SEC Chair Gensler testifies on cryptoassets

SEC Chair Gary Gensler testified last week before the US House Financial Services Committee. He talked about various things, including dark pools and payment for order flow, but let’s have a look at what he said about crypto-assets:

Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending. Frankly, at this time, it’s more like the Wild West or the old world of “buyer beware” that existed before the securities laws were enacted. This asset class is rife with fraud, scams, and abuse in certain applications. We can do better.”

Perhaps we should not be surprised, as this largely repeats the message we’ve heard from the SEC for a long time now.

Another often-repeated messages: chances of crypto trading platforms offering securities are quite high, Gensler warned:

“the probability is quite remote that, with 50, 100, or 1,000 tokens, any given platform has zero securities”.

“Most” of the 5,000-6,000 existing crypto-assets fall under the definition of a security, Gensler said. Rep. Tom Emmers pushed back on that statement during the hearing, challenging that conclusion that many tokens indeed are securities. Rep. Warren Davidson did not get an answer to his question when tokens are sufficiently decentralised to no longer be securities.

Rep. McHenry, who submitted several crypto bills to Congress, pushed back on Gensler’s “concerning and contradictory” statements about crypto regulation and about the SEC’s powers over crypto. Congress can help clarify when the SEC or the CFTC is in charge, replied Gensler.

Although he refused to comment on specific tokens and thought there was no future for most of the existing tokens, Gensler acknowledged that “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”.

On DeFi, Gensler seemed to assume that most DeFi protocols are still centralised enough to impose rules on: “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.” He didn’t clarify how policies could be imposed on DeFi protocols that don’t custody user assets at all.

Gensler instructed SEC staff to identify (i) how the crypto-market can be supervised by existing authorities and (ii) any gaps. Instead of referring to ‘stablecoins’, he used the term ‘stable value coins’, adding further to an already confusing taxonomy in the crypto industry. On stablecoins, or ‘stable value coins’, as he calls them, Gensler wants Congress to clarify how to regulate them. He also compared current stablecoins to poker chips at a casino, although things might be different for future stablecoins with “clear and clean reserves”.

Some questions from the floor suggested that the SEC’s enforcement approach making crypto companies and projects move abroad. Where are they moving to? Gensler mentioned 3 top destinations: Singapore or Malta or Hong Kong.

Does the SEC plan a blanket crypto-ban as in China, asked Rep Budd? After some hesitation, Gensler responded: “No, that would be up to Congress”.

Sources: US SEC website, which has the full text of the prepared statement, the website of the House Financial Services Committee, which has a recording of the hearing, and Coindesk.

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