Securities and Exchange Commission Chairman Gary Gensler has instructed agency staff to study how to extend investor protections to cryptocurrency platforms and how to register and regulate platforms where securities and non-securities trade together.
Crypto trading and lending platforms, whether centralized or decentralized, have recently traded over $100 billion worth of crypto daily, with the top five trading platforms handling 99% of all trades. DeFi, or decentralized finance, is also concentrated, with the top five platforms accounting for nearly 80% of exchanges, he said.
Since the SEC oversees platforms that trade in securities, Gensler said he asked SEC staff “how best to register and regulate platforms where trading in securities and non-securities is intertwined. “. He said the SEC and the Commodity Futures Trading Commission, using their respective authorities, should jointly address platforms that may trade both crypto-based security tokens and certain commodity tokens.
“These crypto platforms perform similar roles to traditional regulated exchanges,” he said. “So investors should be equally protected.”
Gensler said that if a company creates a crypto market that protects investors from fraud and manipulation and preserves market integrity, “then customers are more likely to trust and have greater confidence in this market”.
If someone offers a security to the public and doesn’t register it or make the required disclosures, he said he would tell them, “Come in, work with us and register.”
Gensler made the remarks Monday at the Penn Law Capital Markets Association’s annual conference at the University of Pennsylvania’s Carey Law School.
The regulator, a former Wall Street executive and MIT professor, said he wants crypto platforms to be registered and regulated to protect client assets. Unlike traditional exchanges, centralized crypto trading platforms take custody of their clients’ assets, Gensler noted. And last year, $14 billion was stolen.
Crypto trading platforms can also act as market makers, trading for their own accounts against client trades. This poses conflicts of interest and is not an acceptable practice on traditional exchanges like the New York Stock Exchange. Gensler asked if the market making functions of crypto platforms should be separated.
He also said that crypto tokens that are securities should be registered with the agency. “Issuers of crypto tokens that are securities must register their offers and sales of such assets with the SEC and comply with our disclosure requirements, or satisfy an exemption.”
Yet token issuers face a chicken-and-egg problem; they are unlikely to attempt to register as securities without an exchange that could list them, giving them little incentive to go through the costly registration process.
“Until the platforms are registered and regulated, I don’t think tokens will enter and register in a meaningful way,” Gensler said during a Q&A session.
If crypto assets have forms or disclosures that they “really cannot comply with, our staff are here to discuss and assess those concerns,” he said.
“Any token that is a security must follow the same market integrity rules as other securities under our laws,” Gensler said.
Crypto can provide new ways for entrepreneurs to raise money to fund their projects and for investors to trade, but “when new technology comes along, our existing laws don’t just go away,” he said.
Generally speaking, Gensler reiterated a call for comprehensive regulation both to protect investors but also to allow the market to thrive with clear rules. The auto industry, he noted, has benefited from speed limits, alert cops and traffic lights. “If we hadn’t done that, would we have sold so many cars? No way,” he said. “Our capital markets and our economy benefit from some basic rules of the road.”
Write to Janet H. Cho at [email protected]