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SEC's Gensler on $2 trillion crypto market: 'Lots of innovation, but plenty of hype'

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(Kitco News) Securities and Exchange Commission (SEC) Chair Gary Gensler addressed the $2 trillion crypto market in his latest speech, promising greater oversight and improved investor protection.

"In February, you all might have noticed Super Bowl ads for several crypto platforms. This wasn't the first time we'd seen some new innovations getting air time on the biggest TV event of the year," Gensler said at the Penn Law Capital Markets Association's annual conference. "Seeing these ads reminded me that, in the lead-up to the financial crisis, subprime lender AmeriQuest advertised in the Super Bowl."

Within the crypto space, "there is lots of innovation, but plenty of hype," Gensler pointed out. "As in other start-up fields, many projects likely could fail."

This was Gensler's introduction before he revealed several initiatives to improve regulation and investor protection. One of the main takeaways was Gensler's pledge to register and regulate crypto platforms in a similar way exchanges are regulated.

"Amongst crypto-only exchanges, the top five platforms make up 99 percent of all trading, and just two platforms make up 80 percent of trading … These platforms likely are trading securities. A typical trading platform has dozens of tokens on it, at least," Gensler described. "These crypto platforms play roles similar to those of traditional regulated exchanges. Thus, investors should be protected in the same way."

Gensler also wants to partner with the Commodity Futures Trading Commission (CFTC) to address crypto platforms that trade crypto-based security tokens and commodity tokens.

Crypto custody was also mentioned: "I've asked staff how to work with platforms to get them registered and regulated and best ensure the protection of customers' assets, in particular whether it would be appropriate to segregate out custody," he said.

Stablecoins — digital assets with a value pegged to fiat currencies — are also part of the regulatory framework, according to Gensler. The $183-billion market is a concern, especially when it comes to illicit activity, financial stability, monetary policy, and investor protection. "There are conflicts of interest and market integrity questions that would benefit from more oversight," he said.

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The last area touched on was crypto tokens — "most crypto tokens involve a group of entrepreneurs raising money from the public in anticipation of profits — the hallmark of an investment contract or a security under our jurisdiction," Gensler noted.

Registration is key, the SEC chair reiterated, stressing that many entrepreneurs raise money from the public by selling crypto tokens.

"Most crypto tokens are investment contracts under the Howey Test," he said. "It is important that we work to get crypto tokens that are securities to be registered with the SEC. Issuers of crypto tokens that are securities must register their offers and sales of these assets with the SEC and comply with our disclosure requirements, or meet an exemption."

Gensler urged lawmakers not to throw away an effective playbook that already exists to regulate financial markets. "We already have robust ways to protect investors trading on platforms. And we have robust ways to protect investors when entrepreneurs want to raise money from the public," he said. "We ought to apply these same protections in the crypto markets. Let's not risk undermining 90 years of securities laws and create some regulatory arbitrage or loopholes."

Gensler's crypto speech comes less than a month after U.S. President Joe Biden signed an executive order, calling on key government agencies to identify the risks and benefits of cryptocurrencies and the hazards associated with creating the central bank digital dollar.

U.S. Treasury Secretary Janet Yellen is also scheduled to give her remarks on digital assets on Thursday. "Secretary Yellen will make the case for a consistent and comprehensive policy framework that promotes responsible innovation of digital assets and appropriately assesses and mitigates the risks they may pose," according to the press release. "She will also discuss principles that will guide Treasury's approach to digital asset policymaking and Treasury's work as part of President Biden's Executive Order."

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