Making crypto firms do their work within the bounds of the law

When I taught a course on blockchain and money at the Massachusetts Institute of Technology, I asked my students every semester who they thought Satoshi Nakamoto was.

To this day, no one knows. Nakamoto’s anonymous identity is part of the creation myth of finance without trusted third parties – a new way of moving value on the internet, with the aim that there will be no government oversight or central intermediaries such as banks.

Since ancient times, however, the financial world has been built on trust and legal certainty. Furthermore, finance has tended towards centralisation, concentration and interconnection, from banks to stock exchanges.

The crypto market is no exception. It has many “trusted” – but non-compliant – intermediaries. Today, crypto is dominated by a handful of trading, lending, betting and other financial intermediaries. The investing public trusts these entities to be responsible for investors’ assets. According to some data, the three largest crypto trading platforms allegedly account for almost three quarters of all trading volume.

Crypto entrepreneurs can claim, in their own marketing materials, that they are transparent and regulated. But make no mistake: very few, if any, are actually registered with the SEC and are in full compliance with the federal securities laws.

The lack of compliance puts investors’ hard-earned assets at risk. Investors lack fundamental disclosures about the cryptoassets themselves and the firms that execute their trades and hold their assets: What do firms do with client funds? How do they finance their promised returns? Are they putting their hands in the investors’ pockets? When you buy or sell a token, are you trading against the house? What are the rules to protect against manipulation and fraud? Without disclosure and other investor protections, we simply don’t know.

Essentially, these companies are saying “trust us.” Also, when firms go bankrupt (as many have recently), they turn to the bankruptcy courts to sort out the mess. Given Nakamoto’s initial vision — essentially, that code is law — that’s somewhat ironic.

As head of the Securities and Exchange Commission, I have one goal with regard to the crypto markets: to ensure that investors and the markets receive all the protections they would in any other securities market. How?

First, intermediaries and tokens should come into compliance on their own. Crypto intermediaries should structure their businesses to comply with our laws governing securities exchanges, broker-dealers and clearing houses; they could put in place rulebooks that protect against fraud and manipulation. Cryptocurrency issuers should file registration statements and provide the required disclosures.

These are the same rules that everyone else in the securities markets has played by for decades.

I find it unconvincing to talk about a lack of clarity in the securities laws. Some crypto companies may say that the laws are unclear rather than admit that their platforms do not have adequate investor protection.

We have been clear that most crypto-tokens backed by founders, among other features, are likely to be securities. We have been clear about how lending and betting platforms fall under the securities laws. We have been clear that platforms listing crypto-securities must register with the SEC. Furthermore, the securities laws are clear that these platforms must not combine functions under a single umbrella, which creates conflicts and risks for investors.

A common feature of crypto firms that offer trading, lending, or staking-as-a-service is that they typically require users to surrender control of crypto assets to the platforms (not your keys, not your coins). Thus, SEC staff has been clear about how firms should account for cryptoassets they hold for their users, and staff has provided guidance on disclosure obligations arising as a result of recent bankruptcies and financial distress among cryptoasset market participants.

We have also been clear that, based on how crypto platforms generally operate, investment advisors cannot rely on them today as qualified custodians. We have also proposed rules that would require all assets invested with investment advisers, including cryptoassets that are not funds or securities, to be held with qualified custodians.

Honestly, though, crypto brokers aren’t exactly lining up to register with the SEC and comply with the laws passed by Congress. Perhaps it is simply that their business models rely on non-compliance. At times it has felt as if someone sought a stamp of approval for non-compliant activity, rather than changing a fundamentally non-compliant business model fraught with conflict.

Of course, another tool in our toolbox is to root out non-compliance through investigations and enforcement actions.

The SEC has successfully brought or settled more than 100 cases against crypto intermediaries and token issuers, including some who ran Ponzi or pyramid schemes, engaged in illegal espionage, or committed other forms of fraud. We recently filed fraud charges against the CEO and other executives of FTX, as well as Terraform and its founder.

Enforcement measures take time and resources. This is especially true in crypto, as firms are often uncooperative, claim foreign jurisdiction despite offering products to US investors, and are well-funded for protracted litigation, including the potential use of money raised from investors in and on their platforms . However, we will be steadfast in our mission to eradicate injustice in the market.

Some have criticized the SEC for bringing cases — or even just investigating — crypto issuers and intermediaries. Some have said that we should let innovation flourish or risk it going abroad. But abandoning investor protections puts real people’s life savings at risk. Enforcement is a tool, not the goal. The goal is to make market participants comply with laws and regulations and to protect our “clients”: American investors.

The point is this: Even if Nakamoto’s identity isn’t clear, the laws are. Crypto firms should do their work within the bounds of the law, or they shouldn’t do it at all.

Gary Gensler is chairman of the US Securities and Exchange Commission.