SEC Chair Gensler Argues for Greater Regulation of Digital Assets
SEC Chair Gary Gensler laid out the case for more extensive SEC regulation of crypto trading and lending platforms, stablecoins and tokens.
In an address before the Penn Law Capital Markets Association Annual Conference, Mr. Gensler reported that he instructed the SEC staff to "work on a number of projects related to [crypto] platforms" including:
- Registration of Platforms: Mr. Gensler stated in order to maintain investor faith in the crypto platforms, they must be subject to market regulation. He asked SEC staff to consider "whether and how the protections that are afforded to other investors on exchanges with which retail investors interact should apply to crypto platforms."
- Mixing Non-Securities and Securities on Platforms: Mr. Gensler stated that the staff will focus on "how best to register and regulate platforms where the trading of securities and non-securities is intertwined" and would like to work with the CFTC on how to jointly address this issue. He noted that the CFTC can help address prospective platforms that trade crypto-based security tokens and commodity tokens.
- Crypto Custody: Mr. Gensler stated that "[u]nlike traditional exchanges, currently centralized crypto trading platforms generally take custody of their customers' assets." He asked the staff to consider "whether it would be appropriate to segregate out custody." In addition, Mr. Gensler stated that because crypto trading platforms may also act as market makers, he has also asked staff to consider "whether it would be appropriate to segregate out market making functions."
Regarding stablecoins, Mr. Gensler likened them to bank deposits and market funds and raised the following three policy issues:
- Financial Stability and Monetary Policy: Mr. Gensler raised concerns about what backs these tokens and how to ensure a one-to-one dollar conversion.
- Stablecoins and Illicit Activity: Mr. Gensler raised concerns about stablecoins in relations to: "anti-money laundering, tax compliance, sanctions, and the like."
- Stablecoins and Investor Protection: Mr. Gensler raised conflict of interest questions concerning stablecoins in that "[t]he three largest stablecoins were created by trading or lending platforms themselves" and that investors "generally have a counterparty relationship with the platform."
Regarding tokens, Mr. Gensler reaffirmed the legal standard for determining when they are securities, the Howey Test, arguing that most crypto tokens are investment contracts and thus securities. He advocated for all "crypto tokens that are securities to be registered with the SEC."
Mr. Gensler noted the crypto market is roughly a $2 trillion market and that "[though] there is lots of innovation, [there is] plenty of hype." He said that new technology will always come along, but the focus is on how we adjust to it.
Commentary
In these remarks, SEC Chair Gensler states, as he has previously, that the SEC should be technology neutral. This brings to mind Commissioner Peirce's recent speech (see coverage here) in which she argued that a technology-neutral approach "works only if new technology can in fact comply with a prescriptive rule-set designed for old technology, which is not at all clear." Ms. Peirce further noted that technologies forced into an inflexible regulatory framework may fail because they are not given an opportunity to mature and thrive. Mr. Gensler's remarks seem to be a direct response and strong rejection of the proposal that new rules should be applied to allow for new technology, as indicated by his conclusion that current regulations should be applied to crypto markets so as to "not risk undermining 90 years of securities laws and create some regulatory arbitrage or loopholes."
In addition to reaffirming the view that rules should not change to meet technology, Mr. Gensler restates former SEC Chair Clayton's view that most crypto tokens are securities. Members of the crypto space should pay close attention to these remarks and the aggressive regulatory stance they present.