SEC Chairman Gary Gensler warned that cryptocurrency exchange platforms were jeopardizing their very survival if they ignored his call to work within the regulatory framework.
Gensler told the Financial Times that while he remains “technology neutral”, cryptoactives are no different when it comes to public policy imperatives such as protecting investors, preventing illicit activity and maintaining financial stability.
“With a value of around $2 trillion worldwide, it’s of such a level and nature that if it’s to have any relevance in five or ten years’ time, it will be as part of public policy,” he said. “History says it doesn’t last very long there. At the end of the day, finance is based on trust.”
Gensler expressed disappointment at the industry’s response to his suggestion that exchange platforms register with the SEC on the grounds that enough cryptocurrencies could qualify as securities.
“Talk to us,” he challenged. “There are a lot of platforms in operation today that would do better to participate and, instead, there’s a bit of…. apologizing rather than giving permission.”
Cryptocurrency exchange platforms are big business in the USA. New York-listed Coinbase reported second-quarter profits of $1.6 billion. However, it’s unclear which US financial regulator is supposed to oversee them. Gensler has asked Congress to make this authority more explicit.
Gensler’s comments on crypto-currencies carry all the more weight as he has taught on the subject at the Massachusetts Institute of Technology (MIT). This week, he was due to testify on cryptos and other issues before the European Parliament’s Committee on Economic and Monetary Affairs.
Gensler explained that he focused on cryptocurrency trading platforms because over 95% of activity in this “highly speculative asset” takes place on these sites, with investor protections that he described as “really thin”.
He said that cryptocurrencies and decentralized financial platforms (DeFi) represent a challenge for regulators because they exist without traditional brokers, to whom laws can easily be applied. Instead, they offer investors the opportunity to deal more directly with each other.
But he said regulators could exercise authority even over supposedly decentralized platforms. He argued that DeFi was “not really a new concept”, but a variation on the peer-to-peer lending businesses that emerged at the turn of the century.
Just as there was “a company in the middle” of peer-to-peer lending, DeFi platforms have “a healthy dose of centralization”, including governance mechanisms, fee models and incentive systems.
“It’s a mistake to say it’s just software that’s on the web,” he said. “But they’re not as centralized as the New York Stock Exchange. It’s something interesting that sits in the middle.”
Chinese companies
Mr. Gensler also reiterated his concern about Chinese companies listed in the USA. He said the vehicles listed were usually shell companies based in offshore locations, such as the Cayman Islands, which sign service agreements with companies operating in China.
“Is there real money flowing from the operating company in China to make the payments or not?” he questioned. “There’s a service agreement and generally these entities don’t pay dividends.”
The SEC is also finalizing rules that will suspend trading by these companies if their auditors don’t allow U.S. regulators to examine their books. Under the Trump-era Foreign Corporate Accountability Act, these companies have until 2024 to comply with these rules.
Congress is considering bringing this timetable forward by one year. Gensler said the Commission would be ready to implement the rules under the accelerated timetable, meaning that Chinese companies could be subject to increased scrutiny as early as 2023.
