly century old discriminatory law. Even your ETF is obsolete as anyone can buy crypto without needing to go through old brokers. We can mine it, we can yield it, we can launch it, and there is nothing whatever you can do about it as code is law.
Shame though your honeymoon crashed as quickly as that of Biden, but at least you’re right. We do finally have clarity. This space thus can no longer work with SEC, this regulator should be shunned and not responded to or engaged in anyway except through courts, and coders as well as entrepreneurs and users should heed the new incentive to launch and use decentralized open source platforms as that is the way to freedom.
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