Rep. Torres: SEC invented ‘crypto asset security’ out of thin air

Lawmakers from both sides of the aisle on Wednesday expressed frustration with the US Securities and Exchange Commission’s current approach to digital assets.

The House Financial Services Committee Digital Assets Subcommittee on Financial Technology and Inclusion convened Wednesday to discuss how crypto market participants are navigating the current regulatory landscape — and what additional clarity is needed.

The hearing, entitled “Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets,” featured legal experts and market participants as witnesses, including Robinhood Markets Chief Legal Officer Dan Gallagher and Teddy Fusaro, the president of Bitwise Asset Management.

Committee members were largely interested in discussing how the SEC defines “crypto asset securities,” a term that the agency made up, one Democratic representative claims.

“Did the SEC invent the term out of thin air?” Rep. Ritchie Torres, D-N.Y., asked, somewhat rhetorically, when questioning Gallagher.

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Robinhood, Gallagher said, attempted to follow SEC Chair Gary Gensler’s instructions to “come in and register,” but found that the current structure for the special purpose broker dealer license the exchange sought was incompatible with digital assets.

“We recommended modifications that would make it work, and we were submitting to full regulation by the Commission,” Gallagher testified on Wednesday. “It was a fruitful process. It was very cordial with the SEC staff until about early 2023, when we got a very perfunctory note from the Chairman’s office telling us that there’s no reason to talk anymore.”

The SEC’s refusal to adjust its framework is not consistent with securities laws, Subcommittee Chair French Hill, R-Ark., asserted. In federal court, the SEC continues to have “legal face plants,” when trying to defend their stance that virtually all cryptocurrencies are securities, he added.

Not all Committee members feel the same, though, and despite some bipartisan cooperation, Wednesday’s hearing also highlighted party disputes that have existed around digital assets for years.

Why would the vast majority of companies who have faced enforcement actions from the SEC since 2021 have opted to settle and pay a collective $5.5 billion in penalties if they hadn’t done anything wrong, Rep. Maxine Waters, D-Cali., asked the witnesses.

Lee Reiners, a lecturing fellow at Duke University, responded by saying that he feels the SEC — under both former Chair Jay Clayton and current Chair Gensler — has overwhelmingly been in the right when bringing various enforcement actions against crypto players.

There has been “one notable partial loss,” Reiners said, when Ripple partially won against the SEC in 2023, but even this ruling has since been “repudiated by several other federal judges in that same federal district court.”

Rep. Sean Casten, D-IL, later expressed concern with how current legislative proposals do not sufficiently protect the investing public from fraud, as exemplified, he said, by the recently-announced World Liberty Financial project, which the Trump family has been promoting.

The World Liberty team said they would retain control of 20% of the token supply, which, based on the Financial Innovation and Technology for the 21st Century Act — passed in the House in May — would mean the project is “decentralized and not subject to regulation,” Casten said.

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