Gary Gensler, Chair of the Securities and Exchange Commission (SEC), attracted a lot of attention following his remarks at the Aspen Security Forum earlier this month, asking Congress for more authority “to write rules for and attach guardrails to crypto trading and lending” and opining that for the “volatile” industry to truly prosper it needs more investor and consumer protections. But make no mistake: Gensler is not waiting around for Congress to act. In his remarks, Gensler highlighted various areas where the SEC currently has jurisdiction and emphasized that “we have taken and will continue to take our authorities as far as they go.”
Labeling crypto the “Wild West” (a term that has been bandied about since the early days of ICOs and has been applied to other parts of digital token investing), Gensler stressed the need for stronger oversight of an asset class that “is rife with fraud, scams, and abuse in certain applications” and surrounded by a large amount of “hype and spin.” Acknowledging that each token’s legal status depends on its own facts and circumstances, Gensler’s remarks focused the need for greater SEC oversight when crypto assets could be securities. For example, he noted that “the probability is quite remote” that a crypto trading platform with 50 or 100 tokens has zero securities, and made a more sweeping statement about the market in general (“I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight”). Gensler further signaled that the SEC will continue its oversight role, noting that “Certain rules related to crypto assets are well-settled. The test to determine whether a crypto asset is a security is clear.”
Gensler’s remarks are not surprising and echo his prior statements at a May 6, 2021 Congressional hearing advocating for the need for further investor protection regulation aimed at cryptocurrency exchanges, observing at that hearing: that “Right now, there’s not a market regulator around these crypto exchanges, and thus there’s not protection against fraud or manipulation.” Similar issues were outlined in a July 7, 2021 letter from Senator Elizabeth Warren to Gensler asking his opinion on the need for more investor protection surrounding cryptocurrency exchanges and how the authority of the SEC to oversee traditional securities exchanges differs from its authority over cryptocurrency exchanges. As a high-level response, Gensler said at the Aspen Security Forum: “In my view, the legislative priority should center on crypto trading, lending, and DeFi platforms. Regulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending.” Similar sentiment was expressed in his response to Senator Warren.
These issues (and more) have been bubbling since the beginning of the new Administration when the industry expected a fresh take and new regulatory guidance. With Gensler’s extensive expertise in blockchain, all eyes are on what he says, what areas he will focus on in consultation with Congress, and how the agency – through enforcement and perhaps increased regulatory authority – will attempt to tame the so-called Wild West aspects of crypto. The pressures are numerous and diverse: the industry is clamoring for guidance to address operational uncertainties, members of Congress are asking for greater consumer protection around crypto investing and greater AML controls, some investors – and some SEC Commissioners – are calling for greater regulatory flexibility for DeFi innovations, and some companies have sought approval for bitcoin ETFs. Meanwhile, in his remarks, Gensler discussed the need for continued regulatory focus on has asked for additional comment on cryptocurrency custody arrangements (“Custody protections are key to preventing theft of investor assets, and we will be looking to maximize regulatory protections in this area”) and simply more resources and attention to “prevent transactions, products, and platforms from falling between regulatory cracks.” Beyond these issues are of course bigger monetary issues about stablecoins and CBDCs (central bank digital currencies).
Some changes are certainly ahead, as Gensler, in his remarks, expressed his view that lasting innovations and societal benefits in the digital currency space can only come about alongside “public policy frameworks” that engender trust in the markets.