July 9, 2021

Senator Warren Writes SEC on Regulation of Crypto Exchanges, Cites Need to Close Gaps

Steven Lofchie Commentary by Steven Lofchie

In a letter to SEC Chair Gary Gensler, Senator Elizabeth Warren (D-MA) requested information on the SEC's authority to regulate cryptocurrency exchanges. Senator Warren highlighted the "unique risks" of manipulation and fraud in connection with such exchanges, stating that they (i) lack the regulatory protections of traditional national securities exchanges and (ii) may be able to avoid regulatory obligations if the asset being traded does not qualify as a security under federal law.

Senator Warren stated that due to regulatory gaps, investors and consumers are currently "vulnerable to dangers in this highly opaque and volatile market." Senator Warren's letter cites a number of studies and articles asserting manipulation, improper trading activities and fraudulent trade reporting on cryptocurrency exchanges.

To determine whether congressional action is needed, Senator Warren asked that Mr. Gensler address the following points of inquiry by July 28, 2021:

  • whether cryptocurrency exchanges currently operate in a "fair, orderly, and efficient" manner;

  • the differing characteristics of assets traded on cryptocurrency exchanges and those on traditional securities exchanges;

  • the scope of the SEC's existing authority to regulate cryptocurrency exchanges;

  • the extent to which international coordination will be needed to address regulatory gaps;

  • whether Mr. Gensler agrees with CFTC Commissioner Dan M. Berkovitz's assessment that the absence of intermediaries to monitor decentralized finance platforms means a lack of investor protection and, if so, how the SEC should address this issue within its jurisdiction (see related coverage); and

  • whether decentralized cryptocurrency exchanges warrant additional protections relative to those for centralized cryptocurrency exchanges.


This letter is likely the first step in Senator Warren introducing legislation to expand the authority of the SEC or the CFTC to regulate cryptocurrency exchanges. See also "Crypto is "Wild West" Needing Consumer Protections, Warren Says."

The most important questions asked by Senator Warren have fairly straightforward answers: (i) the SEC does not have authority to regulate exchanges that trade cryptocurrency assets that are not securities; and (ii) given that these exchanges are not regulated, the SEC does not believe that these exchanges are as "fair, orderly and efficient" as registered national securities exchanges.

It will be interesting to see Chair Gensler's reply to the question on international coordination. Mr. Gensler was aggressive in asserting the CFTC's authority globally during his tenure as chair of that agency; and that posture resulted in meaningful tensions that seem to have since cooled.

It will also be interesting to see whether any legislation introduced by Senator Warren proposes to give more authority over cryptocurrency exchanges to the SEC or the CFTC. Both agencies have expertise in regulating exchanges and clearinghouses. However, the SEC is larger and the securities markets and regulations are more "retail"-focused - so that might give the SEC the edge in Senator Warren's evaluation.

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