What Crypto Users Need Know About Gary Gensler’s SEC
Acting SEC Enforcement Director Berger to Step Down. What Crypto Users Need Know About Changes At The SEC
Berger presided over the enforcement division when it launched the Ripple lawsuit.
* SEC said Berger presided over the agency’s prosecution of the Telegram initial coin offering and its initiation of the unregistered securities suit against Ripple Labs.
* Enforcement staff pursued “meaningful relief” for victims of cryptocurrency fraud during Berger’s tenure, SEC said.
Gensler Said To Be Named SEC Chairman
Gensler has testified before Congress about cryptocurrency and blockchain on multiple occasions.
Gary Gensler, a Washington and Wall Street veteran who has closely studied the cryptocurrency field, is expected to be named chairman of the U.S. Securities and Exchange Commission (SEC) in the next several days by President-elect Joe Biden, two sources familiar with the matter told Reuters on Wednesday.
* A former chairman of the Commodity Futures Trading Commission (CFTC), Gensler served as a key financial regulator for former President Barack Obama, spearheading new derivatives rules after the 2008 financial crisis. He also served in the Treasury Department during the Clinton administration.
* More recently, he has also testified before Congress about cryptocurrency and blockchain on multiple occasions, pushing back against comparisons between cryptocurrencies and Ponzi schemes and declaring that the still-unlaunched libra token met the requirements of being a security under U.S. law.
* At MIT’s Sloan School, Gensler taught a course on cryptocurrencies and blockchains, calling the technology “a catalyst for change in the world of finance and the broader economy.”
Cryptocurrencies Face Greater Oversight Under Gensler-Led SEC
Gary Gensler’s expected nomination to lead the U.S. Securities and Exchange Commission is seen ushering in an era of greater federal oversight of the $1 trillion cryptocurrency market.
Gensler, who most recently taught about cryptocurrencies and their underlying technologies at the Massachusetts Institute of Technology, previously chaired the Commodity Futures Trading Commission and was a partner at Goldman Sachs Group Inc. He is known for pushing back at banks and corporations in search of greater investor protections.
In talks and editorials over the last several years, he’s advocated for a nationwide way to register and monitor cryptocurrency exchanges, instead of leaving oversight to the states.
That could have implications for online exchanges like Coinbase Global Inc., which is planning to go public. The SEC is also likely to continue to go after thousands of initial coin offerings, as Gensler has said he believes that most of these digital tokens are unregistered securities.
“It is good to have an ex-banker in there who is smart enough to recognize the value of Bitcoin and other cryptocurrencies to building wealth and value in society,” said Tim Draper, a billionaire venture capitalist who is a large investor in cryptocurrencies. “He will understand the importance of allowing innovation, while watching over banks who might try to restrain trade by blocking the use of superior currency.”
In a 2018 Bloomberg Television interview, Gensler said that the pure-cash cryptocurrencies like Bitcoin would “need more protection.” The world’s biggest cryptocurrency by market capitalization quadrupled last year, and has continued to surge in volatile trading since the start of 2021.
Gensler has also advocated for greater regulation of cryptocurrency exchanges. He didn’t respond to a request for fresh comment.
“If it gets broad adoption, if we really think the crypto world is going to be part of the future, it needs to come inside of public policy envelope,” Gensler said in the 2018 interview. “That means we need to guard against illicit activity. And yes, we need to protect investors. The crypto exchanges, big exchanges like Coinbase, need to come within the SEC or the CFTC.”
Greater oversight could lead to greater mainstream adoption, he said.
“I would say, you want some form of regulation, you want traffic lights and speed limits, because then the public is confident to drive on the roads,” Gensler said in the 2018 Bloomberg interview.
He has also long railed against illegal offerings of securities, which the SEC has been actively pursuing.
In December, the agency filed a lawsuit against Ripple Labs Inc. for issuing more than $1 billion in unregistered tokens XRP. In a 2019 keynote at Harvard Law School, Gensler said “I don’t think the SEC is going to leave many ICOs off the hook.”
In his 2019 Congressional testimony, Gensler appeared to favor projects like Facebook-led Diem, which used to be called Libra — an effort to create a cryptocurrency for payments. But he did suggest that the effort may need to have banking regulations applied to it.
“Gary is extremely dialed-in on the crypto markets and understands them extremely well,” said Nic Carter, co-founder of researcher Coin Metrics. “If his stated views are any indication of his priorities as commissioner, I would expect the SEC to continue with or even accelerate its agenda of discouraging unregulated securities issuance in the form of tokens.”
An Old Foe of Banks Could Be Wall Street’s New Top Cop
Gary Gensler is expected to be Joe Biden’s pick to take over the Securities and Exchange Commission. ‘He will do things that are controversial.’.
President-elect Joe Biden’s expected pick of Gary Gensler to lead the Securities and Exchange Commission could give Wall Street its most aggressive regulator in two decades.
The finance industry has thrived under the Trump administration’s light regulatory touch. Mr. Gensler, who sources familiar with the transition say is likely to be tapped by Mr. Biden for SEC chairman, has a history of shaking up the status quo. If he gets the assignment, he would be tasked with toughening regulation and enforcement of public companies and the finance industry.
He did that when he ran the Commodity Futures Trading Commission, a smaller regulatory sibling to the SEC, from 2009 to 2013. There, he steamrolled the opposition to write rules from scratch governing the markets for hundreds of trillions of dollars of derivatives. Some of these complex financial instruments were blamed for the 2008-09 financial crisis.
Lawyers, regulators and lobbyists say Mr. Gensler would likely be the most active, pro-regulatory SEC chairman since William Donaldson ran the agency in the wake of the corporate scandals of the early 2000s, or Arthur Levitt’s tenure during the Clinton administration. They also expect a renewed eagerness to pursue enforcement cases against major corporations and Wall Street banks. At the CFTC, Mr. Gensler earned a reputation for an aggressive, sharp-elbow style of management more reminiscent of Wall Street than Washington, at times even clashing with officials in his own party.
“He’s a totally different cup of tea than we’ve had at the SEC,” said Hal Scott, a professor of capital markets law at Harvard Law School. “He will do things that are controversial.”
Mr. Gensler’s nomination hasn’t been formally announced by the Biden transition team. People familiar with the matter say it is no coincidence that his name emerged only after Democrats won control of the Senate following runoffs in Georgia on Jan. 5. The irony is Mr. Gensler is a product of Goldman Sachs Group Inc., a Wall Street giant that attracts criticism from progressives. He made partner at Goldman at 30 and then served in the Treasury Department and led the CFTC after an 18-year stint on Wall Street. Since leaving the CFTC, Mr. Gensler has been teaching at Massachusetts Institute of Technology’s business school.
A spokesman for the Biden transition team declined to comment for this article. Mr. Gensler didn’t respond to requests for comment.
Mr. Gensler’s record at the CFTC fits with the Democratic Party’s progressive wing, which hopes to use the SEC as a lever for driving domestic policy goals. These include combating climate change and racial injustice, forcing more transparency around corporate political spending and tilting the balance of power from executives to workers and small investors.
But the firms the SEC regulates are hopeful Mr. Gensler’s understanding of finance and markets would make him a pragmatist when balancing progressive demands against the implications of causing widespread disruption.
Among Democrats’ top priorities are for the SEC to require more-comprehensive reporting from public companies about the risks they face from climate change or government efforts to curb it. They say financial disclosures should also include more information about companies’ diversity and worker pay. And Mr. Gensler is already facing calls to further tighten a 2019 rule that stopped short of requiring brokers to put their clients’ interests ahead of their own.
“We are really looking for someone to be bold,” said Lisa Gilbert, executive vice president at consumer-advocacy group Public Citizen, adding that Mr. Gensler has shown an ability to challenge entrenched interests.
Critics of the SEC in recent years have said it focused too much on helping companies raise capital and not enough on investor protections. Rick Fleming, the SEC’s in-house investor advocate, said in a Dec. 29 report that the agency “engaged in numerous rule-makings of a deregulatory nature” last year that “often had the effect of diminishing investor protections.”
Some have also called for the SEC to refocus enforcement efforts on large banks and hedge funds. Under recently departed chairman Jay Clayton, the enforcement program emphasized wrongdoing that harms less-sophisticated investors, including cryptocurrency scams, Ponzi schemes and investment advisers who fleeced clients with murky fees.
Mr. Gensler dealt with the big banks at the CFTC when he oversaw enforcement actions against banks accused of manipulating a key interest rate known as Libor.
Another target of Democrats may be private-equity firms and hedge funds, lightly regulated investment firms that are off limits to small investors. The firms captured 69% of the capital raised in 2019, while the regulated public markets accounted for 31%, according to SEC estimates.
At the CFTC, Mr. Gensler faced fierce opposition from Wall Street over his push to make trading of derivatives more transparent as required by the 2010 Dodd-Frank Act. He advanced a series of regulations that required so-called swaps to be traded on public platforms, in an effort to eliminate the unseen buildup of risks that precipitated the 2008-09 financial crisis.
Former colleagues said Mr. Gensler wasn’t afraid to say no to powerful financial firms in meetings at the CFTC and that he was unflappable in sometimes-heated congressional hearings. Mr. Gensler’s nomination could face opposition in Congress from Republicans, Ms. Gilbert of Public Citizen said.
He clashed at times with Republican members of the CFTC, who accused him of leaving them out of key discussions over proposed rule makings. He was accused of implementing rules too fast, exposing the agency to legal challenges. A Republican commissioner in 2013 said in a speech that lawsuits challenging CFTC regulations were evidence of a “flawed rule-making process that prioritized getting the rules done fast over getting them done right.”
But he also demonstrated an unusual ability to navigate the competing interests of industry, lawmakers and other regulators to churn out a prolific volume of work. That track record likely made Mr. Gensler a front-runner for the SEC nomination.
At the SEC, Mr. Gensler would have to manage a much larger staff—4,500 employees to the CFTC’s 700—and a five-member commission that tends to be more partisan. He also has fewer congressionally mandated reforms to tackle than during his tenure at the CFTC, which was dominated by implementation of the Dodd-Frank financial reforms.
“The policy agenda for the SEC is pretty obvious…the question is who can get it done, sequence and prioritize,” said Dennis Kelleher, a Biden transition team adviser who is president of Better Markets, a group that advocates for stricter Wall Street oversight. “Gary proved at the CFTC that he has the ability to operate in multiple arenas at the exact same time.”
Biden Team Announces Pick To Lead SEC
Biden’s pick to run the SEC has some serious crypto and blockchain chops.
President-elect Biden’s team recently unveiled additional folks it plans on nominating for various positions after the inauguration on Wednesday.
One key pick is Gary Gensler as Chairman of the Securities and Exchange Commission, or SEC, according to a statement from Biden’s transition team on Monday. On Jan. 12, Reuters reported on anonymous sourcing forecasting Gensler as Biden’s choice. Today’s statement from the Biden team confirms the President-elect’s expected choice.
“Gary Gensler served as chairman of the U.S. Commodity Futures Trading Commission from 2009 to 2014,” the statement said. Coming immediately after the financial crisis, Gensler’s term at the CFTC saw him enforcing the provisions of the nascent Dodd-Frank Act in commodities markets.
Formal nomination will have to wait until Biden actually takes office, and will further need confirmation from the U.S. Senate. January run-off elections in Georgia, however, secured the Senate for the Democrats.
Gensler also taught classes on blockchain and crypto at MIT. Having someone knowledgeable on the crypto and blockchain industry leading the SEC could pave the way for educated regulation and guidelines. The SEC has been critical for its role in regulating the initial coin offering market, which has quieted down significantly since the commission began treating many ICOs as unregistered public securities offerings.
Biden’s Wall Street Watchdogs Signal New Era of Tough Oversight
President-elect Joe Biden’s team of financial regulators is taking shape, with progressive favorites being chosen for the top jobs at the Securities and Exchange Commission and the Consumer Financial Protection Bureau — moves that mean Wall Street should prepare itself for a new era of tougher oversight and stricter rules.
Biden’s SEC pick, former Commodity Futures Trading Commission Chairman Gary Gensler, 63, is known for sparring with the industry as the nation’s top derivatives watchdog during the Obama administration and for his deep knowledge of finance as an ex-partner at Goldman Sachs Group Inc.
That means he not only knows how to mobilize a bureaucratic federal agency but also understands the often impenetrable ways that Wall Street makes money — and how firms use that complexity to turn regulation in their favor.
His top targets likely will include Chinese companies that list on U.S. stock exchanges while bypassing American regulations, the surge in trading by neophyte investors during the coronavirus pandemic, cryptocurrencies and pushing Corporate America to reveal more about workforce diversity and how climate change impacts bottom lines.
Biden’s pick for the consumer agency, Rohit Chopra, 38, will seek to revive an agency that progressives contend was put to sleep during the Trump administration.
Chopra also is an acolyte of Senator Elizabeth Warren, the Massachusetts Democrat who conceived of the CFPB and is a renowned Wall Street adversary. If he succeeds in turning the agency around, life will almost certainly get less pleasant for student lenders, for-profit colleges, payday lenders and credit-card companies that progressives say prey on consumers.
The pending nominations send a clear signal that the rule-cutting and lax enforcement that Wall Street has grown accustomed to during four years of President Donald Trump are over. Here’s an overview of what the pending appointments mean for the agencies and for the financial industry.
Robinhood and SPACs
Robinhood Markets and special purpose acquisition companies — or SPACs — were among the finance industry’s hottest phenomenons in 2020. Both are sure to draw Gensler’s attention.
Robinhood, with its popular smartphone app, rode a wave of Covid 19-fueled day trading to add millions of customers. But critics say the company represents a disturbing trend of brokerages encouraging less-sophisticated investors to take risks that they don’t understand — and Gensler is likely to face pressure from progressives to erect new guardrails.
Robinhood has disputed claims that its platform promotes a “gamification” of trading as an inaccurate depiction of its business, saying its goal is to “democratize” wealth creation and investing by enabling a new class of consumers to trade shares and other assets.
Critics, including former SEC Chairman Arthur Levitt, say what’s needed is an aggressive examination by the regulator of whether apps use technological nudges to inappropriately stimulate excessive and even addictive trading. Robinhood has also faced repeated calls to improve its customer service, something the firm says it’s doing.
There’s another concern that the Robinhood-led boom in retail trading is inflating a stock bubble that could pop, triggering steep losses for investors — something that also worries progressives.
SPACs, which list on public exchanges to raise money to buy companies, have already been drawing scrutiny from the SEC. The attention is a direct result of how hot they are, with the vehicles used to raise a record $79.2 billion from U.S. investors in 2020.
Jay Clayton, who stepped down as SEC chairman last month, has said he’s concerned that potential investors aren’t receiving appropriate disclosures about conflicts and insiders’ lucrative pay structures. That prompted the agency to launch a review, which would now fall to Gensler.
