Securities and Exchange Commission Chair Gary Gensler’s views on crypto regulation came into sharper focus this week, making clear he sees a need to bolster investor protections.
In remarks to the SEC’s Investor Advisory Committee Thursday, Gensler reiterated the need to bring crypto — an asset class with a $2.6 trillion market cap — within public policy frameworks to ward off nefarious activity and protect investors.
Calling crypto an asset class “rife with fraud, scams and abuse in certain applications,” Gensler noted that "hype and spin about crypto assets" gets in the way of balanced and thorough information about the digital currencies and trading platforms.
The price of Bitcoin, the most popular of hundreds of cryptos, dropped last year, but has soared since July, topping $68,000 for an all-time high last month.
Since many cryptocurrency tokens are considered investment contracts, they’re subject to federal securities law. For crypto issuers and trading platforms, that means register with the SEC, or face enforcement.
"We just don’t have enough investor protection in crypto," Gensler said in a written copy of his remarks. "The American public is buying, selling, and lending crypto on trading, lending, and decentralized finance (DeFi) platforms, where there are significant gaps in investor protection."
That means there's potential for harm, he explained. "This leaves markets open to manipulation," he said. "This leaves investors vulnerable. If we don’t address these issues, I worry a lot of people will be hurt."
Since assuming the post, Gensler has expressed a desire for increased oversight of the cryptocurrency market, and at the same time it has been subject to increased congressional scrutiny.
Gensler isn’t the only chairman angling to police crypto. Rostin Behnam, acting chairman of the Commodity Futures Trading Commission, has said his agency should regulate crypto, Markets Insider reported.
Behnam argues his agency is the appropriate regulator for crypto because a majority of the digital assets qualify as commodities. Bitcoin, for example, is classified as a commodity because its mining is decentralized, rather than being controlled by a single entity, per the New York Times.
Gensler, who previously served as CFTC chairman during former President Barack Obama’s administration, said many cryptocurrency tokens can be defined as investment contracts, which fall under the securities umbrella. That means the current crypto market features unregistered securities lacking required disclosures or oversight, he contended.
“Make no mistake: To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they meet an exemption,” he said. “Make no mistake: If a lending platform is offering securities, it also falls into SEC jurisdiction.”
Gensler, appointed by President Joe Biden earlier this year, also conveyed this view during an exchange this week with his Republican predecessor, Jay Clayton, who occupied the role under former President Donald Trump, The New York Times reported. They spoke at the Digital Asset Compliance and Market Integrity Summit in New York.
The agency will take legal action against crypto trading platforms that don’t register with the SEC, but “a better approach for these platforms…is to work to get registered within the law,” Gensler said at the summit, per MarketWatch.
"Work with us," Gensler told crypto representatives in attendance, in response to questions from Clayton, according to Bloomberg.
Rather than “wait for a big spill on aisle three,” Gensler urged operators of crypto platforms or crypto issuers to consult with the SEC because investors deserve the same protections they get with other asset classes.
“To the extent there are challenges about how to register or come into compliance, we’d like to hear what those are,” he said. “The staff is standing by, ready to better understand if any bespoke adjustments may be appropriate.”
Among crypto companies, neither Coinbase or Ripple are thrilled with the idea of SEC oversight; both have had legal run-ins with the agency. Coinbase welcomes regulation of the digital asset market, but by a newly created regulator, not an existing one. Ripple has touted legislation that would make the CFTC its overseer.
In September, Gensler referred to crypto as “the Wild West.” Lawmakers, too, have called for more supervision around cryptocurrency: Sen. Elizabeth Warren, D-MA, has referred to it as the “new shadow bank.”
In one recent instance of crypto fraud, the SEC announced Thursday that a Latvian citizen was charged with bilking investors of about $7 million through two separate schemes in 2018 and 2019, one involving an initial coin offering, and the other, a supposed digital asset cloud mining program.