When the chairman of the Securities and Exchange Commission (SEC), Gary Gensler, took up his current post in April, the crypto industry expected a change in the position of federal agencies, which was hostile during the tenure of its predecessor towards cryptocurrencies and digital assets. He disappointed them.
Key points to remember
- SEC Chairman Gary Gensler criticized the crypto industry during his Senate testimony on Tuesday.
- He said DeFi is decentralized in name only and that “very many” tokens traded in the crypto markets are securities.
- Gensler also clarified that, despite his criticism, he was not negative about cryptocurrencies.
- He said his agency was understaffed and could use more funds.
Not only has Gensler raised new concerns and called the industry a “Wild West”, but he has also taken every available opportunity to advocate to bring the industry under the watchful eye of his agency. In his testimony to the Senate Banking Committee on Tuesday, the SEC chief reiterated these concerns and argued for putting the recalcitrant industry under his watch.
A critical appraisal
Most of Gensler’s assessments of the state of affairs in the cryptocurrency industry were negative. According to the SEC chief, only a “small number” of cryptocurrencies currently traded in the crypto markets are not securities. “Very many are,” Gensler said. This includes stablecoins, a type of cryptocurrency whose price is pegged to a fiat currency or basket of assets to minimize price fluctuations.
When asked about his reasoning for classifying stablecoins as securities, Gensler pointed to the “35 different things” defined as securities in the Securities Act of 1933. While the cryptocurrency industry is obsessed with the Howey test as described in a Supreme Court verdict to define securities, the law actually defines securities in several forms, including investment contracts, security deposits and certificates of deposit .
Decentralized finance or DeFi tokens and services have exploded in popularity this year. But Gensler said the services are decentralized in name only, and the user agreements for those services mask additional fees and charges that are not obvious to the customer. He said DeFi and crypto tokens are a “highly speculative asset class” and agreed with Senator Elizabeth Warren, Democrat of Massachusetts, that the high and unpredictable charges for DeFi services could “make crypto dangerous.”
During the hearing, Gensler also targeted Coinbase, North America’s largest cryptocurrency exchange in terms of transaction volume. Coinbase Global, Inc. (COIN) CEO Brian Armstrong accused the SEC last week of “truly sketchy behavior” for refusing to disclose the reasons for categorizing tokens in their lending product as securities. He also said the agency was “creating an unfair market” by threatening to continue crypto exchanges.
Gensler said the exchange “could have dozens of tokens that are securities” in its trading markets. “But they [Coinbase] are not registered with the SEC, ”he added, meaning that Coinbase is not subject to the same disclosure regime as other trading exchanges registered with the agency.
Despite his relentless criticism of the crypto industry, Gensler made it clear that he was not “negative or minimalist” about cryptocurrencies. “I am concerned that if the field, which I studied for 3.5 years at MIT, remains outside the framework of public policies for the fight against money laundering (AML), investor protection and tax evasion. , it will not persist, “he said.
More funding and coordination needed
Even though he was advocating for more crypto oversight, Gensler also asked for more funding for his agency. He arrived at the agency at a critical time in its existence. Technology has rendered previous rules for the formation of the capital market inadequate, and the emergence of memes stock traders has upset investor protection. According to Gensler, his agency is currently working on 6,000 projects and is understaffed. “From a funding point of view, we could use a lot more people,” he said.
When it comes to cryptocurrencies, better coordination between market regulators is needed, he said. For example, establishing a regulatory framework for stablecoins might require his branch to coordinate its efforts with bank branches. “And then there are things in the weeds, like infrastructure and guard [for digital assets], which I think we can work with Congress to clarify, ”Gensler said.
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