SEC Chair Gensler Declines to Say if Ether Is a Security in Contentious Congressional Hearing

U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler refused to say whether ether ETH$3,125.08, the second-largest cryptocurrency by market cap, was a security during a nearly five-hour hearing Tuesday.

Over the course of the marathon hearing, Gensler fended off questions about whether his agency was pushing too hard on proposed rules, providing too little time for public feedback on these rules, how it was approaching crypto companies hoping to operate in the U.S. and a host of noncrypto questions, including proposed disclosure requirements around climate change and audit trails.

Gensler's appearance before the House Financial Services Committee on Tuesday was his first since the current Congress took over, and indeed his first in over a year.

"Congress must provide clear rules of the road to the digital asset ecosystem because the regulators cannot agree," Committee Chairman Patrick McHenry (R-N.C.) said in his opening statement. "Regulation by enforcement is not sufficient nor sustainable. Your approach is driving innovation overseas and endangering American competitiveness."

His counterpart, ranking member Rep. Maxine Waters (D-Calif.), took a different tone, saying the hearing was focused on Gensler despite more pressing issues, such as the recent bank failures, a housing crisis and the potential debt ceiling default.

"I would also like to applaud Chair Gensler and his staff for the forceful actions the SEC has taken and dedicated more resources to go after crypto criminals," Waters said.

One of the most contentious points in the hearing came early on, when McHenry asked Gensler to say if he thought ether was a security.

"Back in 2018, then-SEC Corporation Finance Director Bill Hinman said he believed ether was not a security," McHenry said. "Last month [Commodity Futures Trading Commission] Chair [Rostin] Behnam expressed his view that ether is a commodity. The State Attorney General of New York asserted in a court filing last month that ether is a security. Clearly an asset cannot be both a commodity and a security. Do you agree?"

"It depends on the facts and the law," Gensler said repeatedly during the line of questioning, refusing to say yes or no.

Joshua Ashley Klayman, head of Fintech and head of Blockchain and Digital Assets at Linklaters, argued after the hearing that this was a positive sign for the industry that Gensler didn't immediately just say ether was a security, or say that "everything other than bitcoin" was a security.

"This was the best we could possibly hope for, and it gives some cover to not just ETH but also other cryptocurrencies," she said.

Regulatory clarity

Gensler's responsiveness – or perceived lack of responsiveness – to congressional inquiries outside of the hearing came up during Tuesday's questioning.

Rep. Bill Huizenga (R-Mich.) asked Gensler if the SEC would provide its internal staff memo recommending an enforcement action against the FTX exchange and its one-time CEO Sam Bankman-Fried.

"You're responding to our FTX request solely with publicly available documents ... you didn't give us anything surrounding the charges filed against Sam Bankman-Fried," Huizenga said.

Gensler said investigative documents are intended to be confidential, with Huizenga responding he would follow up on the matter.

A number of lawmakers questioned Gensler about a perceived lack of regulatory clarity for crypto companies.

Gensler told Rep. Brad Sherman (D-Calif.) that companies needed to "come in and comply and register to protect the investing public."

Rep. Warren Davidson (R-Ohio) and McHenry said the regulator has not provided the clarity needed by the industry to actually do so. Davidson pointed to Gensler's lack of a definitive answer on whether ether is a security as one example.

Congressman Stephen Lynch (D-Fla.) said there is indeed "a fair amount of guidance and clarity," though "it's just not clarity that the crypto industry wants," pointing to the SEC's enforcement actions and recent guidance, and joint statements by various federal regulators.

"My friends on the other side of the aisle seem to be bemoaning a lack of regulatory clarity, and then in the same breath they criticize the SEC's rule-making efforts, which arguably would provide that clarity that they desire," Lynch said.

Read more: Congressional Republicans Criticize SEC Chair Gary Gensler's Crypto Approach Ahead of Hearing