Gensler sets SEC sights on DeFi, crypto lending and more in expansive speech on regulation

Quick Take

  • SEC chairman Gary Gensler spoke about crypto regulation during an event appearance on Tuesday.
  • His remarks indicate that the SEC is scrutinizing major trends in the crypto space today, including decentralized finance (DeFi), stablecoins and more. 
  • Notably, he wants to see Congressional legislation focused on “crypto trading, lending, and DeFi platforms” and granting regulators additional authorities to regulate the crypto ecosystem.

Securities and Exchange Commission Gary Gensler said Tuesday during an event that "right now, we just don’t have enough investor protection in crypto."

"Frankly, at this time, it’s more like the Wild West," Gensler continued.

The statements, prepared ahead of time and made public by the SEC, represent perhaps Gensler's most expansive comments to date on the topic of regulation and crypto, though he stressed that he was speaking for himself rather than the agency itself. And though some of his comments have been aired elsewhere — for example, Gensler has said publicly that he wants more regulation for exchanges and seeks to cooperate with Congress on the matter — Tuesday's speech laid out in clear terms the agency's regulatory priorities for the industry under his leadership.

Indeed, while Gensler described himself as "technology-neutral," he went on to claim that he is "anything but public policy-neutral."

"As new technologies come along, we need to be sure we’re achieving our core public policy goals," Gensler continued.

Gensler's speech focused on a number of key areas: tokens that are classified as securities, trading and decentralized finance (DeFi) platforms, stablecoins, and financial products tied to crypto such as exchange-traded funds.

Exchanges and stablecoins on the agenda

On the first topic, Gensler pointed to the viewpoint held by his predecessor, Jay Clayton. 

"I find myself agreeing with Chairman Clayton. You see, generally, folks buying these tokens are anticipating profits, and there’s a small group of entrepreneurs and technologists standing up and nurturing the projects," said Gensler. "I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight."

He also honed in on so-called stock tokens, which have drawn the attention of regulators around the world in recent months.

"Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These products are subject to the securities laws and must work within our securities regime."

Next, Gensler turned to crypto trading platforms, which he said "not only can implicate the securities laws; some platforms also can implicate the commodities laws and the banking laws." In the remarks, he was referring to both centralized and decentralized marketplaces.

"A typical trading platform has more than 50 tokens on it. In fact, many have well in excess of 100 tokens. While each token’s legal status depends on its own facts and circumstances, the probability is quite remote that, with 50 or 100 tokens, any given platform has zero securities," Gensler said, going on to note:

"Moreover, unlike other trading markets, where investors go through an intermediary like the New York Stock Exchange, people can trade on crypto trading platforms without a broker — 24 hours a day, 7 days a week, from around the globe. Further, while many overseas platforms state they don’t allow U.S. investors, there are allegations that some unregulated foreign exchanges facilitate trading by U.S. traders who are using virtual private networks, or VPNs. The American public is buying, selling, and lending crypto on these trading, lending, and DeFi platforms, and there are significant gaps in investor protection."

"Make no mistake: To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they meet an exemption," Gensler continued. "Make no mistake: If a lending platform is offering securities, it also falls into SEC jurisdiction."

Gensler also made note of the size of the stablecoin ecosystem, stating "nearly three-quarters of trading on all crypto trading platforms occurred between a stablecoin and some other token."

"Thus, the use of stablecoins on these platforms may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system: anti-money laundering, tax compliance, sanctions, and the like," he continued. "This affects our national security, too. Further, these stablecoins also may be securities and investment companies. To the extent they are, we will apply the full investor protections of the Investment Company Act and the other federal securities laws to these products."

During the speech, Gensler appeared to express interest in exchange-traded funds (ETFs) tied to bitcoin futures, referring to CME.

"I anticipate that there will be filings with regard to exchange-traded funds (ETFs) under the Investment Company Act (’40 Act). When combined with the other federal securities laws, the ’40 Act provides significant investor protections," he said. "Given these important protections, I look forward to the staff’s review of such filings, particularly if those are limited to these CME-traded bitcoin futures."

Looking to Congress

Ultimately, Gensler is hoping for Congress to grant the SEC additional powers and resources as it expands its oversight of the crypto, according to the speech.

"Certain rules related to crypto assets are well-settled. The test to determine whether a crypto asset is a security is clear," said Gensler. "There are some gaps in this space, though: We need additional Congressional authorities to prevent transactions, products, and platforms from falling between regulatory cracks. We also need more resources to protect investors in this growing and volatile sector."

He went on to say:

"In my view, the legislative priority should center on crypto trading, lending, and DeFi platforms. Regulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending."

How the process for obtaining those resources and authorities remains to be clear. Senators are currently debating the scope of tax reporting requirements for crypto "brokers" as part of a billion-dollar infrastructure bill. Last week, Rep. Don Beyer (D-VA) filed a far-reaching bill focused on the regulation of digital assets and stablecoins. 

Gensler reinvoked the topic of national security as his prepared remarks came to a close.

"Right now, large parts of the field of crypto are sitting astride of — not operating within — regulatory frameworks that protect investors and consumers, guard against illicit activity, ensure for financial stability, and yes, protect national security," he said. "Standing astride isn’t a sustainable place to be. For those who want to encourage innovations in crypto, I’d like to note that financial innovations throughout history don’t long thrive outside of our public policy frameworks."

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