SEC Chair Gensler: No Carve-Outs or Safe Harbors for Tokens

Calls from entrepreneurs, legislators and founders for more clarity and guidance from the SEC have fallen on deaf ears. “Regulation by enforcement” is the order of the day, according to the SEC chairman.

The crypto industry does not need any specific rulemaking for projects issuing tokens, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler said in a speech Thursday.

Framing the issue as one of investor protection, Gensler said the rules and regulations that crypto issuers and service providers must abide by have been clear for years.

“Nothing about the crypto markets is incompatible with the securities laws,” Gensler said in his prepared remarks to the Practicing Law Institute. "Investor protection is just as relevant, regardless of underlying technologies.”

His remarks are perhaps the clearest indication yet that the SEC intends to continue applying existing rules and regulations to the crypto industry, contrary to investors' and entrepreneurs' hopes that the agency will create some sort of carve-out that will let startups issue tokens without having to register as a securities platform.

Gensler also reiterated his view that “most crypto tokens are investment contracts” in his speech, and pointed to past SEC publications such as the DAO report and the Munchee order as guides that developers and entrepreneurs can and should follow.

“Some in the crypto industry have called for greater ‘guidance’ with respect to crypto tokens. For the past five years, though, the commission has spoken with a pretty clear voice here,” Gensler said. “Chairman [Jay] Clayton often spoke to the applicability of the securities laws in the crypto space.”

Whether intentional or not, Gensler’s refusal to learn how the crypto space operates and regulate accordingly is going to kill innovation. His refusal to consider a carve-out for crypto developers like the one proposed by his predecessor Hester Pierce leaves the industry vulnerable when raising funds through tokens.

In 2021, Pierce proposed the Token Safe Harbor Proposal 2.0 that would create a three-year safe harbor period in which developers would be allowed to distribute tokens to facilitate the development of a decentralized network, exempt from the registration requirements of the federal securities laws. This exemption was predicated on developers meeting certain conditions. It calls for a mandatory exit evaluation at the end of the safe harbor period by outside counsel, who would analyze the network and determine if the network is decentralized or functional. Those products that are deemed neither would be designated a security and the developer would need to register it as one.

This is the kind of thing the SEC should pursue to ensure necessary regulation while leaving tech innovators free from the burden of red tape they aren’t suited to handle.