SEC – Remarks by Chair Gary Gensler on oversight of crypto under securities laws

August 3, 2021-Addressed what the SEC plans to do about crypto and its intersection with US security. Must protect investors and consumers, prevent illicit activity, ensure financial stability. Thus, need to bring crypto into regulatory framework to achieve these 3 SEC missions. SEC will maximize its authorities in this area but needs Congress to step in and act. Believes legislative priority should center on crypto trading, lending, and Decentralized Finance (DeFi ) platforms.

Crypto Asset Class Value: Since introduced 12 years ago, purportedly worth about $1.6 trillion, with 77 tokens worth at least $1 billion each and 1,600 with at least $1 million market capitalization.

Investor Protection Lacking: Stated that right now, there are not enough investor protection around crypto. At this time, it’s more like the Wild West; rife with fraud, scams, abuse in some cases. There is a great deal of hype and spin about how crypto assets work, and investors are not able to get rigorous, balanced and complete information, in many instances. Gensler is concerned that if these issues are not addressed, a lot of people will be hurt.

Securities Laws Apply: Many digital tokens offered and sold as securities and there is concern in some crypto markets that tokens may be unregistered securities, no required disclosures or market oversight. SEC has brought dozens of actions in this area, prioritizing token-related cases involving fraud or other significant harm to investors and has not yet lost a case. There are initiatives by several trading platforms to offer crypto tokens or other products, that are priced off of the value of securities and operate like derivatives. They are subject to securities laws too, as it doesn’t matter if it’s stock token, stable value token, or virtual product with synthetic exposure to underlying securities. Gensler asked SEC staff to protect investors from risks of unregistered securities sales.

Crypto Trading, DeFi Platforms: Gensler believes some crypto trading platforms, lending platforms, and other decentralized finance (DeFi) platforms implicate securities, commodities, banking laws. The world of crypto finance now has platforms where people can trade tokens and other venues where people can lend tokens; many have more than 50 tokens on it. Unlike other trading markets, where investors go via an intermediary like NYSE, people can trade on crypto trading platforms without a broker 24/7, from around the globe. Many overseas platforms say don’t allow US investors, but allegedly some unregulated foreign exchanges facilitate trading by US traders using virtual private networks (VPN). Gensler added that American public is buying, selling, and lending crypto on these trading, lending, and DeFi platforms, and there are gaps in investor protection.

Use of Stablecoins: The use of stablecoins on these trading platforms may facilitate those seeking to sidestep public policy goals connected to traditional banking and financial system. However, stablecoins can be securities and investment companies, and to the extent they are, SEC will apply the full investor protections of the Investment Company Act.

Investment Vehicles, Custody: Gensler discussed investment vehicles providing exposure to crypto assets, the largest of which have been around for eight years and worth more than $20 billion. Gensler anticipates that there will be filings with regard to ETFs under ICA. Staff will review such filings, particularly those limited to CME-traded Bitcoin futures. As for custody of crypto assets, the SEC is seeking comment on crypto custody arrangements by broker-dealers and relating to investment advisers. Custody protections key to prevent theft of investor assets, and we will be looking to maximize regulatory protections in this area.

SEC to Maximize Authorities, Needs More: Gensler noted that SEC has taken and will continue to take its authorities as far as they go; and pointed out that certain rules related to crypto assets are well-settled. The test to determine if a crypto asset is a security is clear, even if some gaps exist. He said SEC needs additional Congressional authorities to prevent transactions, products, and platforms from falling between regulatory cracks in this space. SEC also needs more resources to protect investors in this growing volatile sector. Believes legislative priority should center on crypto trading, lending, and DeFi platforms.

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