SEC Chair Urges Crypto Firms to Comply with Securities Laws
Commentary by Steven Lofchie
In an Op-Ed published in The Hill, SEC Chair Gary Gensler argued that investors must receive the same protections within crypto markets as they would receive in any other securities market.
Mr. Gensler asserted that while crypto asset firms often purport transparency, they seldom register with the SEC or are compliant with federal securities laws. He warned that due to lack of regulatory compliance among crypto asset firms, investors do not have the information necessary to understand (i) what these firms are doing with customer assets, (ii) how firms fund investor returns, (iii) the implications for a firm when the investor buys or sells a token, and (iv) whether a firm has established safeguards against manipulation and fraud.
Mr. Gensler said that the SEC's singular goal is to ensure that the protections given to investors in crypto markets are on par with the protections provided within any other securities market. He urged crypto intermediaries to implement practices that protect against fraud and manipulation, and called on issuers to file registration statements and make all required disclosures.
He also emphasized the SEC’s commitment to identifying noncompliance by crypto asset firms through investigations and enforcement actions. He stated that while enforcement actions are resource-intensive and there is a high degree of non-cooperation from crypto-firms, the SEC will continue to pursue actions to address marketplace misconduct.
Commentary
It is quite clear that Chair Gensler is of the view that all digital assets (except Bitcoin) are securities and that the ordinary securities rules generally apply.
The problem with Mr. Gensler's position is not a lack of clarity. The problem is that the ordinary securities rules are not practical for digital assets (other than those digital assets that are ordinary securities or debt represented on the blockchain) and, therefore, there is no practical way for firms to comply. If Mr. Gensler believes that the ordinary rules can be applied to digital assets, the SEC should prepare a form of registration statement for Ether, for example, to illustrate how it should be done. But it would be readily apparent that that it is not realistic, and thus Mr. Gensler's berating of the industry does not advance U.S. regulation.
It is ironic that Mr. Gensler decries the risk in the custody of digital assets, when the SEC has effectively prevented registered broker-dealers from providing custodial services (and the bank regulators have largely discouraged banks from providing custodial services). Had the U.S. regulators permitted regulated financial institutions to provide custodial services as to digital assets, then perhaps customers would have had a regulated custodian and been protected by U.S. regulation. Likewise, he has prevented any Bitcoin-based product from listing on a U.S. securities exchange even as other Commissioners have questioned the legal basis of his actions.
Mr. Gensler has shown no interest in supporting a regulatory scheme specifically appropriate to digital assets. Instead, he falls back on the mantra that digital assets must be regulated like all other securities, despite the fact that there is great diversity in securities regulation applicable to the diversity of securities products. Mr. Gensler actually recognized this truth in a 2022 speech. He stated: "Given the nature of crypto investments, I recognize that it may be appropriate to be flexible in applying existing disclosure requirements. Tailored disclosures exist elsewhere — for example, asset-backed securities disclosure differs from that for equities."
It is past time for Mr. Gensler to act on this statement. Until he does so, no real progress can be made.