A formal letter from US lawmakers questioned SEC Chair Gary Gensler’s classification of crypto airdrops as securities.
Two key U.S. lawmakers, House Majority Whip Tom Emmer and House Financial Services Committee Chairman Patrick McHenry, have voiced their concerns about the Securities and Exchange Commission’s (SEC) treatment of airdrops as securities.
In a letter sent to SEC Chair Gary Gensler in September 2024, they questioned the agency’s stance on this matter.
Details of the Letter to Gary Gensler
The letter emphasizes the significance of airdrops in the blockchain ecosystem, describing them as “distributions of a digital asset to early users of a blockchain protocol.”
The lawmakers noted that crypto airdrops “play a crucial role in developing a decentralized blockchain ecosystem.”
Emmer and McHenry explained that airdrops encourage participation in blockchain applications, fostering decentralization and governance within the network.
They criticized the SEC under Gensler’s leadership for stifling blockchain growth by fostering a “hostile regulatory environment.”
The lawmakers argue that the SEC’s approach is making “the goal of decentralization impossible to obtain” and preventing the technology from reaching its full potential.
They further claimed that by issuing enforcement actions and warnings, the SEC is “putting its thumb on the scale” and hindering U.S. citizens from contributing to the development of the next generation of the internet.
In their letter, Emmer and McHenry raised several points for Gary Gensler, seeking clarity on how the SEC interprets securities laws about airdrops.
A central question asked whether the SEC believes that distributing digital assets for free could trigger the Howey Test, a legal standard used to determine if a transaction is an investment contract under U.S. law.
They asked, “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 airdrops and other consumer rewards, such as airline miles or credit card points, which are not subject to the Howey Test.
Questions for the SEC Chair
The lawmakers queried, “How does the SEC distinguish between these rewards, given away for free, and digital assets airdropped to an individual?”
Additionally, they expressed concerns over the potential impact of classifying digital tokens as securities on the broader blockchain industry.
They noted that as networks decentralize, token values are increasingly driven by “demand for their consumptive use, akin to a commodity.”
Emmer and McHenry warned that the SEC’s stance could hinder on-chain applications, asking, “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 assessed the economic impact of classifying digital assets as securities, particularly in terms of lost economic growth and tax revenue.
They pointed out that some developers are already preventing U.S. users from participating in airdrops due to SEC regulations.
Emmer and McHenry asked Gensler to respond by September 30, 2024. Meanwhile, the SEC is preparing for a congressional hearing on September 18 regarding political bias in crypto regulation.
