SEC Chairman Gensler says crypto is centralized despite fundamental principles

Gary Gensler, chairman of the Securities and Exchange Commission, took another shot at the crypto industry in a speech on Monday, criticizing what he perceives as the disproportionate power that centralized cryptocurrency exchanges wield in the sector.

Gensler’s comments, made Monday ahead of the annual meeting of the Securities Industry and Financial Markets Association — a prominent trade group representing securities firms, banks and asset managers — focused primarily on promoting competition among stock market makers. But the SEC chairman, while warning about the danger of centralization in traditional finance, also made a point of taking a passing swipe at the crypto industry.

“We’ve even seen centralization in the crypto market, which was founded on the idea of ​​decentralization,” Gensler said. “This field actually has significant concentration among intermediaries in the middle of the market.”

Gensler used the analogy of sand flowing through an hourglass to articulate how financial intermediaries—who sit at the neck of the hourglass while processing trillions of dollars worth of transactions—can capture profits disproportionately, given their advantageous position.

He then said that he believes a number of cryptocurrency exchanges operate in this problematic manner, although he did not single out any particular exchanges by name.

“There is a tendency for central intermediaries to benefit from scale, network effects and access to valuable data,” Gensler said of these self-enriching financial intermediaries.

The SEC chairman then added, in an apparent allusion to blockchain technology, that while new technologies can often help create new forms of economic competition and untangle established winners, centralization quickly finds a way to re-establish itself in new sectors.

“Although technological innovations repeatedly disrupt existing business models, centralization still tends to re-emerge,” Gensler said.

Gensler’s comments, particularly his criticism of the rise of centralization in the supposedly decentralized crypto ecosystem, are particularly noteworthy given the actions taken in recent months by federal agencies to restrict certain decentralized components of crypto and DeFi.

In August, the Treasury Department’s Office of Foreign Asset Control (OFAC) sanctioned Ethereum coin mixing tool Tornado Cash and blacklisted a number of wallet addresses associated with the service; Tornado Cash allowed users to keep their crypto transactions private by hiding otherwise publicly available transaction data. The Ministry of Finance claims that the service facilitated money laundering and aid to terrorist groups.

Many privacy advocates took the move as an indication that the federal government has decided anonymity — a fundamental tenet of crypto, along with decentralization —to be a fundamental unacceptable part of the crypto market.

The episode also deepened a rift between centralized crypto companies and decentralized projects and their advocates. Some crypto firms, especially larger, centralized ones, immediately took steps to preemptively comply with the Tornado Cash sanctions, because of the risk of attracting the ire of the federal government. Decentralized organizations, meanwhile, redoubled their hostility toward the US government and their commitment to users’ privacy.

Circle, the company behind stablecoin USDC, was one such centralized firm that actively followed – without being asked by federal authorities – the Tornado Cash sanctions, freezing all USDC present in wallets blacklisted by OFAC. The company’s co-founder and CEO, Jeremy Allaire, later apologized in a blog post that he felt the federal government had forced his hand and made Circle a less decentralized company against his will.

“[Complying with Tornado Cash sanctions] compromised our belief in the value of open software on the Internet and our belief that the premise and preservation of privacy should be enshrined as a design principle in the issuance and circulation of digital dollar currencies,” Allaire said at the time.

The Commodities and Futures Trading Commission (CFTC), meanwhile, is entrenched in an ongoing, new trial towards a Decentralized Autonomous Organization (DAO), which would see the DAO’s entire membership held accountable for the consequences of all DAO-wide votes. The suit, if successful, could see DAOs — the organizational cornerstone of crypto’s decentralization push — derailed as an alternative to a centralized corporate structure for crypto projects.

Lawyers for the venture capital company Paradigm wrote in a submission last week that the CFTC’s “theory of liability would safeguard countless unwary technology users and seriously threaten the viability of DAOs in the United States.”