SEC Chairman Calls for Regulating Crypto Exchanges for Greater Investor Protection

Gary Gensler, the newly-appointed Chairman of the US Securities and Exchange Commission (SEC), is calling for a regulatory framework for the $2 trillion crypto-asset market which “could benefit from greater investor protection.” Gensler said,

“There’s a lot of authority that the SEC currently has in the securities space, and there are a number of cryptocurrencies that fall within that jurisdiction.”

“But there are some areas, particularly Bitcoin trading on large exchanges, that the public is not currently really protected.”

He did not weigh in on whether the SEC intends to approve a Bitcoin ETF.

Need for Greater Investor Protection

This week, during his roughly four-hour-long testimony in front of the House Financial Services Committee on market volatility surrounding meme-ified securities like GameStop and others, while fielding a question about steps to bring regulatory clarity to have a “vibrant” crypto market with legitimate money, Gensler said:

“I think it's only Congress that can really address it; it would be good to consider…whether to bring greater investor protection to the crypto exchanges.”

He noted that right now, crypto exchanges trading in these crypto-assets do not have a regulatory framework either at the SEC or CFTC “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,” said Gensler, who has more understanding of crypto than his predecessors as he taught a class on digital assets at MIT.

He further said the SEC is working on guidance for crypto custody.

A Welcome Development

While the crypto market experienced a sell-off in reaction to the news, trader and economist Alex Kruger says, “It should be a welcome development.” Avi Sanyal, head of trading at BlockTower noted,

“The market needs to internalize that regulation of crypto exchanges is not only inevitable, it's good for the industry. The more volumes that come from regulated exchanges and the more comfortable the trade world is with Bitcoin, the better off we all are.”

“It does not hurt the value proposition of Bitcoin the more institutionalized it gets.”

Addressing the interaction between social media and market behavior, Gensler also said the SEC is paying more attention to it as it can manipulate the market.

“Sentiment analysis has picked up steam in the last couple of years, and it has grown to include online communities. With that comes the risk that nefarious actors may try to send signals to manipulate the market. This is an area for which we will continue to deepen our understanding, resources, and capabilities.”

He then talked about shortening the settlement cycles to same-day, which he said could “reduce costs and risks in our markets,” for which he has directed the SEC staff to put together a draft proposal for the Commission’s review.