In a letter to SEC Chair Gary Gensler, Senate Banking Committee Ranking Member Pat Toomey (R-Pa) slammed a “continued unwillingness by the SEC to give regulatory clarity to the cryptocurrency community and consumers.” According to Toomey, a “regulation-by-enforcement” approach by the SEC has contributed to financial losses for American consumers.
Pointing to the recent failure of several companies providing cryptocurrency lending services, including the collapse of Celsius LLC, Toomey said “things could have been different” if the SEC had provided regulatory clarity.
“Had the SEC responded to calls for clarity on how it would apply existing securities laws to novel digital assets and services, things could have been different,” said Toomey. “Companies could have adjusted product offerings accordingly, preventing investor losses today, and the SEC would have been free to focus enforcement efforts on the worst actors.”
Recent crypto collapses. Several cryptocurrency lending and trading platforms have filed for bankruptcy in the past month. Celsius LLC, a crypto lending platform that according to its CFO had over $10 billion in assets as of June 8, halted withdrawals, swaps, and transfers on June 12. The company then announced on July 13 it had filed for bankruptcy. The collapse follows similar failures by the Vauld and Voyager platforms.
Lack of regulatory clarity? Toomey said the failed crypto lending companies were “arguably within the SEC’s purview” and suggested that consumer losses could have been prevented if the SEC had been clearer about how the federal securities laws applied.
For example, the SEC could have clarified how the Howey and Reves tests applied to crypto lending platform products that paid interest to customers making crypto deposits, said Toomey. He added that the SEC concluded several months ago that BlockFi, another crypto lending company, offered a similar product that fell under the Howey test. In February the SEC announced that BlockFi had agreed to pay $100 million in penalties for failing to register offers and sales of its retail crypto lending product.
Toomey also noted the SEC recently brought insider trading charges against a former employee of the Coinbase cryptocurrency exchange and two other persons, alleging they illegally traded nine digital asset securities.
“In this circumstance and elsewhere, the SEC ostensibly had a clear opinion on why it thinks these digital assets are securities, yet it did not disclose that view publicly before launching an enforcement action,” said Toomey.
Harm to consumers? According to Toomey, regulatory uncertainty and a “haphazard and an apparently sluggish enforcement pace” makes it hard for companies to comply with SEC regulations and harms investors. Toomey stated that press reports in January indicated the SEC was investigating whether Celsius and Voyager were complying with securities laws, yet the SEC failed to act before the companies went bankrupt. Celsius customer funds have been frozen since mid-June, leaving in question the status of billions of dollars’ worth of deposits, said Toomey.
Toomey raised his consumer protection concerns one day after introducing a bill to carve out a tax exemption for personal crypto transactions under $50. The bill would ease adoption of digital currencies, which Toomey said “have the potential to become an ordinary part of Americans’ everyday lives.”
Questions for the SEC. Toomey ended with eight questions for the SEC:
- Are there other major crypto lending companies besides BlockFi that have not registered their services with the SEC? If so, please identify them.
- After the SEC determined that BlockFi’s lending product was a security, did the SEC determine whether any other companies, including Celsius and Voyager, were offering similar services that the SEC believed were securities? a. If so, for what companies did the SEC make those determinations and on what date were those determinations made?
- What material differences has the SEC identified between BlockFi and other crypto lending companies?
- Did Celsius, Voyager, BlockFi, or any similar crypto lending company ever ask the SEC for guidance as to whether their crypto lending services were securities? If so, when were those inquiries first made and what did the SEC say in response?
- Did the SEC determine whether to pursue an enforcement action against Celsius or Voyager? If so, when did the SEC make those determinations?
- The SEC’s insider trading charges against a former Coinbase employee and two other persons allege that they illegally traded nine digital asset securities, yet the U.S. Department of Justice’s criminal charges against those defendants claim they made illegal trades in at least 25 digital assets. What distinguishable features do these nine digital assets have that the SEC determined were securities, compared to the other 16 digital assets the SEC did not include in its charges? a. What guidance does the SEC plan to provide for these 16 digital assets?
- In the absence of a commitment by the issuer of a digital asset to provide an investor a specific return or a claim against the issuer, how would an investor have a sufficiently well-founded expectation of profits to pass Howey’s “expectation of profits” and “investment in a common enterprise” prongs?
- How does a decentralized open-source network compromised [sic] solely of software code meet the “common enterprise” and “efforts of others” prongs of the Howey test?