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Specialties: House Majority Whip Tom Emmer and Rep. Patrick McHenry is seeking clarity on the Industry and Trade Commission’s regulatory approach to the distribution of crypto tokens known as “airdropping,” FOX Business has learned.
In a letter sent Tuesday to SEC Chairman Gary Gensler and viewed by FOX Business, Emmer, R-Minn., and McHenry, R.N.C., raise concerns that the crypto beat’s self-proclaimed police officer is engaging in regulatory power grabs by dividing “the airdrop” certain as unregistered securities.
“Under Chairman Gensler’s tenure, the SEC has put its thumb on the scale and prevented the American people from shaping the next iteration of the Internet,” Emmer said in a statement to FOX Business. “Airdrops play an important role in promoting the participation of blockchain-based applications, which in turn contributes to the continuous development, initial governance, and eventual deployment of these networks.”
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SEC Chairman Gary Gensler participates in a meeting of the Financial Stability Oversight Council at the US Treasury on July 28, 2023, in Washington, DC. (Kevin Dietsch/Getty Images)
Airdropping is when a blockchain project developer sends free tokens directly to a crypto wallet to attract users to the site, which industry fans liken to loyalty rewards like airline miles or credit card points. Although the SEC has not brought an enforcement case specifically targeting airdrops, it has suggested the possibility in recent enforcement actions against crypto firms that, in certain circumstances, crypto airdrops may qualify as securities.
Gensler stated in congressional testimony his belief that most cryptocurrency tokens, other than bitcoin and ethereum, are unregistered securities that trade illegally. Under his leadership, the agency began a three-year regulatory blitz against the $2 trillion digital goods industry. Critics of the SEC’s enforcement approach say the agency is overly broad in its interpretation of the Howey test — the agency’s litmus test for determining whether assets are securities.
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Emmer and McHenry’s letter calls for answers to five questions, including how the SEC distinguishes between rewards such as airline miles and air-drawn crypto tokens, and how the agency believes the Howey test applies to free crypto tokens given to users .
House Majority Whip Tom Emmer, R-Minn., speaks at an event celebrating 100 days of House Republican legislation at the Capitol on April 17, 2023. | Getty Images
“We are concerned that the misuse of security laws will prevent these technologies from achieving their full potential,” the lawmakers wrote.
Many blockchain developers use airdrops as a promotional tool to attract new users to their platforms or as a reward for early adopters of a new project. Token holders can use their tokens for management rights, to collaborate or complete tasks on the platform, or to claim a stake in the future growth of the platform.
Recent enforcement actions have shown that certain types of airdrops can meet the criteria of an investment contract, an important factor in determining whether an asset is collateral. It also raised concerns that airdrops could be used to circumvent securities registration requirements.
“Due to the SEC’s reluctance to establish a regulatory framework in the United States, developers have been forced to prevent Americans from claiming ownership of digital assets in an airdrop,” Emmer and McHenry said in the letter. “This includes people who may have been building on the network or participated in its development.”
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The headquarters of the Securities and Exchange Commission in Washington, DC, on Jan. 28, 2021. (Saul Loeb/AFP via/Getty Images)
Proponents of airdrops, like Emmer and McHenry, say that because users aren’t investing in tokens — they’re just getting them for free — they don’t satisfy Howey’s “investment.” It also may not satisfy “business as usual” if token recipients use it for charitable purposes and do not expect to collect profits based on the developer’s efforts.
Lawmakers continue to suggest that by preventing Americans from participating in airdrops, the agency is preventing them from fully realizing the benefits of blockchain technology.
“Given the SEC’s approach during your time as Chairman, the SEC has only ensured that the next iteration of the Internet is not designed for Americans or with American standards, which does not benefit our members,” Emmer and McHenry concluded the letter. , giving Gensler a two-week deadline to respond.