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Crypto 101 from SEC's Gensler: lies, disclosures & token ownership confusion in 'highly speculative' space

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(Kitco News) The crypto space is highly speculative, and investors need to pay close attention to disclosures, token ownership, and much more when taking on risks, U.S. Securities and Exchange Commission Chair Gary Gensler said Monday.

Gensler addressed the crypto market during the 2022 FINRA annual conference Monday, following a crypto crash last week, which saw the TerraUSD (UST) stablecoin collapse and Bitcoin drop below the $30,000 level

"I'm going to use this opportunity to talk not just to the audience in the room but to the investing public. This space, crypto markets, is a highly speculative asset class," Gensler said.

One of the big problems in the crypto space is that investors are not getting a proper disclosure of the risks involved. "You, the investing public, can make your choice about what risks you take, but there are supposed to be full and fair disclosures, and people aren't supposed to lie to you," Gensler said.

The tokens Gensler is focusing on are considered securities. The key difference between a commodity and security when it comes to digital tokens is the raising of money by a third party.

"Many of these entrepreneurs come up with an idea, and they want to raise money from you. And that puts it inside of the securities laws," Gensler explained. And we can get legal about it. But it comes down to this, if somebody is raising money from the public and the public's anticipating a profit based on those entrepreneurs, that's under the securities laws."

This was a rare crypto 101 lesson from Gensler, who said the space is not as decentralized as many people present to be.

"This crypto asset space is not that decentralized. There's a lot of concentration. There's a handful of major trading venues and a handful of major lending venues that you, the investing public, think you're trading on or investing," he said.

To protect the public, the SEC is looking into basic market integrity rules, including not front-running your customer, anti-fraud, and anti-manipulation.

Ownership of tokens is also often quite misleading in the crypto space, warned the SEC chair. "Don't think you own your tokens when you go into a digital wallet and transfer ownership to a platform. And if the platform goes down, you're just having a counter-party relationship with the platform, so get in line in bankruptcy court," he said.

Plus, crypto platforms are not prohibited from using the tokens stored there. "They can trade them. In the equity markets, we have laws put in place 50 years ago on bankruptcy protection and so forth. Not [in crypto]. The New York Stock Exchange is not trading against you. [In crypto], these platforms are often trading against you. They're making markets against you," Gensler explained.

This is not the first time Gensler brought up the idea that crypto platforms are trading against investors. In an interview with Bloomberg last week, Gensler pointed out that digital-asset exchanges are "trading ahead of their customers" and are often "trading against their customers … because they're market-marking against their customers."

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Another significant risk Gensler discussed on Monday was investors getting too involved in the crypto space and being caught up in something similar to what happened in the 1920s in the equity market.

"Retail public had gotten deeply into the markets in the 1920s, and we saw how that came out, and it was part of the Great Depression. In the 1930s, Congress and FDR [Franklin D. Roosevelt] came together. Section Six of the 34 Act protections are as relevant in [crypto]. Don't let somebody sort of say, 'we don't need to protect against fraud, manipulation.' That's where you lose trust in markets."

Gensler's concluding message to the public was this: "I'm going to stay technology-neutral, but I am not public policy-neutral."

The SEC chair noted that until there is better regulation of the crypto space, the public will remain vulnerable. "We're going to continue to be a cop on the beat. We will continue to use our limited resources as best we can to help protect the investing public."

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