Securities and Exchange Commission Chairman Gary Gensler on Tuesday warned that new regulations are needed on cryptocurrencies and digital assets in order to protect U.S. national security.
“This asset class is rife with fraud, scams and abuses in certain applications,” he said. “There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced, and complete information,” said the SEC chief during an appearance at the virtual Aspen Security Forum.
He expressed particular concern about stablecoins, or digital tokens that are pegged to the U.S. dollar or another fiat currency, and facilitate trading between various cryptocurrencies. Gensler said that roughly 75% of all crypto trades involve some kind of stablecoin, like tether /zigman2/quotes/226258617/realtime USDTUSD -0.03% or USD coin /zigman2/quotes/226472410/realtime USDCUSD -0.0100% .
“These platforms may facilitate those seeking to sidestep a host of public policy goals,” Gensler said. “Sidestepping our traditional banking system…and sidestepping anti-money laundering and tax-compliance sanctions,” he added, noting that this may threaten U.S. national security.
Gensler also called for greater regulation of decentralized finance, or DeFi, an alternate financial universe comprising countless applications that run autonomously, mostly on the Ethereum /zigman2/quotes/108573964/realtime ETHUSD -6.16% network, where users can deposit their digital assets and earn returns, borrow or loan money and even buy and sell derivatives of blue-chip equities.
Gensler has been a leading voice arguing for stricter regulation of cryptocurrencies, including bitcoin /zigman2/quotes/31322028/realtime BTCUSD -5.44% and ether /zigman2/quotes/108573964/realtime ETHUSD -6.16% , though he has prioritized other issues , including mandatory climate risk reporting, in his first months as chairman.
Prior to his confirmation at the SEC, crypto enthusiasts were excited for his chairmanship, given that he spent several years at the Massachusetts Institute of Technology studying digital currencies and developed a course on “ blockchain and money ” that has attracted millions of viewers on YouTube.
In a question-and-answer session following Gensler’s speech, the SEC chairman may have disappointed those in the industry who are seeking greater clarity as to whether the agency considers any particular digital asset a security for regulatory purposes.
Crypto entrepreneurs have largely created and disseminated digital assets without registering them with the SEC as securities, saving significant time and money on regulatory compliance. The SEC has brought dozens of cases against entities that produce digital tokens for failing to register as issuers of securities, but the industry has clamored for the regulator to issue bright-line guidance that spells out specifically when a digital asset will and won’t be considered a security.
“We’ve been awfully clear on a lot of this,” Gensler said in response, adding that the SEC has issued statements, reports and taken enforcement actions that, taken together has brough “a lot of clarity” to the question, he said.
The SEC abides by a set of conditions known as the Howey test, developed by the Supreme Court in 1946, which states that an instrument is considered a security when it’s “a contract, transaction or scheme whereby a person invests his money in a common enterprise, and is led to expect profits solely from the efforts of the promoter or a third party.”
“I think a lot of this is clearer than some of the entrepreneurs would like to think,” Gensler said. “It’s basically anticipation of profits on the efforts of a sponsor or others. It depends on the facts…but that is the story of a lot of these circumstances.”
The SEC chairman said that he anticipates working with Congress to establish clearer authority for the regulator to oversee cryptocurrency exchanges, be they traditional centralized exchanges like Coinbase /zigman2/quotes/225893452/composite COIN +0.81% or Kraken, or decentralized ones that use computer code to match buyers and sellers on a peer-to-peer network.
One hurdle the SEC faces in regulating cryptocurrencies is a lack of resources, Gensler said. Though the crypto market is small compared to the equity and bond markets, it takes a great deal of scarce expertise, time and attention to oversee properly, he added. “We can double or triple the number of people we have working on this at the SEC and still probably not fully covered this field.”