Crypto doesn’t need more guidance, says SEC chairman Gensler

The crypto industry does not need specific regulations for projects that issue tokens, Securities and Exchange Commission (SEC) Chairman Gary Gensler said in a speech on Thursday.

Framed as an investor protection issue, Gensler said the rules and regulations that crypto issuers and service providers must comply with have been clear for years.

“Nothing about the crypto markets is inconsistent with securities law,” Gensler said in his prepared remarks to the Practicing Law Institute. “Investor protection is equally relevant, regardless of underlying technologies.”

His remarks are perhaps the clearest indication yet that the SEC intends to continue applying existing rules and regulations to the crypto industry, contrary to investors’ and entrepreneurs’ hopes that the agency will create some kind of “carve-out” that would allow startups to issue tokens without having to register as a securities platform.

Gensler also reiterated his view that “most crypto-tokens are investment contracts” in his speech, pointing to previous SEC publications such as the DAO report and the Munchee order as guides that developers and entrepreneurs can and should follow.

“Some in the crypto industry have called for greater ‘guidance’ with regard to crypto tokens. However, over the past five years, the commission has spoken with a pretty clear voice here,” Gensler said. “Chairman [Jay] Clayton often spoke about the applicability of securities laws in the crypto space.”

Gensler echoed those comments in an interview with CoinDesk previewing Thursday’s speech.

There are more than 10,000 cryptocurrencies listed on CoinMarketCap, with varying amounts of liquidity and value, but all are seeing similar approaches from the investing public, he said.

“[The public is] investing for a better future, based on the efforts of others,” Gensler said. “There are websites you go to, there are Medium posts you read, there are crypto Twitters, there are Reddit forums and places you can look for information. And it is about the ordinary enterprise and the entrepreneurial effort, which is the hallmark of investment contracts, which are securities.”

Later in his speech, Gensler took aim at intermediaries in crypto, looking at both centralized and decentralized platforms.

“Crypto intermediaries – whether they call themselves centralized or decentralized (e.g. DeFi) – are often a mix of services that are typically separated from each other in the rest of the securities markets: exchange functions, broker-dealer functions, custody and clearing functions, and lending functions,” he said in the speech.

These trading platforms should follow rules that protect their users, Gensler said, noting that they operate order books and facilitate transactions in crypto, which can be securities. This last aspect “makes them brokers.”

Gensler pointed to lawyers hired to represent crypto entities as another example of how these projects can align with traditional securities platforms.

“I’m going to guess you had a client. I’m going to guess that you didn’t take on the work on behalf of a dispersed, unidentified group of individuals in an ‘ecosystem,’” Gensler said in his speech.

When asked whether the SEC would take enforcement action against trading platforms that refused to voluntarily register with the agency, Gensler pointed to the agency’s previous enforcement actions, which have largely focused on token issuers.

“We’re a cop on the beat,” he said. “That’s what Congress set up in the 1930s, but we work with market participants and … to quote Joe Kennedy, the first chairman of the SEC, ‘no honest business need fear the SEC.’

In his speech, Gensler only briefly mentioned lending companies, saying they fall under his agency’s jurisdiction if they offer securities.

He emphasized the potential dangers for investors in a conversation with CoinDesk, noting that several have filed for bankruptcy and frozen customers’ access to their funds.

Even companies that haven’t filed for bankruptcy still have frozen user access to their money, he said.

“There are fundamental protections in our securities laws that protect against that,” he said. “If you invest in any of these, these service providers, the platforms, you don’t get the basic protections that insure you against fraud, manipulation, what’s called front-running.”

Gensler pointed to the SEC’s settlement with crypto lender BlockFi as an example of how companies could register with the agency, though he declined to talk about other specific companies (noting that he could talk about BlockFi since it’s a settled case).

The SEC is still sorting through the rest of the crypto-lending space, he said, but in his view it’s “unequivocal” that lending platforms must register with the agency.

“It doesn’t matter what you hand over to a platform, whether you hand over gold, whether you hand over bitcoin, or you hand over one of 1,000 plus alternative coins, frankly, if you hand over chinchillas. That the platform takes these funds of value and does something with them – they may run a hedge fund, they may lend it out, they may run other investment schemes – but that platform is under the Securities Act because how they’ve taken the money from you,” Gensler said.

Gensler’s main message – that crypto activities are already covered by existing regulations, and do not need new laws or separate regulations – is repeated throughout his speech.

Stablecoins — cryptocurrencies whose value is tied to the value of a real asset, such as the dollar — exemplified this, and are another area where investor protection is important, Gensler said in his speech.

Stablecoins can be securities, depending on how the bond is maintained, whether they pay interest and how they are sold, Gensler said.

– This is by no means an exhaustive list. The bottom line is that it is important to look at the facts and circumstances of a product, not the label, to determine whether it is a crypto security token, a crypto non-security token, or another instrument, Gensler said in his speech.

He told CoinDesk that he intended to work with the Federal Reserve and the US Treasury Department on this issue.

More broadly, he said he intends to work with companies and service providers, but reiterated that he saw the SEC’s role as being “an energetic policeman” overseeing the crypto sector.

“If we succeed, there will be more confidence in these markets and investors will get to decide and entrepreneurs will decide and projects will win or lose or fail based on their inherent risk,” he said. “… We’re going to continue to use the authority Congress gave us, but also the mandates to help best protect the public.”

UPDATE (September 8, 2022, 13:30 UTC): Adding minor changes throughout.