Volcker Rule and Private Equity
After the 2008 financial crisis, Gensler solidified his status with progressives by insisting on a tough version of the Volcker Rule. The regulation, which banned proprietary trading by Wall Street banks, was eased during the Trump administration. Goldman and other firms will now be watching to see whether Gensler leads an effort among regulators to bolster its restrictions.
Another area in which Gensler is likely to square off with big names in finance is over the SEC’s approach to regulating private-equity firms. During the Trump era, the SEC sought to remove regulatory barriers that prevent private equity from raising money from retail investors. Progressives are hopeful that Gensler will move in the other direction, by bringing more transparency to buyout firms, which Warren and other lawmakers blame for loading companies with unsustainable debt burdens and cutting jobs.
A Crackdown on Chinese Stocks
One area that will demand Gensler’s attention is rising tensions between the U.S. and China — fighting that is now being waged in financial markets.
Congress passed legislation late last year that could lead to Alibaba Group Holding Ltd., Baidu Inc. and other Chinese companies getting kicked off of U.S. stock exchanges if they continue their non-adherence to American auditing rules.
At issue are longstanding American requirements that all publicly traded companies in the U.S. allow their auditors to be inspected by the Public Company Accounting Oversight Board. Gensler will be responsible for writing rules that make Chinese companies comply. Their penalty is possible ejection from U.S. markets.
The crackdown would follow a separate one already initiated by the Trump administration, which issued an executive order in November that requires American investors to sell their stakes in Chinese companies deemed a threat to U.S. national security.
New Rules For Crypto
Bitcoin is on a tear again, having surged roughly four-fold last year. That means it and other cryptocurriencies are likely to get renewed attention from Gensler’s SEC.
He’s quite familiar with the industry, having taught a class about it at the Massachusetts Institute of Technology, and has called for more regulation.
Some in the industry argue that more oversight wouldn’t necessarily be a bad thing because, right now, many institutional investors shy away from the space, as they see it as akin to the Wild West. As a result, stiffer rules might bring more capital flows to digital tokens.
Environment And Diversity
Progressives have long contended that the SEC should have just as strong a role in responding to climate change as more obvious agencies such as the Environmental Protection Agency.
A change at the top of liberals’ wish list is for the SEC to require public companies to boost disclosures of how a warmer planet and less-reliance on fossil fuels could impact profits, a move that could hit oil companies particularly hard.
Gensler could show he’s serious about such concerns by prioritizing whats known as environmental, social and governance investing, or ESG. One way he may do that is by establishing a new SEC office that’s dedicated to ESG issues.
The diversity of C-Suites and public companies’ employees is also a top focus for progressives, who want the SEC to force businesses to disclose more information on race and gender.
Chopra’s Quick Fix
One reason Chopra was picked for the CFPB, progressives say, is that he’s uniquely qualified to get a fast start in reversing some of Trump’s policies on day one.
Since he already holds a Senate-confirmed post as a Democratic member of the Federal Trade Commission, federal law allows him to join the CFPB immediately as its acting chief. In such an arrangement, he would be able to retain his position at the FTC and run the CFPB for about 300 days before the Senate signs off on his nomination.
While an official nod from the Senate is likely with Democrats poised to take control of the chamber, the several weeks or months it might require for confirming a CFPB chief is much longer than progressives are willing to wait.
The regulator’s shift under Trump has been impossible to miss. Since the outgoing president’s appointees took over in late 2017, it has imposed just a single fine against one of the U.S.’s six largest banks — a $500 million penalty against scandal-ridden Wells Fargo & Co. for allegedly overcharging auto lending and mortgage customers.
Banks from Wall Street to Main Street are expecting the CFPB to review the controversial — and lucrative — practice of lenders penalizing depositors when they spend money that they don’t have in their accounts. Known as overdraft fees, such charges generate some $12 billion annually for U.S. banks.
Consumer advocates also want Biden’s incoming CFPB chief to bring back an Obama-era rule that required payday lenders to assess prospective borrowers’ abilities to repay their loans.
Companies that provide short-term credit such as Enova International Inc., Curo Group Holdings Corp. and Elevate Credit Inc. could come under pressure, Height Capital Markets analyst Edwin Groshans told clients earlier this month.
Bitcoin Dips After Gensler Says SEC Must Root Out Crypto Fraud
Cryptocurrency enthusiasts exhibited a bit of nerves during Tuesday’s Senate confirmation hearing for Gary Gensler, the nominee for chairman of the U.S. Securities and Exchange Commission.
Bitcoin dipped to the lowest levels of the day after Gensler said that insuring that cryptocurrency markets are free of fraud and manipulation is a challenge for the agency. The largest cryptocurrency declined as much as 3% to $47,341 in New York trading. It has jumped about 65% since December.
Gensler, who served as a Commodity Futures Trading Commission chairman during the Obama administration, has been viewed as a strong advocate for digital assets. He serves as a senior advisor to the MIT Media Lab Digital Currency Initiative and teaches about blockchain technology and digital currencies.
State of Crypto: How SEC Chair Gary Gensler Could Differ From Predecessor Jay Clayton
Gary Gensler will testify before the U.S. Senate Banking Committee today for a confirmation hearing on his nomination to lead the SEC.
Gary Gensler ran the Commodity Futures Trading Commission (CFTC) after the 2008 financial crisis. Now, he’ll get a chance to run its securities-regulating counterpart.
Former Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler has been nominated to run the Securities and Exchange Commission (SEC) by President Joe Biden. Gensler unites a pro-regulation history with a pro-crypto viewpoint, and could finally implement the regulatory clarity many in the industry have desired.
In this, he’s likely to depart from predecessor Jay Clayton, who repeatedly said he believed initial coin offerings are securities but did not provide much guidance on when or how tokens might be classified as something other than a security.
Today, the U.S. Senate Committee on Banking, Housing and Urban Affairs will hold a hearing to consider his nomination for chairman of the SEC.
Why It Matters
Should he be confirmed, Gensler will shape crypto policy over the next several years, though it’s an open question if the industry will love the rules he implements. Under his tenure, the CFTC approved nearly 70 rules or pieces of guidance, and he may just regulate the hell out of crypto. He told the Senate Banking Committee he intends to continue focusing on consumer protection at the SEC.
“We have seen that when the SEC does its job – when there are clear rules of the road and a cop on the beat to enforce them – our economy grows and our nation prospers.,” Gensler said in his prepared remarks.
Companies are already hinting at or have announced plans to file to launch a bitcoin exchange-traded fund (ETF), a retail-accessible product that the industry has been pursuing for years. Some in the industry hope that under Gensler the SEC might finally create “bright-lines” regulatory guidance that clearly defines when a token is a security and when one is not.
He’ll also oversee litigation against companies that SEC staff believe have violated federal securities laws, including the high-profile lawsuit against Ripple Labs.
Breaking It Down
Like many of Biden’s nominees, Gensler was an official in former President Barack Obama’s administration. As CFTC chair, he had a major role in the Dodd-Frank Act, which sought to bring some consumer-focused reforms to Wall Street. Gensler has been a part of Team Biden since the president won the White House last year; Biden announced Gensler would lead his Wall Street reform team just days after news organizations projected his victory.
Many of his views on the digital asset space can be found in the transcripts of his lectures at MIT, some of which my colleague Danny Nelson went through. Gensler gave these lectures in 2018, though he has remained active in the industry as a member of the MIT Digital Currency Initiative.
He’s also spoken out about blockchain over the past several years. Below is a summary of his views on some issues that are important to the crypto industry.
A day before former SEC Chair Jay Clayton stepped down, the securities regulator filed a lawsuit alleging Ripple Labs, the San Francisco startup closely associated with the XRP cryptocurrency, had violated securities laws for over seven years by selling XRP in unregistered securities transactions.
Other senior SEC staff, including now-former Director of Enforcement Stephanie Avakian, also departed around that time. If approved, Gensler will inherit an agency overseeing one of its highest-profile crypto cases.
In his own words, Gensler believes XRP is “a non-compliant security,” though he said (again, this is from 2018) that it would require the courts to make that determination, “whether it’s appellate courts or the Supreme Court.”
He went on to explain that he believes XRP meets the requirements of the Howey Test, the Supreme Court case often used to determine whether something is a security.
The SEC has spent years suing companies that conducted initial coin offerings (ICOs) without registering their tokens as securities, often because they raised money specifically to build a project that could issue a token that investors could re-sell at a profit.
Gensler raised concerns about information asymmetry in one of his lectures, noting that U.S. law is designed to protect investors and consumers. He’s also expressed concern that ICOs, which were numerous in 2018, might violate securities laws, particularly given the projects that launched without having any code or tokens developed.
“Jay Clayton, who runs the SEC, has said in congressional testimony in February that he hadn’t met an ICO that he didn’t think was a security … But it wasn’t quite enough,” Gensler said.
He said early tokens may fail, but as some projects go live they could provide a roadmap for how future projects could succeed, pointing to Telegram (which ended its blockchain ambitions after the SEC sued) and Filecoin (which went live last year).
Central bank digital currencies (CBDCs) are becoming increasingly popular, with multiple central banks now trialing different types of sovereign digital currencies. In Gensler’s view, CBDCs could bring efficiencies to cross-border remittances or local payments.
Central Banks Have To Understand Why They Would Launch A CBDC And What The Benefit Would Be, He Said, Explaining:
“The strategic question for the central banks is, should we allow direct access to digital reserves? We have this intermediated central bank digital reserve called bank deposits, but should we have something direct to us? Like cash is a direct relationship between the central bank and the holder.”
Still, in that same lecture Gensler noted that a CBDC doesn’t necessarily need to rely on a blockchain platform, a view echoed by Boston Fed and MIT Digital Currency Initiative researchers looking into different technology bases that could support a digital dollar.
In 2019 Gensler participated in a wargaming exercise that looked at a hypothetical future where the digital yuan, China’s effort at a central bank digital currency, was live and used by the government of North Korea to bypass U.S. sanctions. The premise of the exercise was the U.S. may need to revisit how it enforces its sanctions regime, which basically seeks to lock individuals or entities out of the global financial system.
“I think it’s good to have a healthy debate about where we stand with the U.S. dollar, our reliance on SWIFT – the international messaging system – for a tool in our sanctions regime that we the U.S. have,” Gensler told CoinDesk ahead of the exercise. “We’re using it as a tool in geopolitics, a digital form of blockade that in the 17th and 18th and even in the 19th century, what one would have to do with ships we’re doing digitally.”
Gensler further noted during his MIT lectures that other countries could use CBDCs as part of an effort to bypass U.S. sanctions, citing Venezuela and Iran, both of which had announced efforts to create sovereign digital currencies at the time.
Does Crypto Fund Terrorism?
Last week, the U.S. House Financial Services Committee’s Subcommittee on National Security, International Development and Monetary Policy held its long-awaited hearing on domestic terror financing. You can read my preview and summary but my immediate impression was that it seems good crypto wasn’t being scapegoated as this tool for terror financing, despite multiple statements of concern by Treasury Secretary Janet Yellen and other lawmakers.
The hearing almost went in that direction at the beginning, when Rep. James Himes (D-Conn.), the subcommittee’s chair, asked the witnesses to speak to whether cryptocurrencies were enabling easier terror financing.
Instead, the witnesses compared cryptocurrencies to systems like PayPal or GoFundMe, and called for better moderation efforts by the companies behind these tools.
That said, the proposed FinCEN counterparty rule was raised multiple times, and so it is worth keeping an eye on any next steps here.
Robinhood, GameStop and Whether Blockchain Fixes This™
I wasn’t planning on talking about the Robinhood-GameStop thing again but the Depository Trust and Clearing Corporation (DTCC) published a proposal to shorten settlement times from T+2 to T+1, on the same day GameStop’s stock jumped like 100%. So let’s take a quick look.
First Off: If the bit about T+2 to T+1 didn’t make sense, read this article first, then come back to the newsletter.
Okay, so moving to T+1 requires industry agreement, meaning participants have to get together and say, “We think one-day settlement makes financial and operational sense and that we are all capable of handling it.” Robinhood CEO Vlad Tenev has come out in favor of shortened settlement times, blaming T+2-related margin requirements for why his company had to suspend trading in volatile securities last month.
The DTCC said in a blog post after that incident that it didn’t have the authority to unilaterally make that decision, but now “based on extensive industry engagement conducted throughout 2020,” it seems the industry could be open to faster settlement.
The DTCC has looked into whether blockchain in particular can offer a T+0/1 settlement solution through its Project Ion last year. In short, a distributed ledger-based settlement system can effectively shorten settlement times, though the Project Ion proof-of-concept paper noted that its PoC focused on usability over scalability.
“It’s important to note that NSCC and DTC can support T+1 and even same-day (T+0) settlement today, using existing technology. In fact, NSCC clears T+1 and T+0 trades every day and DTC is already a T+0 settlement platform. However, the current T+2 settlement cycle is a convention of market practice,” last week’s white paper said.
Gary Gensler’s confirmation hearing is today, as is that of CFPB Director-Nominee Rohit Chopra. I’ll be live-tweeting the hearing (shameless plug here). As of press time, there’s still no formal nomination for the next heads of the CFTC or OCC.
What Gary Gensler Thinks About Bitcoin’s Future
Cryptocurrency enthusiasts have been eyeing Joe Biden’s pick to run the US Securities and Exchange Commission for clues about how he might regulate the technology. In his confirmation hearing today, nominee Gary Gensler suggested that more government oversight of cryptocurrencies was in the offing.
He also hinted that the type of oversight will depend on which form of cryptocurrency is under discussion. With crypto prices on a tear in recent months, the frenetic debate about whether the rapidly evolving market constitutes a legitimate new asset class or a bubble ripe for abuse has turned into a regulatory conundrum, as institutional and retail investors race ahead of rules to govern the space.
As head of the SEC, Gensler would be in charge of cryptocurrencies deemed to be securities. During the Senate Banking Committee hearing, Gensler said that while the SEC should promote innovation in blockchain technology, if there are securities involved that trade on exchanges, “we want to ensure that there’s appropriate investor protection.”
This thinking isn’t new. Using the definition of a security to determine how a financial instrument should be regulated, known as the Howey test, dates back to a 1946 Supreme Court ruling, devised to help define which transactions constitute an investment contract. It’s a rule Gensler knows well.
He is known in progressive circles as a tough financial sector reformer from his post-financial crisis days as head of the Commodities Futures Trading Commission, but he is also hailed by the crypto crowd for his understanding of blockchain technologies, as an MIT economics professor who teaches about blockchain, digital currencies, and financial innovation.
Gensler’s comments during the hearing echo his teachings on the Howey test. By this logic, cryptocurrencies are generally either defined as utility tokens, which act like a form of tender, or security tokens, which represent equity or share in a company that would be regulated by the SEC.
