Securities and Exchange Commission (SEC) Chairman Gary Gensler claims he is “animated every day” to protect working families through securities laws. It’s a nice sentiment, but his shield has often stifled poorer Americans’ passive income opportunities at a time of high inflation and a potential looming recession. This is especially true in the crypto markets, where Gensler has barred savers from accessing easy new revenue streams.
The latest example is the crypto marketplace Celsius, which announced on April 11 that it was shuttering its Earn financial product for everyone but the wealthiest Americans who qualify as “accredited investors.” Earn had allowed anyone to “stake” crypto holdings with Celsius and receive impressive returns. This was particularly true for stablecoins—pegged one-to-one to a stable monetary asset, usually the U.S. dollar. Stablecoins’ role in the crypto ecosystem as a liquid asset and safe haven from volatility means their value far exceeds their pegged counterparts. Thus, crypto virtual marketplaces like Celsius pay yields of 8 percent APY or higher to people who stake them.
But citing discussions with “regulators”—almost certainly the SEC given the nationwide ban (New York state had also approached them)—the company announced that it will cease offering new clients the Earn product if they are “unaccredited”—that is, not wealthy.
Working people who could have used this product will now have to choose between riskier assets or be relegated to the banking system with 0.06 percent average yields—a money-losing proposition given inflation rates.
The news comes on the heels of an earlier SEC settlement with virtual crypto marketplace BlockFi, which also put the kybosh its high-yield savings product. Like that settlement, no one alleged Celsius engaged in fraud or other nefarious acts. To the contrary, according to Celcius’ website, it currently has 1.7 million users and $19.2 billion in assets.
Last fall, the SEC shut down Coinbase’s similar Lend product before it even got started. The commission threatened to sue, citing the Howey test for unconventional securities deriving from a 1946 Supreme Court case involving Florida orange groves.
Two policy prerogatives emerge from this ongoing morass. First, the Howey test should be retired. Whatever its past benefits, this vague four-part test, which courts have now stretched beyond any limiting principle, has no business dictating crypto rules. As I have previously suggested, Congress could fix this problem by removing crypto projects from the definition of “investment contract” and thereby beyond the SEC’s purview.
Contrary to critics’ claims, this would not result in a Wild West atmosphere. The Federal Trade Commission would still have authority to regulate fraud. As attorney Greg Zerzan recently testified before the House Energy and Commerce Committee, “the Federal Trade Commission Act (FTCA) has protected Americans from ‘unfair or deceptive acts or practices in or affecting commerce’ since 1914. … The FTCA’s powerful consumer protection provisions, which clearly apply to internet-based transactions, afford a strong layer of protection for market participants.”
Second, decentralized finance (DeFi) is crucial to the future economic prospects of working Americans. DeFi runs on code, smart contracts, and market realities. It allows people to transact, earn, lend, and borrow outside the heavily regulated banking industry. It has no CEOs or legal officers the SEC can threaten. Washington should take a light regulatory approach and let DeFi succeed.
Gensler should lock up his shield and allow the people he claims he is working to protect engage with the crypto world. As economic forecasts darken, they will need all the opportunities they can get.