Regulation,  United States

Is Gary Gensler’s Bark Worse Than His Bite?

Chairman seeks greater authority, but Americans—and a Connecticut jury—aren’t convinced

SEC Chairman Gary Gensler thinks investors needs more protection when it comes to Crypto, telling a key Senate committee recently that when it comes to financing, issuing, lending or trading Crypto, more is better when it comes to Crypto regulation.

Following his testimony, Gensler characterized U.S. securities laws in a way that brings to mind the wide nets that industrial fishing trawlers use to snare vast numbers of tuna on the open seas.

And if you happen to be pondering a foray into the staking arena be warned, he said, because lending products are likely to fall under the purview of the Twin Towers of SEC authority:  The 1933 Securities Act and the 1934 Securities Exchange Act.

“Not So Fast,” however, said a federal jury sitting in the District of Connecticut on November 1, when it decided that various digital assets, including coins, wallets used for staking, and interest in crypto mining profits issued by GAW Miners LLC were not securities, and thus not subject to the SEC’s regulatory clutches. [Citation: Audet v. Fraser, 16-cv-00940 (Dist. Conn.)]

GAW Miners sold equity in Crypto mining profits, in the form of “Hashlets” which could also be converted into a proprietary cryptocurrency called Paycoin.  Paycoin holders had the option to stake their Paycoin for 30, 90 or 180-day terms in a wallet to generate fixed returns.

The jury found that none of GAW Miners’ activities, including selling the equity interests in crypto mining profits, were securities under the Supreme Court’s Howey test, no doubt giving hope to untold legions of coin issuers, staking project engineers and NFT minters everywhere that their venture won’t be caught in the SEC’s crosshairs any time soon.  Until the next jury of their peers decides otherwise, that is.

The unexpected result in Connecticut Federal District Court may embolden crypto entrepreneurs to stand and fight when the SEC comes calling, which could lead to more juries being asked to decide similar issues affecting how far the long arm of the SEC truly reaches.

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Andrew D. Beresin is a practicing securities attorney and former hedge fund trader. He advises Wall Street firms on regulatory matters and provides expert services on exchange-listed trading. Beresin is a former federal district court judicial clerk and a graduate of Harvard Law School.