US Lawmakers Slam SEC Chair Gary Gensler Over Airdrop Securities Classification

Kelvin Munene Murithi
September 18, 2024
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Highlights

  • Lawmakers questioned Gary Gensler on whether free digital asset airdrops trigger the Howey Test under current securities law.
  • The letter compared airdrops to rewards like airline miles, asking the SEC to clarify distinctions between them and blockchain-based incentives.
  • Concerns were raised over the economic impact of classifying tokens as securities, including potential loss of growth and tax revenue.

Two prominent U.S. lawmakers, House Majority Whip Tom Emmer and House Financial Services Committee Chairman Patrick McHenry, have raised concerns over the Securities and Exchange Commission’s (SEC) approach to classifying airdrops as securities. In a letter dated September 2024, they addressed SEC Chair Gary Gensler, questioning the agency’s stance on airdrops.

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Contents of Letter To Gary Gensler

The letter highlights the importance of airdrops in the blockchain ecosystem. It describes them as “distributions of a digital asset to early users of a blockchain protocol.” Moreover, the lawmakers stated that crypto airdrops “play a crucial role in the development of a decentralized blockchain ecosystem.”

According to the lawmakers, airdrops incentivize participation in blockchain-based applications, contributing to the network’s decentralization and governance. The letter criticized the SEC under Gary Gensler’s leadership for stifling the growth of blockchain by creating a “hostile regulatory environment.”

The lawmakers argued that the SEC’s actions are making “the goal of decentralization impossible to obtain” and preventing the technology from reaching its full potential. They further allege that by issuing enforcement actions and warnings, the SEC is “putting its thumb on the scale” and precluding U.S. citizens from participating in the development of the internet’s next generation.

In addition, Emmer and McHenry posed a series of pointed questions to Gary Gensler. They sought clarification on the SEC’s interpretation of securities law in relation to airdrops. A key question is whether the SEC believes that giving away digital assets for free could trigger the Howey Test.

For further context, the Howey Test is the legal standard for determining if a transaction qualifies as an investment contract under U.S. law. This question also arises since the assets themselves are not classified as securities.

The lawmakers 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?” The letter also compares crypto asset airdrops to other forms of consumer rewards.

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Questions To SEC Chair

The rewards include airline miles or credit card points, which do not fall under the Howey Test. “How does the SEC distinguish between these rewards, given away for free, and digital assets airdropped to an individual?” the lawmakers asked.

Additionally, the letter to Gary Gensler also raises concerns about the potential impact of classifying digital tokens as securities on the broader blockchain ecosystem. Emmer and McHenry pointed out that as networks become more decentralized, token values are driven by “demand for their consumptive use, akin to a commodity.”

They warned that the SEC’s approach could hinder the ability of on-chain applications to function. Hence they asked, “How might classifying these tokens as securities and subjecting each transaction to the scrutiny of the SEC impact the ability for on-chain applications to exist or function?”

The lawmakers also requested data on whether the SEC has quantified the economic impact of classifying digital assets as securities. This comes particularly in terms of potential loss of economic growth and tax revenue. Furthermore, they noted that developers are already blocking American users from participating in airdrops due to the SEC’s regulation.

Emmer and McHenry requested a response from Gensler by September 30, 2024. Meanwhile, the agency gears up for a September 18 congressional hearing on political bias in crypto regulation.

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Investment disclaimer: The content reflects the author’s personal views and current market conditions. Please conduct your own research before investing in cryptocurrencies, as neither the author nor the publication is responsible for any financial losses.
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Why Trust CoinGape

CoinGape has covered the cryptocurrency industry since 2017, aiming to provide informative insights Read more…to our readers. Our journal analysts bring years of experience in market analysis and blockchain technology to ensure factual accuracy and balanced reporting. By following our Editorial Policy, our writers verify every source, fact-check each story, rely on reputable sources, and attribute quotes and media correctly. We also follow a rigorous Review Methodology when evaluating exchanges and tools. From emerging blockchain projects and coin launches to industry events and technical developments, we cover all facets of the digital asset space with unwavering commitment to timely, relevant information.

About Author
About Author
Kelvin Munene is a crypto and finance journalist with over 5 years of experience, offering in-depth market analysis and expert commentary . With a Bachelor's degree in Journalism and Actuarial Science from Mount Kenya University, Kelvin is known for his meticulous research and strong writing skills, particularly in cryptocurrency, blockchain, and financial markets. His work has been featured across top industry publications such as Coingape, Cryptobasic, MetaNews, Cryptotimes, Coinedition, TheCoinrepublic, Cryptotale, and Analytics Insight among others, where he consistently provides timely updates and insightful content. Kelvin’s focus lies in uncovering emerging trends in the crypto space, delivering factual and data-driven analyses that help readers make informed decisions. His expertise extends across market cycles, technological innovations, and regulatory shifts that shape the crypto landscape. Beyond his professional achievements, Kelvin has a passion for chess, traveling, and exploring new adventures.
Investment disclaimer: The content reflects the author’s personal views and current market conditions. Please conduct your own research before investing in cryptocurrencies, as neither the author nor the publication is responsible for any financial losses.
Ad Disclosure: This site may feature sponsored content and affiliate links. All advertisements are clearly labeled, and ad partners have no influence over our editorial content.