“According to Senator Pat Tomey, famous for his vocal support for the crypto industry, the United States Securities and Exchange Commission (SEC) could have prevented the loss of $12 billion in assets by investors who trusted Celsius, a crypto lending platform, that froze their deposits in June” [Attlee, D. Pat Toomey blames the SEC for crypto lending platform crisis. (Accessed July 30, 2022)]. Specifically, Toomey wrote:

In recent weeks, several companies whose crypto lending services were arguably within the SEC’s purview have collapsed. These firms often promised enormous, seemingly unsustainable interest rates to depositors, and at least one business allegedly engaged in risky practices. One of these enterprises, Celsius, reportedly had nearly $12 billion in assets under management, using funds from thousands of Americans to make loans to entities making short-term crypto investments. Customer funds have been frozen since mid-June, leaving in question the status of billions of dollars worth of deposits. Had the SEC responded to calls for clarity on how it would apply existing securities laws to novel digital assets and services, things might have been different.

[Toomey, P. Letter to Gensler. (Accessed July 30, 2022)].

In essence, Toomey’s is concerned about the “… Securities and Exchange Commission’s (“SEC”) uncompromising refusal to give regulatory clarity to the cryptocurrency community and consumers. Instead, the SEC has pursued a capricious and ineffective approach to consumer protection known as regulation-by-enforcement that is chilling financial innovation and contributing to significant financial losses for unsuspecting American consumers” [Id].

“The official letter from Toomey to the SEC chairman Gary Gensler suggested that the Commission’s inability to clarify how it will apply the existing securities laws to the digital asset services, drew significant repercussions” [Stefan. Pat Toomey Blamed The SEC For The Crisis in Crypto Lending Platforms. (Accessed July 30, 2022)]. Toomey writes:

Companies could have adjusted product offerings accordingly, preventing investor losses today, and the SEC would have been free to focus enforcement efforts on the worst actors.

[Toomey, supra].

Continuing, Toomey wrote:

For instance, the SEC could have clarified how the Howey and Reves tests applied to crypto lending platform products that
paid interest to customers making crypto deposits. It is known the SEC already had an opinion on this matter. Three months before Celsius and Voyager ended up freezing customer accounts (and ultimately declaring bankruptcy), the SEC had already concluded that another crypto lending company, BlockFi, offered a similar product that fell under the Howey test, which determines when something is an investment contract, and thus, a security […] Furthermore, the SEC could have shared its view on how it thought digital asset lending products met the Reves test, which generally considers notes to be securities if used as investments and not as part of commercial transactions like a secured business loan or automobile purchase.

[Id].

Toomey claims that in the absence of a clear declaration by the SEC, “the SEC is choosing to regulate by enforcement, selectively deciding to apply its opaque position on when digital assets and services are securities” [Id]. In this regard, Toomey “mentioned the recent insider trading charges against a former employee of Coinbase, claiming that the SEC had a clear opinion on the securities’ status of these assets, yet did not disclose that view publicly before launching an enforcement action” [Attlee, supra].

Toomey notes the questionable position of the SEC that most tokens are securities. He writes that the reasons to be skeptical of the SEC’s position is:

[…] an associated token may not give its owner any claim to the profits or assets of an enterprise, potentially calling into question whether there could be a reasonable expectation of profits or an investment in a common enterprise under the Howey test. Similarly, there may be other reasons why a token may not have all the features of a common enterprise. By contrast, a security typically has both of these features. Hence, regulatory clarity is needed to resolve these questions and many others involving digital assets and services.

[Toomey, supra]

Toomey also calls into question the SEC’s refusal to provide regulatory clarity and its effect on industry innovation:

the SEC’s continued refusal to give regulatory clarity to the crypto community, combined with a haphazard and an apparently sluggish enforcement pace harms not only investors, but also innovation. It poses a serious challenge for any developer or company striving to comply with existing laws and regulations. Market participants who lack the benefit of the SEC’s thinking prior to designing a product may never create something that uses emerging technologies to solve a previously unsolvable problem.

[Id].

“Toomey poses nine questions to Gensler, requesting a response by Aug. 9. Among them is a request that the SEC publicly identify other major crypto lending companies not registered under the SEC; explain why the SEC has not included 16 out of the 25 digital assets traded by the Coinbase employee in its charges and others” [Attlee, supra].

Toomey closes his letter to Gensler with the following advice:

I hope when you urge crypto firms to ‘come in and talk to us,’ you will have the SEC provide clear and useful feedback. The public, both crypto enthusiasts and skeptics alike, would
benefit, too. A regulation-by-enforcement approach simply fails to provide the regulatory clarity that is needed.

[Toomey, supra].