U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler testifies before a hearing of the Senate Committee on Banking, Housing and Urban Affairs on the SEC on Capitol Hill in Washington, U.S., September 14, 2021.
Evelyn Hockstein Reuters
Securities and Exchange Commission Chairman Gary Gensler said Monday that his agency is seeking increased regulatory oversight of the $2 trillion cryptocurrency market to protect investors from an onslaught of scams.
In a virtual speech, Gensler said the SEC plans to register and regulate crypto platforms, including working on asset segregation to mitigate risk.
“These crypto platforms are playing similar roles to traditional regulated exchanges,” Gensler said at the Penn Law Capital Markets Association annual conference. “So investors should be protected in the same way.”
Gensler is providing details on his plans to tackle the crypto market, nearly a month after President Joe Biden signed an executive order asking the government to review the risks and benefits of cryptocurrencies. Over the past year, more than $14 billion worth of crypto assets were stolen through a variety of scams and cyberattacks.
The SEC, Gensler said, will work with the Commodity Futures Trading Commission to target platforms that trade both crypto-based security tokens and commodity tokens, since the SEC currently only oversees those that trade in securities.
Gensler compared crypto asset platforms to alternative trading systems used in the stock and bond markets. The key difference, he said, is that the latter is mostly used by institutional investors, while crypto platforms “have millions and sometimes tens of millions of retail customers who buy and sell directly on the platform without going through a broker.”
He said the SEC will consider whether crypto platforms should be treated more like retail exchanges by his agency.
Gensler also addressed what the SEC can do in the stablecoin and crypto token space.
Stablecoins are digital currencies that are less volatile than cryptocurrencies by pegging their market value to an external asset like the US dollar. Gensler said the $183 billion stablecoin market raises concerns such as potential use for illegal activities. Crypto-to-crypto transactions, he said, allow users to bypass the traditional banking system, making it harder to track money laundering, taxes and compliance.
Stablecoins are also often owned by crypto platforms, creating potential “conflicts of interest and market integrity issues that would benefit from more oversight,” Gensler said.
Regarding crypto tokens, the SEC chief said that most of them are entrepreneurs raising money from outside investors hoping to build a profitable business. Traditional companies that raise capital from the public in this manner must take the additional step of filing material disclosures with the SEC.
Gensler echoed comments from his predecessor, Jay Clayton, who said “most crypto tokens are investment contracts under the Howey test.” He was referring to a 1946 Supreme Court ruling that a transaction is an investment treaty when people invest money in a “general enterprise with a reasonable expectation of gains from the efforts of others,” Gensler explained.
He added that regulators have long had effective ways to regulate financial markets, and the advent of new technologies doesn’t mean we’re jettisoning the playbook.
“We should apply the same protections to the crypto markets,” Gensler said. “Let’s not risk undermining 90 years of securities laws and creating regulatory arbitrage or loopholes.”
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