Gary Gensler suggests the SEC prepares for increased crypto oversight
SEC Chairman Gary Gensler appears to be preparing the SEC for increased oversight of cryptocurrency exchanges, the latest in a series of regulatory actions aimed at the growing industry.
In prepared remarks at PLI’s recent SEC Speaks conference, Gensler urged cryptocurrency platforms to register each function they perform with the SEC — for example, by requiring crypto dealers, brokers and lenders to register those functions separately with the SEC. Such a move could result in a dramatic upheaval in the crypto market, where there are currently several cryptocurrency platforms that perform all of these functions. This is in stark contrast to the traditional securities markets, where such services are separated from each other.
The SEC’s apparent push to split cryptocurrency business functions comes as the crypto market has come under increasing scrutiny. In January, the SEC proposed a rule that would significantly expand the definition of “exchange,” which would bring the cryptocurrency market under the SEC’s regulatory purview. Gensler has publicly supported these efforts, as he has consistently expressed skepticism about the state of the cryptocurrency market and made it a priority to pass rules that more explicitly regulate crypto.
Gensler’s comments, and the SEC’s corresponding actions, come on the heels of other developments that have affected the nascent industry. In March, North Korea stole approximately $30 million worth of digital tokens (the US government recently seized the stolen tokens). The past few months have also seen a marked drop in crypto values, which is scaring some consumers. Perhaps most notably, in July, crypto lender Voyager Digital filed for bankruptcy, again shaking confidence in the cryptocurrency market.
Even with Gensler’s comments, and the SEC’s proposed rulemaking, the regulatory outlook for cryptocurrency remains unclear. Proposed legislation in Congress (which would place most crypto under the CFTC’s jurisdiction) seems unlikely to proceed in the short term. The SEC has taken some enforcement actions, including matters related to conflicts of interest, which were the focus of Gensler’s latest comments. (Our summary of the latest such action can be found here.) But the crypto market is such a recent phenomenon that there is naturally little precedent to guide how existing laws and regulations apply to it. While new rules may bring more stringent oversight to this area, it is also likely that individual enforcement actions and settlements may continue to build a precedent that brings more clarity to the SEC’s role in regulating the emerging market.
This uncertain regulatory picture underscores the need for cryptocurrency companies and their advisors to stay informed about securities law and regulatory developments, especially as the SEC seeks to expand its existing jurisdiction. Engaging with outside counsel can be critical in helping businesses balance litigation risk with the opportunities inherent in a new (and dynamic) sector. Often, outside advisors can help companies navigate these risks without sacrificing the nimble and bold attitude that helped these companies succeed in the first place – and can actually help position these companies to succeed as the crypto market embarks on its next chapter .
© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 259