If a coin offering is meant to give investors an ownership stake, then the company’s token should be subject to the regulations of a security, he told an audience at a 2018 MIT blockchain conference, even if it doesn’t offer a dividend, or have the typical attributes of an equity or bond.
“The investing public is clearly hoping for possible appreciation,” Gensler said. “When you quack like the duck, when you swim like the duck, when you walk like the duck…I think the bird’s a duck.”
Bitcoin, the most ubiquitous virtual currency, doesn’t qualify as a security, according to Gensler. “Bitcoin came into existence as mining began as an incentive in validating a distributed platform,” he said at the conference. Unlike other cryptocurrencies being offered by companies like Ripple, bitcoin had no initial token offering and no common enterprise.
Ripple, on the other hand, “sure seems like a common enterprise,” he concluded.
The SEC has since followed that logic. In December, it sued Ripple for selling a bitcoin-like digital asset called XRP, a high-profile case Gensler will inherit if he’s confirmed as the agency’s new chair.
Bitcoin’s value dipped on jitters about Gensler’s comments during the confirmation hearing. But according to the Howey test, those investors should be in the clear.
Former SEC Chairman Jay Clayton Joins Crypto Advisory Board
Clayton, who stepped down from the SEC in 2020, joins the regulatory advisory council of One River Asset Management.
Three months after resigning from the United States Securities and Exchange Commission, or SEC, Jay Clayton has joined an advisory board of crypto investment manager One River Asset Management, signaling a changing of the guard for the former securities regulator.
Clayton, along with Kevin Hassett of The Lindsey Group and Jon Orszag of Compass Lexecon, joins One River Asset Management’s newly formed academic and regulatory advisory council, the company announced Monday.
Although Clayton’s exact role within the advisory group wasn’t specified, One RIver CEO Eric Peters said his goal was to bring together distinguished individuals with “varying regulatory and policy experience.”
“We were impressed by Eric’s willingness to hear our varying views on the digitization of our monetary, banking and capital markets ecosystem and One River’s commitment to transparency,” Clayton said.
Clayton served a three-and-a-half-year stint at the SEC before resigning on Dec. 23, 2020. His tenure was defined by a substantial increase in monetary remedies, possibly to the tune of over $14 billion, and returning billions to harmed investors.
He was also present during the last cryptocurrency bull market when Bitcoin (BTC) mania reached mainstream investors. In 2019, Clayton warned investors they would be “sorely mistaken” if they expect that the cryptocurrency would be tradeable on major exchanges without more stringent regulations in place.
One River Asset Management emerged as a pivotal Bitcoin player in late 2020 by scooping up $600 million in crypto assets. At the time, the firm said it expected to own roughly $1 billion worth of BTC and Ether (ETH) by the first half of 2021. Those targets may have already been met, given the rapid appreciation of crypto assets so far this year.
Former SEC Chair Jay Clayton Tips New Bitcoin Regulations Are Coming
The former SEC chairman warns that regulation will come both directly and indirectly.
Former US Securities and Exchange Commission Chair Jay Clayton has stated that Bitcoin has not been classified as a security for a long time.
But speaking on CNBC’s Squawk Box on March 31, Clayton warned that its status as a non-security still does not protect it from the imposition of new regulations which, he warned, could be coming soon.
“Where digital assets land at the end of the day–will be driven in part by regulation both domestic and international, and I expect that regulation will come in this area both directly and indirectly,” says Former SEC Chairman Jay Clayton on #bitcoin. pic.twitter.com/voWcgCFqOH
— Squawk Box (@SquawkCNBC) April 1, 2021
Host Andrew Ross Sorkin pointed out that under Clayton’s watch the SEC did not take a position on Bitcoin regulation. Clayton responded that was because the asset was declared not to be a security before he even took up his position as the head of the regulatory body.
“Bitcoin was decided to be not a security before the time I got to the SEC. Therefore, the SEC’s jurisdiction over Bitcoin was rather indirect.”
Clayton has remained in the industry following his departure from the SEC in December 2020 and currently advises One River Asset Management on cryptocurrencies.
Although he professes not to have any special insights into what new laws are coming from his time heading up the SEC, he believes the regulatory environment is due for a shake up.
“Where digital assets land at the end of the day […] will be driven in part by regulation—both domestic and international—and I expect, and I’m speaking as a citizen now, that regulation will come in this area both directly and indirectly whether it’s through how these are held at banks, security accounts, taxation and the like. We will see this regulatory environment evolve.”
Clayton’s comments come just a week after billionaire hedge fund manager Ray Dalio warned that the U.S. may ban Bitcoin outright just as they did with gold in the 1930s.
His comments about Bitcoin’s status as a non-security are also interesting in light of Ripple’s appeals to the SEC for documents from the agency to determine how exactly it came to the conclusion that Bitcoin and Ethereum were not securities.
The company and its backers have repeatedly argued that XRP is not a security however the SEC believes it is markedly different due to being morcentralized. Former SEC attorney Marc Powers told Cointelegraph that the agency is executing significant overreach in its case against Ripple and its executives.
US Senate Votes To Confirm Gary Gensler As SEC Chair
Gensler’s confirmation comes almost three months after President Joe Biden first announced he was his pick for the SEC.
Voting mostly along party lines, the U.S. Senate confirmed the nomination of Gary Gensler to chair the Securities and Exchange Commission, or SEC.
In a vote of 53-45 today, the Senate members confirmed the former chair of the Commodity Futures Trading Commission, or CFTC, to lead the Securities and Exchange Commission. Gensler, a professor at the MIT Sloan School of Management, volunteered to join then President-elect Joe Biden’s team as a financial expert in November. Biden announced the former CFTC was his pick to chair the SEC shortly before his inauguration in January.
During his confirmation hearings with the Senate Banking Committee last month, Gensler was seemingly evasive about whether he would implement changes to SEC policy regarding crypto. However, he said he supported some of the body’s prior decisions, like the exclusion of Bitcoin (BTC) from the commission’s regulatory purview.
“Bitcoin and other cryptocurrencies have brought new thinking to financial planning and investor inclusion,” said Gensler at the time. “I’d work with fellow commissions both to promote the new innovation but also, at the core, ensure investor protection. If something were a security, for instance, it comes under security regulation, under the SEC.”
Gensler served as chairman for the CFTC under President Barack Obama from 2009 until 2014. He was known as a stringent regulator during his time as CFTC head, overseeing reforms to the $400 trillion financial derivatives market.
SEC Chair Hints At Greater Regulatory Oversight For US Crypto Exchanges
Gary Gensler said a regulatory framework for digital assets from the SEC or CFTC “could instill great confidence” for investors.
Recently confirmed U.S. Securities and Exchange Commission chair Gary Gensler punted to congress on providing more regulatory oversight to the crypto space, but also said the commission would act within its purview.
In a virtual hearing held by the House Financial Services Committee today, North Carolina Representative Patrick McHenry asked Gensler what the regulatory body would be doing to ensure a “vibrant digital asset marketplace with legitimate money and the rule of law.” McHenry highlighted collaborations across regulatory agencies regarding digital assets and cryptocurrencies.
Gensler said the crypto market could benefit from “greater investor protector” within the Securities and Exchange Commission’s, or SEC’s, current authority around securities and other financial products.
He added that he believed only the U.S. Congress had the power to address such regulatory oversight rather than having the commission overreaching its authority under his leadership.
“Right now, the exchanges, trading in these crypto assets, do not have a regulatory framework either at the SEC or our sister agency, the Commodity Futures Trading Commission,” said Gensler. “That could instill great confidence. Right now, there’s not a market regulator around these crypto exchanges, and thus there’s really not protection against fraud or manipulation.”
The hearing today was the third held regarding the controversy over GameStop stock shorts earlier this year. Lawmakers have been exploring allegations of market manipulation from Robinhood and major hedge funds in response to Redditors’ short squeeze of GameStop stock and others. The price of GME has been volatile since peaking at $469.49 on Jan. 28, falling to under $50, and since fluctuating between $100 and $300.
Senate members officially voted on Gensler’s nomination last month, meaning this was his first hearing on the GameStop controversy as SEC chair. During his confirmation hearings with the Senate Banking Committee, Gensler said he supported the SEC excluding Bitcoin (BTC) from its regulatory purview.
Gary Gensler’s Regulatory Clarity Sounds Awfully Familiar
Gary Gensler said Congress should provide clarity around crypto exchange regulation. A 2020 bill sought to do just that.
SEC Chair Gary Gensler’s been on the job for three weeks. He’s just revealed what increased regulatory clarity might look like for crypto.
Securities and Exchange Commission Chairman Gary Gensler, three weeks into the job, said the U.S. Congress could help protect cryptocurrency investors by drafting some laws around crypto exchange regulation, noting the current, limited jurisdiction of the SEC.
“I think that this market, which is close to $2 trillion, [this] crypto asset market is one that could benefit from greater investor protection,” he said.
“I think if [Congress were to take action] – because right now the exchanges trading in these crypto assets do not have a regulatory framework, either at the SEC, or our sister agency, the Commodity Futures Trading Commission – that could instill greater confidence. Right now there’s not a market regulator around these crypto exchanges, and thus there’s really no protection against fraud or manipulation.”
Why It Matters
Okay, some thoughts. First off, a (HUGE!) caveat that this is all speculation on my part.
With that out of the way, the entirety of the crypto industry’s support of Gensler comes from the idea that he understands crypto in a way his predecessor did not, and that this would lead to regulatory clarity. We now have a hint of how Gensler thinks he can provide this clarity.
Any number of issues pertinent to the crypto industry will depend on how the U.S.’ regulatory framework develops, including whether a bitcoin exchange-traded fund (ETF) is approved and how retail investors can tap the crypto market. The question becomes: Will Congress act with Gensler’s backing?
Breaking It Down
What we don’t know are the specifics. There’s no concrete SEC or CFTC framework from Gensler right now. What we do know is that he thinks one of these agencies should have clearer oversight authority to address possible fraud or manipulation around the cryptocurrency markets.
Of course, exchanges are regulated right now at the state level. There are problems with this, though. For one thing, an exchange must secure money transmitter licenses in every state where it wants to operate (except Montana, which doesn’t have a licensing regime), which takes money and time. I’m not sure whether Gensler’s proposed federal framework would supersede the state-by-state approach, but if it did, does that would be massive.
It’s the same problem that former Comptroller of the Currency Brian Brooks (now Binance.US CEO) tried to address with a federal trust charter to crypto companies. (While a few crypto custodians now have trust charters, it remains to be seen whether any exchanges will receive one.)
Both the SEC and CFTC have also demonstrated their oversight of the crypto markets with enforcement actions, but it sounds like Gensler’s going for something bigger. Though the CFTC has also laid claim to a number of crypto spot markets, there’s questions as to whether it actually has the authority to do so. So, in essence, it appears that what Gensler wants is some form of codified confirmation that a federal agency has oversight jurisdiction over the crypto markets in the U.S.
Here’s the next thing: We’ve seen this type of proposal in Congress already. Rep. Michael Conaway (R-Texas) introduced the Digital Commodity Exchange Act in the House of Representatives last year before he retired. That bill outlined how digital currencies could be treated similarly to commodities under federal law and, more importantly, it would create a federal jurisdiction for crypto exchanges.
To the best of my knowledge, there are no immediate plans to reintroduce the DCEA but it does seem like Gensler’s first recommendation has a frame all ready to go if someone in Congress does want to act on it.
It could also, if passed, have a somewhat more immediate impact than the Eliminate Barriers to Innovation Act, sponsored by Rep. Patrick McHenry (R-N.C.), who asked Gensler about digital asset regulation. McHenry’s bill, which has been passed by the entire House, would form a working group that studies the issue sends Congress recommendations after a year, versus the DCEA, which would skip the study aspect.
This extends beyond just the possible impact on exchanges. If Gensler believes the crypto industry in the U.S. needs more oversight, and in particular is concerned about market manipulation on exchanges, that might mean regulated products dependent on trustworthy exchanges won’t be approved before that oversight is in place.
Market manipulation, after all, is an issue the SEC has brought up repeatedly in denying approval of bitcoin exchange-traded fund (ETF) applications. As Bloomberg senior ETF analyst Eric Balchunas tweeted, Gensler may want this oversight to be formalized into law before an ETF is approved.
The possible downside I see here is if a new federal regulatory framework comes on top of the existing state-by-state regime. That would just become an additional burden on exchanges.
There’s also the risk a federal framework would benefit larger, more established exchanges and become too difficult for smaller competitors to match, which would lead to some consolidation. The DCEA, as envisioned last year, would offer exchanges a choice of federal or state regimes to follow, so theoretically it wouldn’t result in a greater burden or consolidation.
I don’t know whether Gensler’s first public comments on crypto as SEC chair are a positive or negative sign for the industry. My view on Gensler’s nomination and confirmation has always been that he is likely to provide regulatory clarity, but it may not necessarily be the type of regulatory clarity the industry wants.
That being said, my impression so far is that if Congress gets together and acts on this recommendation, this will be a long-term positive, both by giving exchanges some of that clarity they want and by giving retail or institutional investors more comfort about how their assets are regulated.
Last Wednesday, the Federal Reserve published a proposal to allow financial institutions with novel banking charters access to accounts and services offered by the Fed. In other words, non-traditional financial institutions – like, say, crypto exchanges with certain charters – would be able to tap the Fed directly for an account rather than have to go through an intermediary bank.
If finalized (there’s currently a 60-day comment period on the proposal), the rule would mean entities like Wyoming-licensed Special Purpose Depository Institutions would be one step closer to acting as a full bank native to the crypto industry.
“The payments landscape is evolving rapidly as technological progress and other factors are leading to both the introduction of new financial products and services and to different ways of providing traditional banking services (i.e., payments, deposit-taking, and lending).
Relatedly, there has been a recent uptick in novel charter types being authorized or considered across the country and, as a result, the Reserve Banks are receiving an increasing number of inquiries and requests for access to accounts and services from novel institutions,” according to the 20-page proposal.
David Kinitsky, the CEO of Kraken Bank, one such Wyoming-chartered bank, told CoinDesk his company had already applied for an account with the Fed, meaning this proposal is “of vital importance to us.”
The fact the Fed has taken the step of publishing this proposal is a good sign in and of itself, he said.
“We’re stoked about how they’re approaching it, with a risk-based approach,” he said. “There’s nothing novel in terms of the factors that they’re including here. It’s exactly the type of things that the Federal Reserve is looking at, in terms of risk to the reserve itself, risk to the payment system [and] risk to the economy.”
In other words, fintech or crypto platforms won’t have to jump through extra hoops simply because they’re within the fintech or crypto industries.
