SEC Chair Gary Gensler Faces Criticism Over Crypto Airdrop Securities Issue

Key Insights:

• U.S. lawmakers question SEC’s use of the Howey Test for free crypto airdrop distributions.
• Emmer and McHenry argue SEC’s stance on airdrops stifles blockchain innovation and decentralization.
• Lawmakers compare crypto airdrops to common rewards like airline miles, pushing for clearer regulations.

U.S. Representatives Tom Emmer and Patrick McHenry have raised concerns over the Securities and Exchange Commission’s (SEC) classification of cryptocurrency airdrops as securities. In a formal letter to SEC Chair Gary Gensler, they questioned the agency’s regulatory approach and its potential impact on the development of blockchain technology.

Emmer, the House Majority Whip, and McHenry, Chair of the House Financial Services Committee, emphasized the crucial role airdrops play in blockchain ecosystems. The letter explains that airdrops—free distributions of digital tokens—are key to engaging early participants in decentralized blockchain networks. The lawmakers argued that airdrops are fundamental in incentivizing users to take part in governance and to ensure the decentralized nature of these projects.

Emmer and McHenry say these distributions help build stronger blockchain applications by encouraging community involvement. However, they claim that the SEC’s current classification of airdrops as securities could significantly hinder these developments. The letter suggests that such regulatory actions could prevent blockchain networks from reaching their full potential, labeling the agency’s approach as a “hostile regulatory environment.”

SEC’s Application of the Howey Test Under Scrutiny

A central issue raised by Emmer and McHenry is how the SEC applies the Howey Test to crypto airdrops. The Howey Test, a legal framework for determining whether a transaction qualifies as an investment contract, is critical in defining what constitutes a security under U.S. law. The lawmakers questioned how the SEC applies this test to digital assets that are distributed for free, like airdrops.

In the letter, they asked whether the SEC believes that distributing non-security digital assets for free could meet the Howey Test criteria. They wrote, 

“Does the SEC believe that giving away non-security digital assets for free implicates the Howey Test? If so, under what circumstances or arrangements?” 

This line of questioning reflects broader concerns that the SEC might be interpreting the test too broadly, potentially stifling innovation within the blockchain sector.

Comparison to Common Consumer Rewards

In their letter, the lawmakers also compared crypto airdrops to widely accepted consumer reward programs such as airline miles or credit card points. These types of rewards are regularly distributed for free but are not treated as securities. Emmer and McHenry asked how the SEC distinguishes between these rewards and digital assets given away through airdrops.

This comparison was intended to show that not all free distributions should be classified as securities. By highlighting these examples, Emmer and McHenry sought to argue that airdrops should be viewed in a similar light, suggesting that the SEC’s current approach may be inconsistent when compared to other sectors.

Economic Concerns and Impact on Blockchain Growth

The lawmakers further raised concerns about the potential economic fallout of treating airdrops as securities. They inquired whether the SEC had conducted any studies on how such regulatory classifications could affect economic growth, innovation, and tax revenue. Emmer and McHenry pointed out that some blockchain developers are already excluding U.S. participants from airdrop events due to concerns over SEC enforcement.

The letter also asked the SEC to provide data on whether the agency has evaluated the potential loss of economic activity and its broader impact on the blockchain industry. Emmer and McHenry cautioned that excessive regulation could push blockchain innovation out of the United States, allowing other countries to take the lead in developing this emerging technology.

Request for Response and Future Hearing

Emmer and McHenry requested a detailed response from SEC Chair Gensler by the end of September 2024. They asked for clarification on the SEC’s legal rationale for classifying airdrops as securities and the agency’s broader regulatory intentions for the blockchain industry.

This letter was sent just weeks before a scheduled congressional hearing on September 18, 2024, where the SEC’s handling of crypto regulation and potential political bias will be discussed.