Biden and Trump S.E.C. Chiefs Trade Tips on How to Regulate Crypto

Regulators on the left and right rarely agree on policy. Yet, when it comes to cryptocurrency, two men who have led the Securities and Exchange Commission are remarkably aligned: The technology and offerings may be new, but old rules still apply.

Jay Clayton, the Republican S.E.C. chairman under former President Donald J. Trump, interviewed Gary Gensler, the current S.E.C. chief in the Democratic Biden administration, on Wednesday at the Digital Asset Compliance and Market Integrity Summit in New York.

Mr. Clayton now advises crypto companies, and Mr. Gensler taught crypto classes as a professor at M.I.T. before joining the agency. When Mr. Clayton asked his successor whether the S.E.C. intended to regulate crypto, Mr. Gensler replied, “I don’t think you mind if I would quote you back to you.”

Mr. Gensler then expressed a view that the former chairman has long articulated — one that blockchain businesses strongly resist — that crypto tokens are “largely” used to raise money for entrepreneurs and, as such, meet “the time-tested definitions of an investment contract and are thus under the securities laws.”

Indeed, Mr. Clayton did not mind, and added: “Yeah. And any other of the array of definitions of a security in addition.”

Their agreement on this issue is significant because it suggests that many, if not most, crypto issuers are violating the law by failing to register with the S.E.C. and could be subject to enforcement actions. And there is a critical case pending that may resolve this question.

At the end of Mr. Clayton’s tenure at the agency last year, the S.E.C. sued Ripple Labs and its founders, accusing them of raising over $1.3 billion through an unregistered, ongoing digital asset securities offering when selling their tokens, which are known as XRP.

Not every cryptocurrency is a security — that much has been established. The original crypto, Bitcoin, for example, is considered a commodity in the United States because there is no single individual or entity minting the tokens. Instead, a decentralized network of independently run high-powered computers compete for the opportunity to “mine” Bitcoin and earn a portion for the work of algorithmically solving math problems.

The S.E.C. argues, however, that because Ripple Labs sold XRP to raise money for its payments products and exchange, investors were owed disclosures about the company’s business and operations, so they could make informed decisions about whether to buy the token.

Neither man named the case in their discussion, but its implications loomed over the conversation.

Both spoke extensively about the asymmetry of information between insiders and investors when companies raise money through unregistered tokens. Registration aims to address this imbalance by mandating certain disclosures, they said, and the crypto markets won’t flourish if companies operate outside the regulatory framework.

As he has before, Mr. Gensler warned that there will be “a spill in aisle three” and the public will wonder why officials didn’t act faster. The “spill” could be the result of instability set off by the boom in crypto lending or in the use of “stablecoins” — cryptocurrencies ostensibly pegged to a stable asset like the dollar, which have so far proved to not always be backed with the quality or quantity of reserves some issuers claim. Or, he added, “it might just come from a lot of the investing public getting hurt either by fraudsters or by good-faith actors who are promoting and raising money” without giving investors “full and fair disclosures.”

For the crypto enthusiasts watching the discussion online, the alignment between the regulators was an evident source of frustration. In the comments, many called for their incarceration or worse. If it came as any consolation that both Mr. Gensler and Mr. Clayton also noted that crypto and its associated innovations had promise, the comments did not reflect it.

But Mr. Gensler’s final thought for the audience — which he characterized as lawyers, accountants, advisers, consultants and technologists — was that innovators and those who support them have a role in ensuring market integrity. He concluded, “I ask you to think about the public interest.”