Kraken Bank intends to maintain full reserves for the assets it holds rather than operate any fractional lending services or otherwise engage in fractional banking, Kinitsky said.
This means the liquidity and solvency risks that other banks might face aren’t an issue for Kraken Bank, he said. Kraken Bank does not intend to apply for Federal Deposit Insurance Corporation insurance at this time for that reason.
That’s not to say the Fed is comparing these alternate-charter institutions to banks. In Kinitsky’s view, the U.S. central bank is trying to determine how best to evaluate novel financial institutions in their own right.
“I think it’s a really positive acknowledgement of the validity of some of these alternative charters that are eligible,” Kinitsky said. “… We don’t want big banks to be gatekeepers, in effect, for them through banking as a service platform. It’s super, super important. It keeps us up to speed with other kinds of global regions like the U.K. faster payments initiative.”
On Friday, Treasury Secretary Janet Yellen announced Michael Hsu would be taking over as the Acting Comptroller at the Office of the Comptroller of the Currency, effective Monday. Hsu comes from the Federal Reserve, where he was a part of the bank supervision division, so he’s got experience overseeing major financial institutions.
I’m not sure if he has any crypto background or where he’ll take former Comptroller Brian Brooks’ work from the past year. I’m also not sure if Hsu will eventually be nominated to become the full comptroller.
Has anyone heard anything about the CFTC?
Gensler Says SEC Should Be ‘Ready To Bring Cases’ Involving Crypto
The SEC chair continued to highlight investor protection as he previewed the regulator’s cryptocurrency enforcement efforts.
U.S. Securities and Exchange Commission (SEC) chief Gary Gensler said Thursday that federal financial regulators should “be ready to bring cases” against bad actors in crypto and other emerging technologies.
“As we continue to stay abreast of those developments, the SEC and FINRA [the Financial Industry Regulatory Authority] should be ready to bring cases involving issues such as crypto, cyber and fintech,” Gensler told FINRA conference attendees. He highlighted investor protection throughout his brief remarks.
The statements come as federal agencies propose upgrades to their crypto-monitoring efforts, from the Internal Revenue Service asking businesses to disclose high-value transactions to lawmakers calling for reviews of crypto-friendly banking policies.
“We need to do whatever we can to ensure that bad actors aren’t playing with working families’ savings and that the rules are enforced aggressively and consistently,” Gensler said.
He said regulators should be ready to pursue deceptive private funds, accounting fraud, insider trading and a bevy of other potential regulatory pitfalls rippling throughout the capital markets.
While hardly offering a playbook, Gensler’s remarks may bolster the perception that investor protection is a top priority for the Biden Adminstration’s SEC – especially when it comes to crypto.
Perhaps more telling was the SEC’s May 11 warning to investors in mutual funds that trade bitcoin futures. Though it contained no allegations of fraud, the memo highlighted bitcoin’s legendary volatility and instructed SEC staff to consider suspicious activity in the space.
US SEC Wants To Work With Congress To Regulate Crypto Exchanges
SEC head Gary Gensler said that the authority spends only $325 million per year on tech, which is less than some industry players spend in two weeks.
The United States Securities and Exchange Commission is looking to cooperate with Congress and other regulators to increase its oversight of cryptocurrency exchanges.
Gary Gensler, the newly appointed chairman of the SEC, said that the commission is looking forward to working with fellow regulators and Congress to fill gaps in investor protection in crypto markets.
The official announced the plans at a Wednesday hearing before the Financial Services and General Government subcommittee of the House of Representatives.
Gensler said that the SEC needs to provide similar protections for crypto exchanges that an investor would get on the New York Stock Exchange or Nasdaq:
“If you placed an order on an app, and you said, ‘Alright, I want to buy a stock,’ there are rules that protect you that somebody won’t use your order and get ahead of you. […] So, it’s trying to bring the similar protections to the exchanges where you trade crypto assets as you might expect at the New York Stock Exchange or Nasdaq.”
The new SEC head also outlined some of the challenges to regulating the cryptocurrency industry, stating that the SEC is “under-resourced” in financial terms when compared with some of the big players in the industry. “We only spend about 16% or 17% of our budget, about $325 million a year, on technology, which is less than probably some large firms spend in a month. Some of them even spend that much in two weeks,” he noted.
Gensler previously suggested that the SEC should be cooperating with Congress to properly address crypto exchange regulation in a market volatility-related hearing of the House Financial Services Committee in early May.
Last week, Michael Hsu, the new head of the Office of the Comptroller of the Currency, announced that the agency has been in talks with the U.S. Federal Reserve and the Federal Deposit Insurance Corporation about setting up an “interagency policy sprint team” focused exclusively on crypto.
US Regulators Must Collaborate On ‘Regulatory Perimeter’ For Crypto: OCC Head
Acting OCC head Michael Hsu wants greater interagency cooperation in establishing regulatory guidelines for the crypto sector.
The acting comptroller of the currency, Michael Hsu, has stated that regulatory agencies in the United States should establish a “regulatory perimeter” for digital assets and cryptocurrencies.
In an interview with Financial Times, Hsu indicated that U.S. regulators will look to take a more active role in policing the crypto-asset sector with an emphasis on minimizing the associated risks faced by investors and consumers.
“It really comes down to coordinating across the agencies,” Hsu said, adding: “Just in talking to some of my peers, there is interest in coordinating a lot more of these things.”
Hsu noted that the first meeting of the interagency, crypto-focused “sprint” team took place earlier this month. The team comprises representatives from the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
Hsu described the group as “small” but “senior,” adding that it is tasked with presenting “ideas in front of the agencies to consider” rather than formulating policy. Hsu emphasized the speed of growth and innovation in the crypto sector, asserting that a failure to begin acting now will only make policing the sector harder in the future:
“The idea is that time is of the essence and if it’s too big that gets harder.”
Hsu is not alone in thinking the United States lacks robust regulatory guidelines for crypto assets, with Securities and Exchange Commission Chairman Gary Gensler highlighting “gaps” in the “current system” regarding crypto while speaking to a House committee last month.
Gensler noted the Treasury Department has recently focused on “anti-money laundering and guarding against illicit activity” in the digital asset industry.
SEC Chief Gary Gensler Braces For Clash With Crypto Traders
Gensler wants to regulate digital assets to the same extent as stocks, bonds and commodity-related trading instruments.
Securities and Exchange Commission Chairman Gary Gensler this week declared war on what he called the Wild West of crypto trading, promising a vigorous attack on fraud and misconduct. But progress is likely to be more piecemeal and incremental than wholesale and sudden.
Mr. Gensler outlined his desire to regulate digital assets such as bitcoin and other crypto products to the same extent as stocks, bonds and commodity-related trading instruments. He told the Aspen Security Forum on Tuesday that his priorities include newer innovations such as stablecoins and decentralized finance, products that are beginning to draw more mainstream investors.
The impulse to regulate these markets is growing more evident around the globe. Japan’s top financial regulator said Wednesday that plans to combat money laundering would also include digital currencies.
Mr. Gensler’s mission faces several obstacles, including the cryptocurrency industry’s historical resistance to following SEC rules. Because so many crypto developers have bypassed the SEC’s front door, the agency has tried to rein them in through enforcement, a slow process that requires investigating a particular product and either suing the team behind it or convincing them to settle and adopt the SEC’s requirements.
“There is going to be a more aggressive enforcement posture, and I think that is one way to bring order to chaos,” said Lee Schneider, a securities lawyer who has worked at several broker-dealers and cryptocurrency firms. “That is one way, but perhaps not the most effective or the most evenly distributed way.”
One of the biggest problems for Mr. Gensler is bitcoin, a cryptocurrency with a market capitalization of $710 billion and one that Washington has acknowledged is a commodity. Market regulators don’t have authority to write rules for how commodities are bought and sold—only for financial products such as futures whose value is tied to the real-world products.
Mr. Gensler has said Congress should create an investor-protection regime for bitcoin trading. But lawmakers tend to move slowly on financial-regulation overhauls, and typically write laws only after a crisis.
That means Mr. Gensler must use the SEC’s existing powers, which limit him to policing crypto assets that qualify as securities. Many are, but crypto developers insist SEC oversight doesn’t fit their technology and trading protocols.
To date, the SEC’s strategy has centered on suing token sellers on a case-by-case basis. The SEC has prevailed—through settlement or trial verdicts—in every such enforcement action it has filed. As a result, public sales of crypto tokens largely stopped, with startups limiting the deals only to private investors.
Late last year, the SEC sued Ripple Labs Inc. and two of its executives, Chris Larsen and Brad Garlinghouse, accusing them of raising $1.3 billion by selling an unregulated cryptocurrency, XRP, that should have been registered with the SEC.
Larger U.S. crypto exchanges reacted by halting trading in XRP. More crypto exchanges should reckon with whether they are dealing in unlicensed securities, the SEC chairman told CNBC on Wednesday.
“They’ve got to come in and let’s talk to them,” Mr. Gensler said. “Many of them right now are trying to say, ‘you know, well, well, we’re not going to come in.’”
Newer crypto innovations, such as stablecoins and decentralized finance, or DeFi, could form the next wave of enforcement targets, according to securities lawyers. Some stablecoins may meet the definition of mutual funds, while certain DeFi applications could be investments that should be registered with federal regulators, Mr. Gensler said.
Stablecoins, which seek to track the value of national currencies such as the U.S. dollar, are used by traders to shift value between exchanges and move between strategies. Total stablecoin supply is about $113 billion, more than triple the level from the start of the year, according to The Block, a news and data provider.
Forcing stablecoin issuers to register the assets as securities could be painful for some players, said Charles Cascarilla, chief executive of Paxos, a blockchain company that developed Binance USD, a dollar-backed stablecoin. But the industry would ultimately benefit from transparency into the reserves that underpin the coins’ value, he added. “Oversight creates trust, and trust can lead to widespread adoption,” Mr. Cascarilla said.
DeFi encompasses a range of projects that seek to replicate traditional financial activities, such as trading and lending, using cryptocurrencies and the internet. DeFi has boomed during the past year, with many projects avoiding the most basic regulation such as anti-money-laundering controls.
Regulators may have trouble applying securities laws to DeFi, where projects are often set up as automated peer-to-peer networks with no central entity operating them. In contrast, the SEC and other federal agencies largely focus on people and companies. Mr. Gensler suggested that legislation might be needed to impose investor protections on DeFi.
“The problem is that regulation applies to entities,” said Lee Reiners, executive director of the Duke University’s Global Financial Markets Center. “But with a decentralized trading or lending platform, it’s not clear who that entity is.”
The industry could potentially avoid an enforcement blitz by agreeing to follow SEC rules or pursuing exemptions on a case-by-case basis. The SEC has exempted a few digital assets from oversight. In those cases, the token wasn’t sold to raise capital and was used for purposes such as videogames or flights on business jets.
Some still argue Mr. Gensler should stop enforcing old rules and propose an updated code tailored to how crypto works. But Mr. Gensler and other regulators have shown little interest in that.
“Many in the crypto industry are saying that the SEC should come up with new rules,” said Michael Didiuk, a former SEC lawyer and now a partner at Perkins Coie LLP. “The SEC, on the other hand, has repeatedly said that, for the most part, the rules are there.”
‘Nakamoto’s Innovation Is Real,’ Says SEC Chair Gary Gensler
Gary Gensler describes Satoshi Nakamoto as an important innovator in cryptography and that their “innovation spurred the development of crypto assets and the underlying blockchain technology.”
Gary Gensler, chair of the United States Securities and Exchange Commission, or SEC, believes that the blockchain revolution started by Satoshi Nakamoto in 2008 is more than just a fad, but a real value proposition for the future of the internet.
In an interview with the Aspen Security Forum on Tuesday, Gensler talked about his role at the Massachusetts Institute of Technology, where he taught about the intersection of finance and technology:
“[…] in that work I came to believe that though there was a lot of hype masquerading as reality in the crypto field, Nakamoto’s innovation is real.”
— Documenting Bitcoin (@DocumentingBTC) August 3, 2021
Gensler noted that, while some within the public sector wish that cryptocurrency would just go away, the technology likely has a big role to play in the future of finance.
“I really do think there’s something real about the distributed ledger technology, moving value on the internet,” he said.
Some within the crypto community took Gensler’s comments to mean that he’s studied the entire field of blockchain and concluded that Bitcoin is the only real innovation. A transcript of Gensler’s address to the Aspen Security Forum appeared to be hyper-focused on the Bitcoin (BTC) white paper published by Satoshi Nakamoto more than a decade ago.
— Rohun vora (@rohunvora) August 3, 2021
“At its core, Nakamoto was trying to create a private form of money with no central intermediary, such as a central bank or commercial banks,” Gensler said in his remarks. Although he acknowledged that no single cryptocurrency broadly fulfills all the functions of public currencies like the dollar, he said assets like Bitcoin provide a different value proposition:
“Primarily, crypto assets provide digital, scarce vehicles for speculative investment. Thus, in that sense, one can say they are highly speculative stores of value.”
After being confirmed by the Senate Banking Committee in April of this year, Gensler assumed the role as SEC chair in June, replacing the outgoing Jay Clayton, whose term expired the same month. Gensler’s five-year term is scheduled to last through 2026. He believes in creating a “robust” regulatory framework for cryptocurrencies in the United States, especially in emerging DeFi markets such as lending.
Crypto’s ‘DeFi’ Projects Aren’t Immune To Regulation, SEC’s Gensler Says
Some peer-to-peer trading and lending projects have features that may trigger the need for regulation, chairman says.
A new breed of digital asset exchanges is potentially the holy grail for cryptocurrencies: online places for people to trade and lend that purportedly involve no middleman setting the rules or taking fees.
But these peer-to-peer networks, so far completely unregulated in the U.S., may not be immune from oversight, said Gary Gensler, chairman of the Securities and Exchange Commission. Some decentralized finance projects, known as DeFi, have features that make them look like the types of entities the SEC oversees, Mr. Gensler said in an interview Wednesday.
DeFi developers write software that automates transactions and say they then step away from the project, allowing it to operate with no central entity in charge. They argue that such decentralization defeats the need for oversight by the SEC, which has said that some cryptocurrencies, such as bitcoin and ether, are sufficiently decentralized to avoid regulation.
But Mr. Gensler, who took over in April, said projects that reward participants with valuable digital tokens or similar incentives could cross a line into activity that should be regulated, no matter how “decentralized” they say they are.
“There’s still a core group of folks that are not only writing the software, like the open source software, but they often have governance and fees,” Mr. Gensler said. “There’s some incentive structure for those promoters and sponsors in the middle of this.”
The SEC under Mr. Gensler has doubled down on an effort, started several years ago, to look for cryptocurrency projects that are offering investments that should be regulated. In the past, that strategy has leaned heavily on enforcement actions that target digital-asset issuers or exchanges on a one-by-one basis.
