Senators Grill SEC Chair Over Cryptocurrency Definition

Whether crypto is an asset or a security is important to investors

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Cryptocurrencies are often hard for many to understand, but some U.S. senators say the government is making it worse by keeping how it defines crypto investments under wraps.

In a Senate Banking Committee hearing Tuesday, ranking member Sen. Pat Toomey grilled Securities and Exchange Commission Chair Gary Gensler on why cryptocurrencies are sometimes considered a security and sometimes not, and how that determination is being made.

Exactly how digital assets are classified by government agencies has become a hot topic. The IRS has treated virtual currencies as assets and property that wouldn't come under the SEC’s purview and wouldn’t be subject to the so-called wash sale rule, like stocks and other securities are. In contrast to the rules for securities sales, investors can currently sell crypto at a loss, immediately buy it back, and apply the loss on the sale against their income to lower their tax bills. But in the House Ways and Means Committee budget proposal this week, digital assets were specifically included in the wash sale rule.

Also earlier this month, crypto exchange Coinbase said the SEC intends to sue the company if it launches its Lend Program, which allows customers to earn interest on Coinbase deposits of USD Coin, a type of digital coin pegged to the U.S. dollar. Coinbase contends the Lend Program is not a security because it is neither a note (or a type of debt security) nor an investment contract. “The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion,” Coinbase wrote in a blog.

At Tuesday’s hearing, Toomey asked Gensler, “What makes some of them securities and others not? . . . Why not publicly announce what characteristics make a cryptocurrency a security or not a security?” Toomey added. “This regulation by enforcement is extremely objectionable and will kill domestic innovation.”

Gensler responded by citing past court cases he said clearly set the parameters for what is considered a security. “I agree with you that some of these tokens have been deemed to be commodities. Many of them are securities and the Supreme Court has weighed in a number of times,” he said. “I’m not a minimalist about crypto. I just think it would be best if it’s inside the investor protection regime that Congress laid out.”

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  1. C-Span. “Securities and Exchange Commission Oversight Hearing.” Sept. 14, 2021. (Video.)

  2. House Ways and Means Committee. “Sec. 138101. Increase in Corporate Tax Rate,” Page 8, Paragraph 3.

  3. IRS. Frequently Asked Questions on Virtual Currency Transactions.”

  4. The Coinbase Blog. “The IRS Has Told Us It Wants To Sue Us Over LEND. We Don’t Know Why.”

  5. Senate Committee on Banking, Housing, and Urban Affairs. “Toomey: Gensler’s Agenda Does Not Appropriately Reflect the Mission of the SEC.”

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