- J McGlynn and M Bacina
SEC Chairman proposes to lock cryptocurrency into the securities system
Updated: Aug 17, 2021
SEC Chairman, Gary Gensler has entered into the ongoing public debate regarding whether crypto-investors need more protections. Similarly to CFTC Commissioner Dan Berkovitz, who urged that "unlicensed decentralized finance (DeFi) markets may be illegal", Gensler agrees that there should be additional regulation of cryptocurrencies.
Gensler calls for better regulation of the crypto 'Wild West’
During an interview at the Virtual Aspen Security Forum, Gensler called on Congress to grant the SEC more authority to police cryptocurrency trading, outlining his concerns for the crypto sector, stating that in certain applications:
This asset class is ripe with fraud, scams and abuses" and "If we don't address the issues, a lot of people will get hurt
It's unfortunate that this narrative continues to be spread, as Chainalysis' Crypto Crime report provides sound data that rejects such myths.
Speaking in his personal capacity and not on behalf of the SEC body, Gensler also publicised his belief that most cryptocurrencies are securities and therefore, already under the purview of the SEC, saying :
We need additional congressional authorities to prevent transactions, products and platforms from falling between regulatory cracks
Cryptocurrencies are so variant in nature that we don't agree with such a broad brush statement, and we note if indeed digital currencies were all securities, this comment invites the question of what further authority would the SEC need that it does not have at present?
Nevertheless, Gensler holds the strong position that most crypto investors are not educated enough to judge and understand the risks of investing in crypto assets, a remarkable position which disregards the individual choices of digital currency purchasers. Gensler said:
we just don't have enough investor protection. And frankly at this time, it's more like the Wild West.
This makes little sense in light of a string of SEC prosecutions and existing laws against misleading and deceptive practices. Gensler's call for an increase in regulation, without any details of same or any basis for showing existing laws are inadequate to address problems, is strange and we respectfully submit show a lack of understanding in the digital currency market. His recent comments may even come as a surprise for those familiar with Gensler's background as an MIT professor who taught on digital currencies and blockchain.
There is no doubt that fit for purpose regulation could address concerns, particularly in relation to products which hold customers assets, via custody requirements, but as we note above, it is already against the law to mislead or deceive purchasers of products (whether securities or not) and it is not usually the role of regulators to seek to restrict what assets purchasers can access.
As has been seen with the recent blow-back to digital currency definitions in the US Infrastructure Bill, careful and measured steps towards digital currency regulation is important, lest changes chase away the very innovation that government says it is trying to encourage.