Mr. Gensler, a longtime policy maker and former banker at Goldman Sachs Group Inc., two weeks ago promised a vigorous attack on fraud and misconduct in the market. He also said he would ask Congress to help legislate a solution to fill regulatory gaps, such as cases in which some digital assets don’t fall neatly into an existing regulatory framework.
A variety of DeFi platforms have popped up, with some rivaling the trading volumes of more established centralized cryptocurrency exchanges.
Unlike conventional crypto exchanges, DeFi apps don’t require users to hand their digital tokens to an exchange to be able to trade. That appeals to traders worried about losing their assets to hackers who steal digital coins from exchanges. There is also no central authority deciding who is allowed to trade, or what tokens can be traded.
DeFi projects generally don’t have safeguards against money laundering, or “know your customer” measures in which an exchange confirms the identity of traders using the platform. That also could raise red flags for authorities.
The SEC earlier this month brought its first enforcement action against a DeFi firm, Blockchain Credit Partners, and two men who ran it.
The project recruited investors to contribute their digital assets in exchange for a slice of income-generating car loans. The business was supposed to be decentralized because a separate “governance” token granted owners the right to make decisions about the business and share in the management company’s profits.
The SEC said the project’s creators misled investors about how the business worked and sold $30 million of digital tokens in violation of investor-protection laws.
The term DeFi is “a bit of a misnomer,” Mr. Gensler said, speaking generally and not about the Blockchain Credit case. ”These platforms facilitate something that might be decentralized in some aspects but highly centralized in other aspects.”
Mr. Gensler said questions about how DeFi may be regulated recall a debate that occurred about 15 years ago over other peer-to-peer lending platforms. Lenders such as Prosper Marketplace Inc. and rival LendingClub Corp. lined up individual investors to fund small loans to consumers that the companies made in partnership with banks.
Prosper, for instance, then sold interests in the loans in the form of promissory notes, with individual investors receiving interest payments as the loans were repaid. The company didn’t initially register the loans with the SEC, which in 2008 said they were securities.
After an SEC investigation, Prosper agreed in 2008 to register the loans, which involved providing information to investors about the borrower’s creditworthiness. That same year, LendingClub agreed to do the same.
Can SEC’s Gary Gensler Offer More Than Tough Talk?
The new chairman has taken a not-so-gentle stance on Bitcoin and U.S.-listed Chinese companies like Alibaba. But does his agency have any real bite?
Gary Gensler, the U.S. Securities and Exchange Commission’s new chair since April, has been making hawkish sounds about risky assets lately. In August alone, he slammed the crypto world as “the Wild West,” one that’s “rife with fraud, scams and abuse.”
He labeled the likes of Alibaba Group Holding Ltd. and other New York-listed, Cayman Islands-incorporated Chinese tech companies as mere “shell companies.”
Keen to rein in his bêtes noires, Gensler is engaged in a turf fight with the Commodity Futures Trade Commission, over the nature of crypto tokens. On Aug. 3, he staked out his territory by saying many of them may be “unregistered securities.”
That claim was rebuffed a day later by the outgoing CFTC chairman Brian Quintenz, who is seen as an ally by crypto traders.
Gensler is now seeking Senator Elizabeth Warren’s help for authority to regulate such exchanges.
To deal with Chinese companies, Gensler called for a “pause” in their U.S. initial public offerings last month. The SEC is starting to issue new disclosure requirements to those contemplating a New York listing, asking about their corporate structure. That would be their “shell” nature, in Gensler’s vocabulary.
It will also require listed companies to disclose more regulatory and political risks, Bloomberg News reported.
With the passing of the Holding Foreign Companies Accountable Act last year, the SEC can now force a delisting if a company refuses to provide information requested by the agency or by the Public Company Accounting Oversight Board, the auditor of auditors established as a result of the 2001 Enron scandal.
Despite all the thundering, can Gensler’s SEC, which has an annual budget of about $2 billion, simply march in and police this wild, wild west? The agency already has a full plate, overseeing about $100 trillion in annual securities trading, 24 national exchanges, and the disclosures of 7,400 reporting companies, among others.
For one thing, forcing a delisting is much easier said than done. There are 248 Chinese corporate names on U.S. exchanges, boasting over $2 trillion market cap as of early May; the SEC cannot possibly have the time nor the money to investigate them all.
The agency’s record isn’t promising. It was slow and reactive between 2018 and 2020, despite the Trump administration’s hardline rhetoric on China. That was the conclusion of a study by CLSA and Mithra Forensic Research.
By looking at the exemptions the SEC used to deny Freedom of Information Act requests, the study found that only five companies — iQiyi Inc, TAL Education Group, GSX Techedu Inc., Alibaba and China Petroleum & Chemical Corp. — were investigated in that three year period. All, except for the state-owned China Petroleum, were short-seller targets.
In other words, the SEC appeared to have relied mostly on whistleblowers instead of its own internal investigative methods — such as accounting forensics or big data — to identify suspect companies.
In June, Gensler fired William Duhnke as chair of the PCAOB, a win for liberal senators Warren and Bernie Sanders, powerful voices on the Senate’s banking and budget committees. The Trump appointee was criticized for being ineffective and taking record low actions against auditors.
The SEC’s long-standing trouble with China Inc. is just one example of its inefficiency. Apart from a lack of resources, the chairman is swamped. He has more than 20 direct reports who deal with everything from enforcement to economic and risk analyses.
If investigating Chinese companies proved elusive for the agency, how can it regulate crypto, a much murkier world where the issues go beyond accounting fraud? The agency’s main weapon is to bring civil charges.
Gensler has a reputation for being a tough regulator. But it’s worth remembering that the SEC chairman needs to appease powerful politicians, mainly because of the makeup of the commission.
All decisions are made by majority vote of a five-person bipartisan group — two Republicans, two Democrats, and the chairman, who is in theory a political independent, appointed by the U.S. president.
As such, the SEC’s enforcement, as well as its budgets, vary from administration to administration. Or even within a presidential term. Five years ago, Warren called on President Barack Obama to replace his SEC appointee Mary Jo White for her refusal to develop a political spending disclosure rule. White stayed on till Obama left the oval office.
In the meantime, despite Gensler’s posturing, the world is moving on. Bitcoin has recovered from Gensler’s not-so-gentle remarks and reclaimed the $50,000 level this week.
And despite the Chinese government’s broad, brutal crackdown on big tech, retail investors continue to buy on the dip — or, depending on your point of view, catch the falling knife — in U.S.-listed ETFs such as KraneShares CSI China Internet Fund in July and August. It’s tough to regulate away day traders’ love for roller coaster rides. The SEC is lots of bark and very little bite.
State of Crypto: SEC vs. CFTC
A Crypto Turf War May Be Brewing Between Two U.S. Regulators.
While the Senate’s bipartisan infrastructure bill has been top-of-mind for the past month, the U.S. Securities and Exchange Commission has been signaling its own importance to the crypto industry, which may lead to an eventful autumn.
What A Year This Month Has Been
What dog days? August has been a pretty crazy month. While the Senate’s infrastructure bill has sucked up a large amount of the oxygen, there’s been quite a lot of other news. Maybe the most important items in the U.S. came from the Securities and Exchange Commission (SEC), which seems to be gearing up for a busy autumn.
Why It Matters
The SEC is one of the most important federal regulators to the crypto industry in the U.S., and in recent months it’s been signaling a more aggressive approach to the crypto industry.
Breaking It Down
There are three key things I’m watching for with the SEC this fall. The first is the possible approval of a bitcoin (BTC, -0.37%) futures exchange-traded fund (ETF). We’ve talked about bitcoin ETFs before, and judging from comments from SEC Chair Gary Gensler, it sure seems like a futures-based ETF is more likely than a spot-based ETF.
An approval wouldn’t be the same as if the SEC approved a full bitcoin ETF, but it’d still be a regulated investment product that people curious about crypto, yet hesitant about directly investing in bitcoin, could look to as an alternative.
There are two interesting signals on the ETF front that seem to support the idea that one (or more) futures-based products might be approved this year.
The first signal came when Gensler told the Aspen Security Forum that he looks forward to SEC “staff’s review of such filings, particularly if those are limited to these CME-traded bitcoin futures.”
A handful of companies immediately filed bitcoin futures ETF applications in the wake of his remarks.
More recently, VanEck and ProShares applied for ethereum (ETH, -0.84%) futures ETF products, but simultaneously withdrew them on Aug. 20. This suggests that the SEC spoke to these companies privately. The SEC has asked companies to withdraw their ETF applications in the past (particularly 40 Act funds, so named because they operate under a 1940 law).
There’s still no guarantee that a bitcoin ETF – or even a bitcoin futures ETF – will receive the SEC’s green light this year, but the fact that agency officials are sending signals about how they’re approaching these applications says something.
The second big thing on my radar is what kind of, sort of, maybe looks like a brewing turf war between the SEC and its sister agency, the Commodity Futures Trading Commission (CFTC), over jurisdiction within the crypto market. It’s too early to say this is happening for sure, and it’s obviously way too early to predict how it’ll play out, but it’s worth keeping an eye on what agency officials say about what falls under their purview.
However, we’ve seen comments from current and former CFTC officials about the agency’s role in regulating the crypto markets, including Commissioner Brian Quintenz, Commissioner Dawn Stump and former Chair Chris Giancarlo.
These comments seem to be a response to Gensler asking for greater authority over the crypto markets.
I Think The Discussion Is Going To Become:
* Who Has Oversight Of Specific Spot Markets?
* Is An Exchange Subject To Sec Jurisdiction Just Because Some Of Its Listed Assets Might Be Securities While Others (Like Bitcoin) Aren’t?
* Does The Cftc Have Oversight Of Exchanges That List Spot Markets For Cryptocurrencies That Aren’t Securities?
Stump said the CFTC doesn’t oversee these spot markets, but it’s unclear to me the SEC necessarily has a clear case in favor of this supervision either.
This goes back to the ETF question as well. The SEC has said in the past that it’s uncomfortable approving ETF applications unless it can closely track the market for potential fraud or manipulation.
A futures market operated by CME is far more likely to meet this standard because CME and the futures product it lists are regulated by the CFTC. The bitcoin spot market, spread across scores of exchanges around the world, is somewhat more unwieldy.
Finally, I’m keeping tabs on regulatory issues faced by decentralized finance (DeFi). I wrote about this earlier this month, but the SEC seems to be building precedent for more enforcement actions in this part of the crypto world.
Last week, AnChain.AI, an analytics firm, told Forbes it had signed a deal with the SEC to monitor DeFi transactions.
This comes on top of enforcement actions against DeFi trading platforms.
And, just to tie this back to the infrastructure bill we’ve all been looking at for the past four weeks, I understand that the Treasury Department does want to capture data from so-called decentralized exchanges with intermediaries, so I imagine there may well be some crossover there as well.
Today will be CFTC Commissioner Brian Quintenz’s last day at the agency. Biden has yet to formally nominate a chairperson to a full term at the agency (though rumors are he’ll tap Acting Chair Rostin Behnam), and it’s unclear how long it may take to fill Quintenz’s seat.
Crypto Market Won’t ‘Last Long Outside’ Regulatory Framework, Gensler Says
Platforms should be “asking for permission” rather than “begging for foregiveness,” the SEC chair said.
The crypto market may struggle to survive in the U.S. outside the country’s regulatory framework, according to U.S. Securities and Exchange Commission Chair Gary Gensler.
* The industry’s future in five to 10 years lies “within a public policy framework,” Gensler said in an interview with the Financial Times Wednesday.
* “History just tells you, it doesn’t last long outside. Finance is about trust, ultimately,” the SEC chair said.
* Gensler reiterated his desire for crypto trading platforms to register with the SEC because a number of cryptocurrencies can be deemed as securities. “Talk to us, come in,” he said.
* “There are a lot of platforms that are in operation today that would do better engaging. Instead there is a bit of … begging for forgiveness rather than asking for permission.”
* Gensler has said previously that he is weighing up more robust regulation of the crypto market, dampening hopes held by many in the industry that his interest in the space may lead to a rather hands-off regulatory approach.
SEC boss Gary Gensler believes crypto assets need to act within a public policy framework to survive over the long term.
Crypto assets will not last long outside of a public policy framework because “finance is about trust,” warns Gary Gensler, the chair of the United States Securities and Exchange Commission.
Speaking to The Financial Times, Gensler stressed the need for a regulatory framework for crypto platforms for their own survival. He explained that crypto assets should be under the same public policy imperatives to protect investors and fight illicit financial activities.
He said that the global market capitalization for cryptocurrencies has already surpassed $2 trillion and, if crypto is “going to have any relevance five and 10 years from now, it’s going to be within a public policy framework,” adding:
“History just tells you, it doesn’t last long outside. Finance is about trust, ultimately.”
Echoing his earlier suggestion for crypto trading platforms to register with the SEC, he said, “There are a lot of platforms that are in operation today that would do better engaging and instead there is a bit of […] begging for forgiveness rather than asking for permission.”
Gensler argued that the lack of traditional brokers makes crypto and decentralized finance (DeFi) platforms a challenge for regulators because it’s unclear to whom the law applies in the DeFi ecosystem. Calling DeFi a variation of the peer-to-peer lending businesses, he argued that those platforms have “a fair amount of centralization” with governance mechanisms, fee models and incentive systems:
“It’s a misnomer to say they are just software they put out in the web. But they are not as centralized as the New York Stock Exchange. It’s sort of an interesting thing that is in between.”
Since his appointment in April, the new SEC chair has repeatedly called for robust regulations for the crypto ecosystem. On the other hand, some crypto leaders argue that stricter regulations would not necessarily help to prevent fraud.
Gary Gensler Focuses On Crypto Trading Platforms, Payment For Order Flow In Senate Hearing
Securities and Exchange Commission chairman says many crypto assets meet definition of securities.
Securities and Exchange Commission Chairman Gary Gensler said he was taking a hard look at cryptocurrency-trading platforms in a hearing Tuesday in which he called for more funding for the regulatory agency.
Mr. Gensler also reiterated his openness to potentially banning payment for order flow, a practice in which stockbrokers sell customers’ trades to high-speed trading platforms.
The official appeared before the Senate Banking Committee to outline a far-reaching policy agenda that would shake up some Wall Street firms’ business models and require heftier disclosures from public companies. He emphasized the SEC’s mission of protecting investors while pointing to challenges stemming from emergent technologies like cryptocurrency and sophisticated data analytics used by financial firms.
“More retail investors than ever are accessing our markets,” Mr. Gensler told the committee. Noting that the SEC’s staff has declined 4% since fiscal 2016, he repeatedly called for Congress to provide more resources for the agency to police capital markets that have grown in size and complexity. “Funding-wise, we could use a lot more people.”
