SEC Chair Gensler Defends Agency Approach to Crypto Regulation and Enforcement
Commentary by Steven Lofchie
SEC Chair Gary Gensler reasserted that crypto asset securities issuers and intermediaries must register with the SEC and denied claims that compliance "isn’t possible."
In remarks before the Piper Sandler Global Exchange & Fintech Conference, Mr. Gensler made clear that crypto security issuers must register with the SEC the offer and sale of their investment contract or meet the requirements for an exemption. He denied claims by crypto asset issuers that have publicly stated they "lacked 'fair notice' that their conduct could be illegal." He highlighted related regulations that (i) govern how issuers must register, (ii) provide flexible disclosure requirements in registration statements and (iii) have offered "years of guidance" on what constitutes a crypto asset security. In response to assertions that certain crypto asset securities tokens have "a function beyond simply being an investment vehicle," Mr. Gensler argued that "some additional utility does not remove a crypto asset security from the definition of an investment contract."
Mr. Gensler asserted that investors are deprived of "critical protections" when crypto asset intermediaries fail to register. He disagreed with the notion that "crypto intermediary compliance isn’t possible" and said that failing to implement separate lines of business or put in place safeguards against fraud does not provide intermediaries with "a free pass to put investors at risk." In recognition of the "risks and uncertainties relating to crypto assets," Mr. Gensler identified several measures taken by the SEC, including (i) reissuing a release stating the applicability of existing rules to crypto asset trading platforms, (ii) proposing amendments to qualified custodian requirements that would cover all crypto assets and (iii) SEC staff statements on public company accounting and disclosures relating to crypto assets.
Mr. Gensler added that with "wide-ranging noncompliance . . . it’s not surprising that we’ve seen many problems in [crypto assets] markets." He asserted that in markets where issuers and intermediaries fail to comply with foundational laws, "misconduct and bankruptcies are more likely to happen."
Commentary
Chair Gensler's statement raises the question as to why the SEC allowed Coinbase to register with the SEC and to have shares listed on Nasdaq. If Mr. Gensler believed that Coinbase's operations were illegal, then the SEC should have refused to register the securities or charged Coinbase with a crime at the point it sought to go public, if not before that. It seems unlikely to be the case that the SEC expected Coinbase to register as an exchange once its securities were listed on Nasdaq, and Coinbase never gave any indication that it intended to do so.
The price of Coinbase shares is now less than half of its full year high, meaning that investors have lost billions of dollars in value; in fact, they have lost tens of billions of dollars since the initial offering. Weren't investors reasonable in assuming that the SEC did not regard Coinbase as a wholly criminal enterprise, if the SEC allowed it to list its shares, knowing full well its activities and that it was not intending to register as an exchange?