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SEC's Gensler distances himself from SBF, says “tokens are securities”

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(Kitco News) - Gary Gensler. the Chair of the U.S. Securities and Exchange Commission (SEC), shed new light on his dealings with former FTX CEO Sam Bankman-Fried in an interview with New York Magazine published over the weekend, while reiterating his hardline stance toward the crypto industry as a whole.

Last week saw reports that Coinbase is reportedly in talks with stock exchange platform IEX to create a federally approved digital asset marketplace following recent meetings with officials from the SEC that centered on gaining Gensler’s approval.

The last time IEX brought a partner to a meeting with the SEC Chair to explore this possibility in March 2022, it was SBF and FTX, then riding high as the number two crypto exchange in the world. Gensler’s reaction at the time does not augur well for the new project.

“I indicated to them they could take their slide deck down on the second slide,” Gensler said in the interview, “and that I didn’t think that they should — with all respect — that it was not a valuable use of their time.”

Gensler said he believed FTX had far too many conflicts of interest for their proposal to have any chance of approval, telling SBF and the others that “alternative trading systems were something amongst and for institutional investors” and that “just coming into compliance was going to need them to disaggregate their business to address the conflicts — that they should have a separate exchange, separate broker-dealer, separate custody, and that they were in the national security exchange Zip Code, not in the ATS Zip Code.”

When asked if he had met with Bankman-Fried other than at this meeting and a previously disclosed meeting toward the end of 2021, Gensler replied, “no.”

Gensler also addressed the perception that through FTX’s lobbying activities and the legislation they backed, the Digital Commodities Consumer Protection Act, Bankman-Fried was engaged in a kind of domestic regulatory arbitrage and was angling to have the Commodity Futures Trading Commission (CFTC) and not the SEC be the main regulator of their crypto empire and the U.S. industry as a whole.

“You’re not going to get me to say anything negative” about the CFTC, Gensler said of the regulator he headed under Obama. “I love the CFTC.” But he had a harsh assessment of the legislation FTX was pushing, saying it would have “unambiguously undermined investor protection,” and its vague text would create gigantic loopholes that would enable tokenized assets to evade regulation.

“We live in a world where Amazon stock and U.S. treasuries are already digital,” Gensler said. “So many of the bills, literally, you could take the $24 trillion treasury market, put it on a blockchain ledger, and take it outside of the current regime.”

Gensler also articulated his comprehensive view that virtually all crypto activity, with the exception of Bitcoin spot transactions and the purchase of goods and services with cryptocurrency, is securities activity and already falls under SEC jurisdiction without the need for new regulation from Congress.

“Everything other than bitcoin, you can find a website, you can find a group of entrepreneurs, they might set up their legal entities in a tax haven offshore, they might have a foundation, they might lawyer it up to try to arbitrage and make it hard jurisdictionally or so forth,” he said. “They might drop their tokens overseas at first and contend or pretend that it’s going to take six months before they come back to the U.S. But at the core, these tokens are securities because there’s a group in the middle and the public is anticipating profits based on that group.”

Referring to U.S. exchanges such as Kraken and Coinbase, which have been targeted by the SEC, Gensler said the activities of these “storefronts” would be impossible in a regulated environment.

“The conflicts in these storefronts, we do not allow in traditional finance, we don’t allow in the securities markets, we don’t allow it in the commercial banking markets, and we don’t allow it in crypto because these storefronts are fundamentally and generally noncompliant with the securities laws as we know them,” adding that “whether they call themselves lending or staking as a service or exchanges, they’re bringing together millions of customers.”

When asked if he thinks consumer-facing regulators should be taking enforcement actions similar to those of the SEC, Gensler was restrained. “I’m in a job where I’m supposed to be merit neutral in terms of what risk investors want to take, but not neutral towards the investor protection — the full, fair, and truthful disclosure you get when you’re investing in a security.”

When asked about the value and utility of crypto as a whole, Gensler distinguished between the blockchain technology itself and the cryptocurrencies and other assets that rely on it. “I personally think it’s very rare that you need that, but it’s possible,” he said of distributed ledger technology. “That’s a real innovation.”

But regarding cryptocurrencies, either as an alternative payment mechanism or as a store of value, he had nothing good to say.

“History tells us throughout — through antiquity to now — that economies coalesce around one monetary unit,” he said. “There is a network effect to having one unit that we humans accept as a medium of exchange and unit of account — a store of value — one unit. The two things governments do since Genghis Khan is basically say, ‘This is what’s accepted for your taxes, and it’s accepted for all debts, public and private.’”

Gensler doesn’t see this role being filled by any assets other than national fiat. “I don’t think there’s much economic use for a micro-currency, and we haven’t seen one in centuries,” he said. “Most of these tokens will fail, because the question is about these economics. What’s the ‘there’ there?”

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