Since being confirmed by the Senate in April, Mr. Gensler has laid out a regulatory agenda that some experts say would amount to the most significant revamp of U.S. securities law in decades.
Among the major fights looming with industry groups are potential rule changes for brokers that sell customers’ orders to high-speed trading firms, the SEC’s plans to increase public companies’ disclosure requirements about their workforces and risks stemming from climate change, and efforts to police the fast-growing cryptocurrency market.
Republicans have argued that the SEC’s agenda under Mr. Gensler is partisan and risks limiting investors’ opportunities in the effort to protect them. They also warned him to tread lightly in his effort to police cryptocurrency markets, citing industry arguments that greater regulation could force financial innovation overseas.
“As to the people and the companies that you regulate as chairman of the SEC, do you consider yourself to be their daddy?” said Sen. John Kennedy (R., La.). “Why do you impose your personal preferences about cultural issues and social issues on companies and therefore their customers and their workers?”
Mr. Gensler replied that investors are seeking more information about issues such as the risks to companies posed by climate change.
“If investors want information about climate risk—and it looks like tens of trillions of dollars of assets under management are asking—then we at the SEC have a role to put something out to notice and comment, do the economic analysis, and really see what investors are saying.”
In his testimony, Mr. Gensler discussed efforts to improve the resilience of the market for U.S. Treasury debt, which seized up in March 2020 as the coronavirus pandemic struck.
He also mentioned plans to enhance disclosures from private funds—a category that includes venture capital, hedge funds and private equity—to their investors and to enhance competition.
Mr. Gensler renewed calls for cryptocurrency-trading platforms to “come in and talk to us,” given the SEC’s view that many of the assets they offer to investors meet the agency’s definition of a security. In an unusual move for an SEC official, he publicly singled out one firm, Coinbase Global Inc., after Sen. Elizabeth Warren asked him about a possible outage at the exchange last week.
“They haven’t yet registered with us, even though they have dozens of tokens that may be securities,” Mr. Gensler said.
Coinbase Global didn’t immediately respond to a request for comment. Last week, the firm said the SEC was investigating its plans to launch a crypto-lending platform.
He also repeatedly referred to the fact that another firm, Citadel Securities, executes nearly half of all retail trading volume, in explaining the SEC’s wide-ranging review of payment for order flow. The practice involves brokerages such as Robinhood Markets Inc. selling clients’ stock and option orders to Citadel and other high-speed traders for execution.
SEC Chair Gensler: Coinbase Should Register With Regulator
SEC Chair Gary Gensler wants to boost the agency’s headcount to better regulate crypto.
U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler warned that crypto exchanges like Coinbase should register with the regulator, an escalation of his previous statements regarding whether crypto trading platforms qualify as securities exchanges.
Gensler told the Senate Banking Committee on Tuesday that the SEC, like other federal regulatory agencies, does not have direct oversight over crypto exchanges, in response to a hypothetical scenario from Sen. Elizabeth Warren (D-Mass.) about selling cryptocurrencies during last week’s exchange outages.
“They haven’t yet registered with us, even though they have dozens of tokens that may be securities,” Gensler said.
That is the most explicit Gensler has been about having crypto trading platforms register as a securities trading platform. In prepared remarks for the committee published Monday, he wrote that any exchange that has a security listed must register with the SEC.
At the time, he did not name any specific companies. Warren used Coinbase as an example during a question about whether crypto actually bolsters financial inclusion.
“Let’s say that last Monday, I took out the last sliver of my savings, I went on the crypto exchange Coinbase, I bought $100 worth of ether, and then I woke up early on Tuesday morning, I saw that the market looked like it was beginning to tank and I thought I better sell right now, but when I tried to sell Coinbase, the exchange was down,” she said.
Gensler broadened his pitch for greater regulatory oversight of the crypto markets by asking for more resources to regulate different projects.
Sen. Catherine Cortez Masto (D-Nev.) asked if the SEC was sufficiently equipped to regulate crypto. Gensler said Congress can help coordinate oversight among banking regulators, as well as stablecoin supervision.
“I think funding wise we could use a lot more people. I just have to be frank with you, I mean there’s 6,000 projects. And while some of those are commodities, many of them are securities under the law,” he said.
A Call For Clarity
Sen. Pat Toomey (R-Pa.), one of the senators who pushed for an amendment to the Senate’s bipartisan infrastructure bill to narrow the definition of a “crypto broker” in a tax provision, pushed Gensler on a lack of explicit guidance on how a cryptocurrency might qualify as a security under federal law.
“A really important question is whether a cryptocurrency is a security for regulatory purposes under the Howey or some other tests.
Based on your public statements, it’s pretty clear that you believe that some are securities, but others are not. So I’m frustrated by the lack of helpful SEC public guidance, explaining how you make this distinction. What makes some of them securities, while others are not securities,” Toomey asked in his opening remarks.
For his part, Gensler said in his remarks that “a small number” of cryptocurrencies are not securities, but he believes many are.
Toomey brought the issue up again during the back-and-forth segment of the hearing, asking about stablecoins as one example.
While Gensler pointed to different features of judicial precedent, including the Supreme Court’s “Reves” case, Toomey reiterated that his key point is a lack of explicit guidance from the SEC.
“I’m just saying as a layman who can read English, when I read those tests, stablecoins don’t seem to meet that test to me,” he said. “Maybe I’m wrong, but if I can misinterpret this, I think others could too and clarity, public clarity could be helpful.”
SEC Is ‘Open To Discussion’ When It Comes To Crypto: Kraken Chief Lawyer
Kraken’s Marco Santori points to the adversarial stance taken by some crypto firms toward regulators.
Amid a fraught period for some high-profile United States crypto firms and financial regulators, Kraken chief legal officer Marco Santori is calling for a dose of pragmatism going forward.
Speaking on Bloomberg’s QuickTake Stock broadcast on Thursday, Santori told viewers, “You’re living in a fantasy world if you don’t believe that this industry is going to face heavier, more Wall Street-like regulation from governments in the U.S. and abroad.”
Santori’s comments follow threats by the U.S. Securities and Exchange Commission earlier this month to sue the well-known crypto exchange Coinbase over a crypto yield program the commission deemed to be a security. The move sparked the exchange’s CEO, Brian Armstrong, to adopt a combative and resistant stance on social media, although the exchange has since announced it will scrap the program at issue, in line with the SEC’s wishes.
Commenting directly on the developments, Santori said, “I’ve certainly followed Brian’s tweets, and I’ll say that look, you’re just not being honest with yourself about the crypto community if a little bit of you doesn’t think he’s saying what a lot of people are thinking.” He soon pivoted, however, taking pains to articulate the more pragmatic agenda he’s pursuing at Kraken:
“I can’t support that kind of approach with regulators. It’s never been successful historically, and from our experience, we’ve found the SEC to be open to discussion.”
U.S. financial regulators, particularly under SEC Chair Gary Gensler, have indicated they intend to introduce a host of policy changes this year that will affect token offerings, decentralized finance, stablecoins, custody, exchange-traded funds and lending platforms.
Despite his hawkish tone, Gensler has appealed to industry actors to engage with the agency going forward. With the regulatory outlook still evolving, the crypto markets, meanwhile, remain highly sensitive to the possible implications of each of the regulator’s crypto-related public interventions.
The Fight To Control The $2 Trillion Crypto Market Is Heating Up
Investors are being rattled by volatility as the two biggest economies — the U.S. and China — seek to tighten their grip on Bitcoin and other digital currencies.
It’s not that governments like China are banning cryptocurrencies because they necessarily expect the technology to fail. It’s that they want to be in charge of an experiment with potentially trillions of dollars in play.
With its latest move, China joins a small list of nations that are crypto prohibitionists.
And it is a swing in the opposite direction of El Salvador, which adopted Bitcoin as legal tender this year and was lauded by Libertarians as well as Bitcoin believers. In the U.S., where crypto trading is allowed but regulators are taking a close look, some see an opportunity in China’s deepening crackdown.
Understanding the many dimensions of this multi-pronged battle to control the market will be key for the millions of investors hoping to cash in on the crypto craze.
The fight is set to reverberate through the global financial system, where every day brings news of products such as Bitcoin exchange-traded funds, bizarrely named digital tokens and NFT assets. The ultra-rich are also involved, and mainstream financial institutions are embracing digital currencies.
More broadly, the fight will also influence socio-cultural discussions over everything from climate change to inequality, and trade to fiat currencies. How the world’s two biggest economies — the U.S. and China — fare in their effort at oversight over the market will likely have the most far-reaching impact.
“Crypto has become too big to ignore,” said Matt Hougan, chief investment officer at Bitwise Asset Management. “Five years ago, at least in regulators’ minds, it was people wearing hoodies playing Dungeons & Dragons and trading among themselves. Today it’s a $2 trillion industry and every major Wall Street bank is helping investors gain exposure to it, and now they have to deal with it.”
China rattled financial markets this week by announcing that all crypto-related transactions will be considered illegal, echoing less definitive exclusions dating back to 2013 that cracked down on initial coin offerings, crypto exchanges and cryptocurrency mining — in which it had become the world’s leader.
Instead, the Chinese government aims to unleash its own cryptocurrency. It’s one of 81 nations that are exploring their own digital currencies, a list that started with early adopters like Venezuela and Estonia but now includes larger nations, including the U.S.
China’s 1.4 billion population will likely give it an edge when it begins rolling out the digital yuan on a global scale at the winter Olympics in Beijing in 2022 — a prospect that has some U.S. politicians wanting to ban American athletes from using the e-coin while there.
“For China, I think it’s pretty clear they want to promote the digital yuan, and that they are simply taking care of the competition,” said Nicolas Christin, an associate professor at Carnegie Mellon University.
China said that 10 regulatory agencies, including the central bank, would work together to track down crypto-related activity. The ban even says that overseas exchanges are barred from providing services to mainland investors.
The country’s moves over the past few years already had the effect of squeezing local trading volumes, said Randall Kroszner, deputy dean at the University of Chicago Booth School of Business and former governor of the Federal Reserve System. “Even with a VPN, it can be very difficult to connect and can be slowed down,” he said.
Governments crack down on crypto for two reasons, Bitwise’s Hougan says. They want to curb crypto mining — the energy-intensive computing process involved in creating the digital currency and verifying transactions. And second, perhaps more critically, they want to be able to monitor currency transactions and negate any challenge to their homegrown digital currencies.
Gary Gensler’s Approach
In the U.S., the government’s regulatory strategy has been different. The approach is aimed at trying to avoid problems, according to Christin at Carnegie Mellon University. For example, financial markets have historically held up high barriers of entry for certain types of transactions, but no such stringent controls are in place for cryptocurrency trades.
That leaves the door open for inexperienced investors to take highly leveraged positions that could lead to potentially catastrophic financial losses.
“Now of course there is a line of thought that people should be able to do whatever they want — after all, it’s their money,” Christin said. “But the question is whether a lot of retail-level folks engaging in these markets are actually equipped to judge the risks rationally, as opposed to engaging in gambling-like behavior.”
U.S. Securities and Exchange Commission Chair Gary Gensler, who has termed crypto as the “Wild West,” is signaling a robust oversight regime over the industry. Coinbase Global Inc.’s planned Lend program, which would have let users earn 4% by lending their tokens, was a flash point in growing tensions between the regulator and the industry. BlockFi CEO Zac Prince recently said the SEC and other regulators needed to give his industry clarity on what’s allowed.
Gensler has in fact been interested in the crypto world for years and once taught a class at MIT’s Sloan School of Management called “Blockchain and Money.” He’s even signaled a pathway for the SEC to approve an ETF tracking Bitcoin futures.
Caution from regulators is understandable. Scammers have ripped off billions of dollars in crypto pump-and-dump schemes, using myriad tactics to draw in unsuspecting investors.
“The government is worried about consumer protections,” said James Seyffart, an analyst for Bloomberg Intelligence. “The U.S. government generally doesn’t ban new technology, they usually embrace innovation. There is going to be new regulation but they just need to give guidance for people.”
Former U.S. Treasury Secretary Lawrence Summers says that rather than resist regulation, the crypto industry should embrace it for its own good. Given the large financial sums involved in crypto, it’s unrealistic for the industry to expect to operate in secrecy without government oversight, Summers said in an interview on Bloomberg TV.
The crypto industry should shed the idea that it’ll function as a “libertarian paradise” where government rules can’t be imposed, Summers said.
Gary Gensler, You Should Be Watching How Canada Is Regulating Coinbase
In Canada, there’s no question whether crypto exchanges offer securities and if they should be regulated as such.
The question of how to regulate cryptocurrencies, and by extension cryptocurrency exchanges, is getting heated.
Securities and Exchange Commission (SEC) Chair Gary Gensler has been regularly hinting that exchanges such as Coinbase should be registering with the SEC because they offer “dozens of tokens that may be securities.” A frustrated Brian Armstrong, Coinbase’s CEO, has accused the SEC of “sketchy behavior” and is planning to publish his own advice on how authorities should regulate crypto.
Up north in Canada, all is quiet. The debate over whether cryptocurrency exchanges need to register with Canada’s version of the SEC has already been settled. In a March 2021 notice, the Canadian Securities Administrators confirmed that crypto exchanges do need to be registered with a securities regulator. Exchanges that want to keep serving Canadians are rushing to comply.
J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and a financial writer at a large Canadian bank. He runs the popular Moneyness blog.
Given how excruciatingly vague the status of cryptocurrency regulation remains in the U.S., it’s striking how Canada’s version of the SEC has been able to bring rapid clarity to the issue.
Is it possible that countries casting around for a definitive solution to regulating cryptocurrency exchanges adopt the Canadian blueprint?
You Probably List Some Securities, So Get Regulated
Before turning to Canada, let’s review the situation in the U.S. The SEC’s jurisdiction over cryptocurrency exchanges like Coinbase and Kraken hinges on whether the tokens these exchanges list are deemed to be securities. The SEC has said that bitcoin and ether aren’t securities. XRP is.
If tokens are securities, and Kraken and Coinbase list them, then Kraken and Coinbase are securities exchanges and they must register with the SEC. Delisting security tokens like XRP is how exchanges like Kraken and Coinbase avoid the registration requirement.
But what about shibu inu, dogecoin, USDC or the thousands of other tokens? Are they securities?
Divining the security-or-not status of a token seems to be more art than science. It rests on how lawyers interpret the SEC’s definition of security, which includes a long list of instruments like notes, stocks, bonds, investment contract, fractional undivided interest and more.
Now, perhaps SEC officials could comb through every one of the thousands of crypto tokens created over the last 12 years and make a list of which of them are securities or not. And then Coinbase and Kraken could delist everything that the SEC says is a security and thus avoid SEC registration requirements.
