SEC Chair Gary Gensler Makes a Power Grab But It was Expected and Will Aid in DeFi Expansion & Bitcoin ETF Approval

Crypto supporter SEC Commissioner Hester Peirce countered Gary Gensler, saying the existing securities laws don't work well for certain aspects of crypto. It was “people's freedom to interact using new technology” that has produced the innovation.

Speaking at the Aspen Security Forum, US SEC Chair Gary Gensler said no crypto asset fulfills all the functions of money. They are primarily digital, scarce vehicles for speculative investment.

“In that sense, one can say they are highly speculative stores of value.”

Crypto assets haven’t been used much as a unit of account or medium of exchange either. When used in that sense, it’s often to skirt the laws around anti-money laundering, sanctions, and tax collection or to enable extortion via ransomware. He added this asset class is “rife with fraud, scam, and abuse.”

As a policymaker, Gensler said, he’s “technology-neutral” but not public policy-neutral, and as new technologies come along, investors and consumers need to be guarded against illicit activity and ensure financial stability.

“If you want to invest in a digital, scarce, speculative store of value, that’s fine. Good-faith actors have been speculating on the value of gold and silver for thousands of years. Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West.”

According to him, in this Wild West, many tokens are sold as securities. Those buying these tokens anticipate profits and a small group of entrepreneurs and technologists nurturing the projects.

“I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight. This leaves prices open to manipulation” and investors vulnerable.

These tokens include stock tokens, stable value tokens backed by securities, or a virtual product providing synthetic exposure to underlying securities, and are subject to the securities laws and must work within securities regime, he added.

In terms of an ETF, Gensler said one that complies with the SEC’s strict rules for mutual funds could provide investors with necessary protections. He also signaled an openness to an ETF, but instead of a Bitcoin-backed fund, he went for one focused exclusively on Bitcoin futures offered by CME, requiring investors to put down the substantial margin to trade.

Gensler also pointed to crypto trading platforms, lending platforms, and DeFi platforms which are facilitating trading by U.S. traders who are using VPNs. And they must register with the Commission unless exempted, he added.

With DeFi wanting to scale to billions of users, institutionalizing, and hiring General Counsels in-house, it would help the sector to be regulated and meet the investor protection standards, said SpartanBlack of crypto fund The Spartan Group.

In terms of stablecoins, the former Goldman Sachs partner mentioned Facebook’s Diem due to its potential impact on monetary policy, banking policy, and financial stability.

In the crypto market, without naming them, Gensler talked about four large stablecoins (USDT, USDC, BUSD, DAI) in the $113 billion worth stablecoin market, which are embedded in crypto trading and lending platforms.

The fact that nearly three-quarters of trading on all crypto exchanges occurred between a stablecoin and some other token last month, such usage “may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system” and affects “national security” as well, he said.

According to Gensler, who was the chair of the CFTC during the Obama administration, these stablecoins may also be securities and investment companies.

He concluded that the SEC is working closely with Congress, the Administration, and fellow regulators. In his view, the legislative priority should be on crypto trading, lending, and DeFi platforms.

“We need additional Congressional authorities to prevent transactions, products, and platforms from falling between regulatory cracks. We also need more resources to protect investors in this growing and volatile sector.”

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