Two prominent Republican lawmakers have issued a demand for U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler to clarify the regulatory stance on cryptocurrency airdrops by the end of September.

In a letter dated September 17, Representative Tom Emmer and House Financial Services Committee Chairman Patrick McHenry expressed concern over the SEC’s handling of airdrops, which they say has stifled innovation in the digital asset space.

Troubling Examples of Regulatory Overreach

The lawmakers referenced the SEC’s legal actions in the past two years as troubling examples of regulatory overreach. One key case highlighted was the September 2022 lawsuit against Hydrogen Technology Corporation, where the SEC accused the firm of Hydro token market manipulation. Hydrogen had minted over 11 billion Hydro tokens, distributing them via airdrops, which the SEC classified as “unregistered offers and sales of securities.”

In another case, the SEC sued crypto entrepreneur Justin Sun in March 2023, accusing him of offering and selling BitTorrent (BTT) tokens in unregistered airdrops to investors. Both incidents have raised alarms among legislators who believe the SEC is overstepping its boundaries by broadly applying securities laws to emerging blockchain technologies like airdrops.

“The SEC is putting its thumb on the scale and precluding American citizens from shaping the next iteration of the internet,” Emmer and McHenry wrote. They warned that the agency’s actions could hinder the growth of decentralized technologies, which are poised to transform the digital landscape.

Howey Test’s Application by the SEC

The lawmakers are particularly concerned about the SEC’s application of the Howey Test, a legal framework used to determine whether an asset qualifies as a security. Emmer and McHenry questioned how airdrops, often given away for free, could meet the criteria of the test. They are demanding answers from Gensler on how the SEC differentiates airdrops from other forms of rewards, such as credit card points.

Additionally, the letter calls on Gensler to address the broader economic implications of classifying airdropped tokens as securities, including the potential impacts on on-chain applications, economic growth, and tax revenue. Emmer and McHenry write:

“The next iteration of the internet is not designed by Americans or American values, which is not to the benefit of our constituents.”

Gensler has until September 30 to respond to the five questions outlined in the letter.

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