But in his recent public pronouncements, SEC Chair Gensler has taken a less helpful approach. It goes a bit like this: “Coinbase, you list 300 tokens, and odds are that a bunch of them are securities (we’re not going to say which), so you should register with the SEC anyways.”
Not Your Keys, Not Your Coins (And Definitely A Security)
If Gensler’s approach to pulling crypto exchanges under the ambit of securities law seems oblique and vague, the Canadian Securities Administrators (CSA) has taken a much more direct approach. The CSA is an umbrella organization for Canada’s provincial and territorial securities regulators, the biggest of which is the Ontario Securities Commission (OSC).
To bring Coinbase and Kraken under the jurisdiction of securities law, the CSA has created a new catch-all term: a crypto contract. Crypto contracts are securities, and because Coinbase and Kraken offer them these platforms come under the ambit of Canadian securities law.
Let me explain a bit more.
Pretty much everyone (including Canada’s regulators) agree that bitcoin is not a security. But according to the CSA, the bitcoin that a Coinbase client holds in their Coinbase account isn’t actually bitcoin. It is a contractual right or claim to underlying bitcoin, or as the CSA terms it, a crypto contract.
Furthermore, the CSA deems all crypto contracts to be securities, even if the underlying crypto, say bitcoin, isn’t itself a security. Since Coinbase and other exchanges deal in crypto contracts and offer a marketplace for them, they must register with one of Canada’s provincial securities regulators.
This approach is remarkably different from the U.S. In the words of law professor Ryan Clements, the CSA’s assertion about crypto contracts is one that “no other international securities regulator has yet taken.”
The CSA’s list of requirements is long and demanding (see Appendix B of this document). Canadian exchanges and dealers, a category that now includes Coinbase, must abide by a set of universal market integrity requirements that cover things like abusive trading, front running, client priority, and more. Coinbase would be required to consider appropriateness and suitability when dealing with clients. And that’s just a sample.
Many exchanges won’t meet the CSA’s requirements, or can’t. Binance quit Ontario in June. FTX no longer onboards users from Ontario either. OKEX stopped serving Quebec and Ontario customers and Huobi has declared all of Canada to be a ‘restricted jurisdiction.’
But Canadian cryptocurrency venues such as Wealthsimple and Coinberry have fallen into line. And they don’t seem too salty about it, either. Coinberry’s CEO Andrei Poliakov has welcomed the CSA’s “measured” regulations as an “end to the ‘wild west’ of cryptocurrency in Canada.”
You can see why regulation would be welcome up north. Canadians were collectively stunned by the collapse of local cryptocurrency exchange QuadrigaCX, which at the time was Canada’s largest. Regulation is seen by all parties – customers, regulators, and cryptocurrency businesses – as a way to purge Canada of future crypto awfulness.
Will large U.S. exchanges like Kraken and Coinbase that serve Canadians choose to comply with Canadian securities laws?
To bring Coinbase and Kraken under the jurisdiction of securities law, the CSA has created a new catch-all term: a crypto contract.
Kraken has long disputed Canada’s assertion that a Kraken customers’ bitcoin balances are a type of Kraken IOU, and thus a security. In a 2019 letter to Canadian securities regulators, Kraken’s lawyers likened Kraken to a “bailee;” that is, in the same way the provider of a safety deposit box doesn’t take title to the box’s contents, Kraken doesn’t take title to the customer’s bitcoins. And so Kraken is offering a service, namely storage, and not a security.
But Canadian regulators never bought Kraken’s claim. The CSA has taken the old bitcoin maxim “not your keys not your bitcoin” to heart and ruled that crypto held at a platform like Kraken is not true crypto, but a contract for crypto.
It remains to be seen if any of the big U.S. crypto exchanges will go to court to defend what they see as their bailee business model against the CSA’s concept of a “crypto contracts.”
That would mean wading into Canadian securities law, which like its U.S. cousin boasts a long list of bewildering instruments that are defined to be securities, including the amorphous “investment contract” category. (Whereas the U.S. relies on Howey to define what an investment contract is, Canada has Pacific Coin vs the OSC.)
Or maybe Coinbase and Kraken will just suck it up and comply with CSA guidance.
From the perspective of consumers, I’d argue the Canadian approach makes a lot of sense.
Coinbase may not be regulated by the SEC, but it does operate under a specific U.S. regulatory framework. It holds 43 different money transmitter licenses, each one issued by a state financial department.
This is a strange fit, though. State money transmittal law is geared towards regulating remittance companies like Western Union or MoneyGram. Coinbase is very different from Western Union.
It facilitates billions of dollars worth of trading each day, rivaling large, regulated securities exchanges such as the Toronto Stock Exchange, NYSE American, and the Nasdaq BX. It’s not apparent how a supervisory official who oversees remittance agents is equipped to deal with an international trading platform.
By contrast, the Canadian approach says that if you are a payments company like Western Union, then you’ll be regulated like a payments company. And if you are an exchange like Coinbase, you can’t pass as a payments company for regulatory purposes. You’re going to fall under securities law because that’s the most appropriate regulatory category for you and your customers.
Whether Canada’s approach to crypto regulation becomes another export to the U.S., along with maple syrup or hockey, remains to be seen. But you can be sure that Gary Gensler is watching and pondering the idea of crypto contracts.
Dan Berkovitz To Become SEC’s New General Counsel Under Gensler
Dan Berkovitz will join the U.S. Securities and Exchange Commission as the Wall Street regulator’s general counsel in November.
Berkovitz, who previously said he plans to leave his seat on the Commodity Futures Trading Commission next month, will replace John Coates, who had been serving as the SEC’s top lawyer, the agency said in a statement Tuesday. Since September 2018, Berkovitz has been serving as a Democratic CFTC commissioner and earlier in his career was the derivatives regulator’s general counsel.
Gary Gensler, who took over as SEC chairman in April, relied on Berkovitz’s advice while leading the CFTC during the Obama administration as the agency wrote rules to regulate the swaps market following the 2008 financial crisis. At the SEC, Gensler has also laid out an ambitious agenda that includes writing dozens of new rules, as well as plans to clamp down on cryptocurrency trading.
As a CFTC commissioner, Berkovitz recently has raised concerns over a fast-growing corner of crypto known as DeFi, or decentralized finance.
SEC’s Gensler Aims To Save Investors Money by Squeezing Wall Street
Chairman of Securities and Exchange Commission has filled important staff jobs with academics and policy advocates from progressive lobbying groups.
Wall Street’s new overseer has outlined an aggressive regulatory agenda that threatens to squeeze the financial industry’s profit margins.
Securities and Exchange Commission Chairman Gary Gensler is working on tougher rules for high-speed trading firms, private-equity managers, mutual funds and online brokerages. Mr. Gensler, less than six months on the job, says he wants to make the capital markets less costly for companies raising money as well as for ordinary investors saving for retirement.
His main targets are what he says are profits and salaries earned above what a purely competitive market would allow, known as economic rents.
“I hope that we address, and try to lower, the economic rents in our capital markets,” Mr. Gensler said. He noted that finance as a share of U.S. economic output had more than doubled since the 1950s to roughly 8% of today’s gross domestic product.
“If we ever got back to what it was,” he said, “that’s a lot of savings.”
The regulatory push risks shaking up some of Wall Street’s most lucrative business models. Some Republicans accuse him of overreach. People close to the industry say Mr. Gensler’s plans are likely to spark opposition. But because the SEC hasn’t issued formal proposals for most of the items on his agenda, few industry representatives have been willing to publicly criticize it.
“I do think it’s very easy for anyone who comes into one of these regulatory roles to become paternalistic,” Republican SEC commissioner Hester Peirce said. “And so we have to guard ourselves against that tendency, because we all think we know what’s best for everyone else.”
Mr. Gensler developed a reputation as a hard-charging regulator during his 2009-14 stint as chairman of the Commodity Futures Trading Commission, or CFTC. Despite legal opposition from Wall Street, he wrote dozens of rules to govern the vast swaps market, which had previously been mostly unregulated and contributed to the 2008 financial crisis.
The SEC, a much larger agency, has been working remotely since Mr. Gensler took over in April. Leading its 4,400 staffers from a bedroom in his 135-year-old house north of Baltimore, Mr. Gensler, 63 years old, has assembled policy experts, lawyers and economists to write proposals for each of the roughly 50 rule-making items on his agenda.
Rather than selecting senior staff from inside the SEC or large corporate law firms, as many of his predecessors have done, Mr. Gensler has filled important positions with academics and policy advocates from progressive lobbying groups.
One example is Barbara Roper, a longtime proponent of tougher rules for stockbrokers, whom Mr. Gensler tapped as a senior adviser focused on investor protection.
Perhaps the biggest fight he has picked is over the plumbing of the stock market, in which a handful of large firms execute a majority of individual investors’ trades.
Under an arrangement known as payment for order flow, brokerages such as Robinhood Markets Inc. send many client orders to high-speed trading firms such as Citadel Securities or Virtu Financial Inc. rather than to a stock exchange. The high-speed traders pay brokerages for the orders and profit from the difference between the buying and selling price of the shares being transacted.
The SEC has previously approved the decades-old practice, which has enabled many brokers to stop charging trading commissions for individual investors in recent years. Citadel Securities and Virtu say they often execute trades at a slightly better price than exchanges, further saving money for investors.
“Concerns about concentration and conflicts are theoretical,” said Douglas Cifu, the chief executive of Virtu. “The actual results are overwhelmingly beneficial to individual investors.”
But Mr. Gensler and other critics say payment for order flow poses a conflict of interest for brokers and reduces transparency in the market by channeling data away from exchanges. He said in August that he was open to banning it altogether, a remark that sent shares of Robinhood and Virtu falling sharply.
“You’ve got some big actors here whose entire business model in the equity market space is based on current rules,” said Chris Iacovella, who worked with Mr. Gensler at the CFTC and now runs a trade association representing regional brokerages. “They’re going to do everything they can to not have to change their business model.”
Mr. Gensler is also scrutinizing the new generation of brokerages like Robinhood. Instead of human brokers taking orders from clients and recommending investments by phone, they use data analytics to study how clients behave. Their algorithms can tailor messages to individual clients and influence investment decisions through push notifications and other features.
“While these developments…can increase access, increase choice, and lower costs, they also raise new questions about potential conflicts, biases in the data, and yes, even systemic risk,” Mr. Gensler told the Senate Banking Committee in September.
Robinhood has said it looks forward to working with the SEC and that its platform has made the stock market accessible to millions of first-time investors.
Mr. Gensler has also signaled plans to require more information from fund managers who offer products they claim to be environmentally or socially responsible.
Public interest in addressing issues such as climate change and racial inequity has made so-called sustainable investing a growing profit source for money managers who have seen their fees decline amid the decadeslong shift by investors toward low-cost index funds.
The problem, Mr. Gensler says, is that the funds don’t use consistent metrics to back up their marketing claims, making it hard for investors to compare them.
Conservatives say some of Mr. Gensler’s plans could undermine his goal of saving investors money. For instance, rules to require more disclosure from companies about the risks they face from climate change could saddle firms with higher compliance costs, which are ultimately borne by shareholders.
A former Goldman Sachs Group Inc. banker, Mr. Gensler’s skepticism of Wall Street goes back decades. After serving in President Clinton’s Treasury Department from 1997 to 2001, he and a former colleague, Greg Baer, co-wrote a 2002 book titled “The Great Mutual Fund Trap.”
In it, they criticized professional stock pickers for charging high fees and delivering poor returns, and urged savers to buy index funds rather than actively managed investments.
“Do not delude yourself into believing that your interests are the same as your broker’s interests,” Messrs. Gensler and Baer wrote. “In the great majority of cases…expert money management advice simply leads investors to underperform the market and enrich Wall Street.”
As SEC chief, Mr. Gensler also is now looking at similar fees charged by private-equity firms. While the SEC traditionally has considered big institutions like pension funds more sophisticated than individual investors, Mr. Gensler has said these investors in private-equity could benefit from more disclosures.
“If private equity had lower fees,” Mr. Gensler said, “the pension funds would get more. Now, maybe the private-equity general partners would get a little less.”
Gensler Confirms SEC Won’t Ban Crypto… But Congress Could
Representative Patrick McHenry believes Gary Gensler’s SEC has disregarded standard practice when going after crypto.
Gary Gensler, head of the United States Securities and Exchange Commission, has confirmed that his agency does not have the authority or intention to ban cryptocurrency.
While responding to questions during a House Committee on Financial Services hearing on Tuesday, Gensler emphasized that prohibiting crypto does not fall within the SEC’s mandate, stating, “That would be up to Congress.”
“It’s a matter of how we get this field within the investor consumer protection that we have and also working with bank regulators and others — how do we ensure that the Treasury Department has it within Anti-Money Laundering, tax compliance,” Gensler said.
“Many of these tokens do meet the test of being an investment contract, or a note, or a security,” he added, emphasizing the need to bring crypto “within the investor protection remit of the SEC.”
Gensler also noted “the financial stability issues that stablecoins could raise” as a priority for the agency.
Representative Patrick McHenry took aim at the actions and stance taken by the SEC regarding digital assets under Gensler’s leadership during the hearing, accusing the SEC head of failing to act in accordance with the agency’s “long-held practice of noticing comment on rulemaking and procedures.”
“Some of those comments you have made have raised questions in the marketplace and made things less than clear. You’ve made seemingly off-the-cuff remarks that move markets, you’ve disregarded rule-making by putting a statement out without due process, and you’ve essentially run roughshod over American investors.”
Gensler responded that the SEC follows the Administrative Procedures Act.
McHenry also cited comments made by Gensler to the Committee in 2019, while he was teaching at the Massachusetts Institute of Technology in which he criticized past rulings from the SEC classifying Bitcoin (BTC) and Ether (ETH) as commodities.
When asked of his current views on the matter, Gensler stated, “I’m not going to get into any one token, but I think the securities laws are quite clear — if you’re raising money […] and the investing public […] have a reasonable anticipation of profits based on the efforts of others, that fits within the securities law.”
The hearing came on the same day that McHenry proposed the Clarity for Digital Tokens Act of 2021, which draws heavily on the safe harbor proposal put forward by the pro-crypto SEC Commissioner Hester Peirce in February 2020.
During the hearing, McHenry pressed Gensler on whether he had taken the time to review Peirce’s proposal. Gensler evaded answering whether he had reviewed Peirce’s proposal specifically, saying:
“Commissioner Peirce and I have talked on her thoughts around a potential safe harbor. I think that the challenge for the American public is that if we don’t oversee this and bring in investor protection, people are going to get hurt.”
Gensler’s Crypto Testimony: 6 Key Takeaways
The SEC chairman laid out his stance on crypto regulation during a House Financial Services Committee hearing on Tuesday. CoinDesk breaks it down.
U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler was on the hot seat on Tuesday during a House Financial Services Committee oversight hearing, and many committee members – 19 of them – took the opportunity to ask Gensler about crypto regulation.
The committee’s focus on crypto revealed the fascination – and pent-up frustration – with the growing crypto industry and the SEC’s role in regulating it.
The SEC’s Regulatory Authority
Rep. Patrick McHenry (R-N.C.), the committee’s top Republican, questioned Gensler about his “concerning and contradictory” statements about crypto regulation and whether the SEC has the authority it needs to regulate crypto.
In May, Gensler told Congress that the SEC would need additional legislation to regulate and define digital assets and exchanges, but McHenry pointed out on Tuesday that in subsequent interviews with the media, Gensler’s position on that has changed: The SEC chairman now posits that the SEC has the authority it needs to regulate crypto under existing legislation.
“I think that the SEC’s authorities in this space are clear,” Gensler told McHenry. “I think that Congress painted with a broad brush for the definition of ‘security’, and included 30 or 35 separate areas that are within the definition of a security to protect the public against fraud.”
Gensler told McHenry that Congress could help “fill gaps” in the coordination between the SEC and the Commodity Futures Trading Commission (CFTC).
Despite the seemingly brewing turf war between the CFTC and SEC over crypto regulation, Gensler was clear in his opinion that Congress doesn’t need to create another regulatory body to oversee crypto.
”We don’t need another regulator,” he said. “There are things that can be done to ensure the smoothness between the two agencies … even if Congress doesn’t act.”
Gensler also commented on the SEC’s shrinking budget and reiterated his request that Congress provide additional funding to the SEC so that it can hire more staff and upgrade its data analytics software.
“We’ve shrunk about 4 or 5% in the last four or five years. I would have hoped that we might have grown 4 or 5% at this period of time,” Gensler said. “I know resources are tight, but it would help us to do our mission.”
Are Cryptocurrencies Securities?
When asked by McHenry and other committee members whether he considered cryptocurrencies like bitcoin and ether to be securities, Gensler dodged the question. ”I’m not going to get into any one token,” Gensler said.
“But I think that the securities laws are quite clear. If you’re raising money from somebody else, and the investing public has a reasonable anticipation of profits based on the efforts of others, that fits within the securities law.”
Gensler testified that “most” of the 5,000-6,000 existing cryptocurrencies fall under the definition of a security and are thus subject to regulation by the SEC – a similar position to that of his predecessor Jay Clayton.
Rep. Tom Emmer (R-Minn.), chairman of the Congressional Blockchain Caucus and a vocal supporter of the crypto industry, pushed back against Gensler’s assertion, saying that he considers most cryptos to fall under the definition of a commodity or currency.
Rep. Warren Davidson (R-Ohio), another member of the blockchain caucus, asked Gensler what it would take for cryptocurrencies to go from being securities to being commodities or currencies, referencing 2018 statements in which Gensler said that ether could be “off the hook” from being considered a security because it had switched to a decentralized network.
“You’ve repeatedly said that you believe initial coin offerings (ICOs) are securities,” Davidson said. “Can you clarify when a token is sufficiently decentralized to no longer be a security in your view?”
Gensler refused to comment on ether or any other specific token, instead saying that any token that passed the Howey Test would be considered a security.
Gensler Is Coming For The Exchanges
In response to a question from Rep. Jim Himes (D-Conn.), Gensler discussed his reasoning for focusing on regulating trading and lending platforms, including decentralized ones.
“Investors are basically giving ownership rights up. They transfer what’s called a private key to the platform … and the platforms take custody,” Gensler said.
Gensler Continued, Saying:
“I think that such a tremendous amount of activity happens there, and it’s a place where we could get better investor protection … even in the decentralized platforms, or so-called DeFi platforms, there is a centralized protocol. And though they don’t take custody in the same way, those are the places where we can get the maximum amount of public policy.”
Gensler repeatedly urged exchanges to register with the SEC, something he has done in past appearances, and decried the exodus of exchanges to friendlier jurisdictions.
“I think firms should just come in and register,” Gensler said. “But what’s happened over the last four or five years is they’ve either chosen not to or they’ve stood up in Singapore or Malta or Hong Kong or other countries and offered their services indirectly through a virtual private network.”
Rep. Anthony Gonzalez (R-Ohio) pointed out that simply “coming in and registering” with the SEC might not be feasible for some exchanges.
“I’ve been speaking with multiple companies in the space, and the common theme in these discussions is that they want to come in and describe their product to the SEC; however, they’re concerned that these meetings could lead to a potential enforcement action,” Gonzalez said. “This sort of friendly open door conversation is not something they believe they’re experiencing.”
When asked his thoughts on investment platforms like Robinhood that offer digital assets alongside stocks, Gensler stressed the need for crypto exchanges to register with the SEC.
“I think if we don’t get these exchanges, these lending platforms inside of the public policy framework, a lot of people are gonna be hurt,” Gensler said. “I think it’s clear that many of these projects are within the securities laws. We’re gonna use our authorities to try to get more of these projects and companies to register and be within the investor protection framework.”
Coming Stablecoin Regulation
Though Gensler asserted several times during Tuesday’s hearing that the SEC already has sufficient authority to regulate cryptocurrencies, he suggested that Congress could be helpful in deciding how to regulate “stable-value coins.”
When asked if he considered stablecoins a systemic risk to the U.S. economy, Gensler doubled down on his previous analogy comparing stablecoins to “poker chips” at a crypto “casino.”
“I think the $125 billion of stablecoins we have right now are like the poker chips at a casino, and I think they create risks in the system,” Gensler said. “Yes, I think if this continues to grow – and it’s grown about 10-fold in the past year – it can present those system-wide risks.”
The statements came hours after CoinDesk first revealed that Circle, a key backer of the USDC stablecoin along with Coinbase, had been hit with an investigative subpoena from the SEC’s enforcement division.
“You can see where it could start to undermine things if it continues to grow,” Gensler said. “[How it could] undermine traditional banking systems if it’s not brought inside the remit of banking.”
Gensler, however, seemed to suggest that dollar-backed stablecoins with “clear and clean reserves” could be “different,” from what one representative called “junk coins” with unknown reserves.
“Wrapping something computer graphically around fiat money could be different, it could be directly around deposits at a bank or, at the other end of the spectrum, it could look a lot like a money market fund,” Gensler said. “It really depends on the underlying assets.”
Gensler also stressed that part of the SEC’s issue with stablecoins is that they have been used within exchanges “in part to avert laws around tax compliance and illicit activity.”
Crypto’s Long-Term Outlook
Gensler also doubled down on previous statements he made to the Washington Post that he didn’t see a long-term future for the majority of crypto projects.
“It’s unlikely that 5,000 or 6,000 private forms of currency are gonna persist. Economic history tells us that’s unlikely. A handful might be competing with gold or silver as a digital speculative store of value … but not many of them. Most of them are speculative asset vehicles.”
Although Gensler repeatedly said he wouldn’t comment on any token in particular, he called bitcoin a store of value.
“Bitcoin … is a highly speculative asset, but it is a store of value that people wish to invest in as some would invest in gold,” he said.
No One Is Banning Crypto (Right Now)
Rep. Ted Budd (R-N.C.) brought up China’s most recent crackdown against cryptocurrencies and crypto mining, and asked Gensler if the SEC was planning to implement similar bans.
After initially demurring, Gensler was forced to answer when Budd asked again directly: “But no bans that you’re interested in implementing via the SEC as China has done, really to funnel everyone through their own digital currency?”
“No, that would be up to Congress,” Gensler said
SEC Chief To Wall Street: The Everything Crackdown Is Coming
The joke in Washington is that Gary Gensler could inspire his own version of the game, “Drink Every Time…”
The Rules: Down a shot every time the U.S. Securities and Exchange Commission chief says he’s “asked the staff” to consider new regulations.
Gensler has “asked the staff” about oversight for crypto — drink. For online brokers — drink. For green investment funds — drink. During two recent congressional hearings, Gensler used the phrase no fewer than 30 times, enough, one lobbyist quipped, to induce alcohol poisoning.
But for Wall Street, Gensler’s plans are hardly something to laugh about. He’s laying out one of the most ambitious agendas in the SEC’s 87-year history — some 49 proposals, many already drawing opposition from hedge funds, stock exchanges, online brokers and public companies.
He’s been similarly aggressive on agency enforcement cases, which can tank share prices, spur fines and trigger embarrassing publicity.
Gensler, an ex-Goldman Sachs Group Inc. executive whose earlier Washington experience includes a hard-fought battle against big banks to bring oversight to the vast derivatives market, says he’s confident the SEC can move ahead on many issues at once.
In an interview, he added that he sometimes thinks of the famous Martin Luther King Jr. speech about the “fierce urgency of now” when it comes to the regulator’s agenda.
The frenetic pace has some SEC veterans, and even Gensler’s supporters, worried that he may be so overextended that he ultimately fails to get much accomplished.
They wonder if he’s leading the commission into a morass of politicking, lawsuits and even a rebellion by the regulator’s unionized workers. Many are asking: how will Gensler pull this off?
“You have to think it will be quite a challenge for the SEC staff to achieve,” said Frank Kelly, a former agency official who now runs Fulcrum Macro Advisors, a Washington policy research firm.
A few Democrats and outside advisers have urged Gensler, 63, to narrow his scope to a more manageable load. The policies he’s advocating, they argue, may take years to complete and have prompted powerful corporate interests to start discussing strategies for suing the SEC.
For his part, Gensler insists he has no priorities because everything is at the top of the list. “Don’t ask me about my three daughters and which one I spend more time with,” he said.
There is plenty of action inside the agency. Gensler has set up some 50 teams involving about 200 people to write rule proposals. Each has staff from the general counsel’s office as well as economists to carefully weigh the costs and benefits, a key requirement of federal law.
He is keeping close tabs on the progress; the groups have been directed to send regular updates to the chair’s office on the state of play.
Gensler also faces political pressures. The Biden administration and congressional Democrats — two constituencies he doesn’t want to disappoint — are keenly interested in particular policies, especially a pending SEC rule that would address climate change through more-robust corporate disclosures.
Lawmakers’ other priorities include reining in special-purpose acquisition companies, or SPACs, responding to this year’s implosion of family office Archegos Capital Management and getting a handle on the unchecked growth of cryptocurrencies.
One area vexing Wall Street is Gensler’s pledge to overhaul the equity market’s plumbing in response to this year’s meme-stock mania. The wild trading has prompted several congressional hearings and put firms, including Robinhood Markets Inc. and Citadel Securities, on edge because new regulations could hurt their lucrative businesses.
Executives who’ve met with SEC officials have been privately cautioned that the market structure rules being developed may be extreme, according to people familiar with the matter.
The warning from inside the agency shouldn’t come as a surprise. Interviews with more than two dozen people who have served in the government with Gensler or clashed with him when he ran the Commodity Futures Trading Commission during the Obama administration say he won’t pare back his ambitions or shy away from a fight.
Most of those willing to discuss Gensler candidly requested anonymity. Some said they admire him, while others had a hard time mentioning his name without adding an epithet. But all said they would never bet against him.
They painted a picture of a relentless and skilled manipulator of the bureaucracy who cares little about making enemies or exhausting staff members.
Those qualities, the people noted, explain how Gensler became one the youngest partners ever at Goldman Sachs and how he was able to force Wall Street to bring swaps out of the shadows after the 2008 financial crisis while leading the CFTC.
“If anyone underestimates his ability to get things done, they do so at their own peril,” said Micah Green, a lobbyist at law firm Steptoe & Johnson.
Still, much of Gensler’s agenda is daunting. Finding a solution to the social-media driven surges of GameStop Corp., AMC Entertainment Holdings Inc. and other meme stocks, for example, entails confronting several complicated issues. Tampering with any one could have unintended consequences for millions of investors.
Take “gamification,” the video-game like prompts that, critics say, encourage excessive trading by customers of Robinhood and other app-based brokerages. The SEC is examining whether such nudges are akin to offering investment advice, which would trigger a thicket of additional regulations. However, securities rules developed decades ago to police human brokers may not be effective in helping investors who are addicted to buying and selling stocks on their smartphones.
A related issue is so-called payment for order flow, in which trading firms pay brokerages to execute clients’ stock orders. Major online brokers rely on the practice to offer customers commission-free trades, but Gensler has suggested that it could be banned.
Eliminating the payments would cut right though the business models of electronic-trading firms that control much of U.S. stock trading, including Citadel Securities and Virtu Financial Inc. They are already vigorously opposing such a move, as are Robinhood, Charles Schwab Corp. and other brokers.
Other policy changes Gensler is contemplating have their own enemies list. Hedge funds, for example, are concerned that they will have to reveal much more about their investing strategies, including short positions.
Crypto firms bristle at Gensler’s contention that they are peddling securities, which would trigger SEC oversight for the unregulated industry. Last month, Brian Armstrong, the chief executive officer of the exchange Coinbase Global Inc., went on a Twitter rant, accusing the SEC of “intimidation tactics” after the agency threatened to sue if the company rolled out a product that would let customers earn interest on their token deposits.
Several white-collar defense lawyers who used to work at the SEC said they couldn’t remember a similar situation and called it an inappropriate use of the agency’s enforcement powers. Still, for a regulator that’s perpetually outgunned by industry, the strategy was effective. Coinbase shelved the product.
As Gensler combats outside forces, he also faces internal challenges.
When he led the CFTC, Gensler drove people hard to implement post-crisis swaps rules and they formed a union after he left.
The SEC is already unionized and in what could be a harbinger of labor troubles, workers recently filed a grievance against Gensler for not extending a Covid-related benefit that let employees care for children during business hours.
Gensler’s progress could also be impeded by the SEC’s painstaking rulemaking process. It typically takes SEC lawyers months to write regulations, which are subject to votes by the agency’s five commissioners.
In addition, any misstep opens up a legal challenge, and several of Gensler’s predecessors have had major policies overturned.
Gensler “has a very challenging job and I think as a practical matter, his legacy is likely to be written in the courts,” said Joseph Grundfest, a former SEC commissioner who’s now a law professor at Stanford University.
Nevertheless, it’s undisputed that Gensler has a record of achievement. The Dodd-Frank Act called for the CFTC to pass more than 60 rules and he completed the bulk of them by the time he stepped down in 2014.
Workers at the futures regulator recall that he personally took charge of the mission, giving teams strict deadlines. Gensler would frequently drop in to meetings unannounced in his stocking feet for status updates. Leaders who slowed things down were removed.
A common tactic Gensler used was to push the CFTC staff to initially take the harshest position possible, thus setting the terms for negotiation with financial firms. The rules that emerged may not have been as tough as he wanted but they still allowed him to claim a win over Wall Street.