Gensler defends SEC's crypto stance in House testimony, reiterates that Bitcoin is not a security
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(Kitco News) - Securities and Exchange Commission (SEC) Chair Gary Gensler appeared in front of the U.S. House Financial Services Committee on Tuesday to testify about how the agency is adapting its oversight and rules to keep up with technological advancements in various fields, including artificial intelligence and cryptocurrencies.
“We are blessed with the largest, most sophisticated, and most innovative capital markets in the world,” Gensler said. “But we cannot take this for granted. Even a gold medalist must keep training. That’s why we’re updating our rules for the technology and business models of the 2020s. We do so with an eye toward investors and issuers alike, to ensure the markets work for them and not the other way around.”
Gensler noted that the agency has issued a proposal that broker-dealers must seek the best execution for investors when they buy or sell securities, a rule that would apply to all sectors of the securities markets, including equity, fixed-income, and crypto asset securities.
Addressing cryptocurrencies directly, Gensler said, “There is nothing about the crypto asset securities markets that suggests that investors and issuers are less deserving of the protections of our securities laws.”
He noted that instead of saying that securities laws applied only to stocks and bonds, Congress “included a long list of 30-plus items in the definition of a security, including the term ‘investment contract.’”
“As I’ve previously said, without prejudging any one token, the vast majority of crypto tokens likely meet the investment contract test,” he said. “Given that most crypto tokens are subject to the securities laws, it follows that most crypto intermediaries have to comply with securities laws as well.”
Gensler said the laws that have been on the books for decades “require that intermediaries acting as securities exchanges, brokers and dealers, and clearing agencies are subject to the securities laws, and must register or satisfy requirements for an exemption.”
“Given this industry’s wide-ranging noncompliance with the securities laws, it’s not surprising that we’ve seen many problems in these markets. We’ve seen this story before,” he said. “It’s reminiscent of what we had in the 1920s before the federal securities laws were put in place. Thus, we have brought a number of enforcement actions – some settled, and some in litigation – to hold wrongdoers accountable and promote investor protection.”
He said the SEC has also worked to address the crypto security markets through rulemaking.
“We issued a reopening release that reiterated the applicability of existing rules to platforms that trade crypto asset securities, including so-called ‘DeFi’ systems,” he said. “This release also provided supplemental information for systems that would be included in a new, proposed exchange definition.”
Gensler noted that while the current investment adviser custody rule already applies to crypto funds and securities, the SEC’s recent proposal to update it “would cover all crypto assets and enhance the protections that qualified custodians provide.”
On the topic of predictive data analytics and artificial intelligence, Gensler said the technologies have brought about a “transformational age” that is driving efficiencies across the economy.
“Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals,” he said. “Such analytics and narrowcasting have the potential benefits of greater financial inclusion and enhanced user experience.”
But the developments are not without risks, he warned. “This also raises the possibility that conflicts may arise to the extent, for example, that advisers or broker-dealers are optimizing to place their interests ahead of their investors’ interests. If a firm’s optimization function takes the interest of the firm into consideration as well as the interest of the investor, this can lead to conflicts of interest.”
To combat this, Gensler said the SEC put out a proposal to require firms to analyze conflicts of interest that may emerge when using predictive data analytics to interact with investors. “Firms would need to identify any such conflicts that result in an investor interaction that places the firm’s interests ahead of investors’ interests,” he said. “Firms then would need to eliminate or neutralize the effects of those conflicts.”
|U.S. lawmakers introduce bill to remove SEC Chair Gary Gensler|
After Gensler read his prepared remarks, members of the Committee had the opportunity to ask the SEC chair specific questions related to crypto, AI, and other financial matters.
Representative Patrick McHenry, Chair of the Committee, opened his remarks by saying, “Last time you were before this Committee, I voiced my concerns regarding your reckless approach to rulemaking, lack of a capital formation agenda, crusade against the digital asset ecosystem, and unresponsiveness to Congress. These are the same issues I want to discuss with you today. This means that in the last five months, you have done nothing to remedy the legitimate, and often bipartisan, concerns expressed by this committee. That is disgraceful.”
McHenry said the SEC’s current approach to rulemaking “jeopardizes the integrity of our financial markets and puts investors at risk,” and highlighted the “critical need for comprehensive economic analysis of the rules [Gensler has] proposed and their interaction with one another.”
He also said that while the SEC “has engaged in a wide-ranging regulatory agenda,” they have “overlooked the importance of public input – resulting in bipartisan and bicameral concerns.”
“Under your leadership, the Commission has failed to adequately assess their interplay and cumulative impact,” he said. “That’s shoddy work and does not adhere to the SEC’s statutory mandate.”
Other concerns voiced by McHenry include the failure to put forth an initiative “aimed at improving access to capital or enhancing market competitiveness,” and the creation of “real harm for consumers and the markets” due to the SEC's “efforts to choke off the digital asset ecosystem.”
“You said the law is clear, but your actions have created more confusion and lasting damage,” McHenry said. “You have also said your goal is consumer protection. Yet, your actions have pushed legitimate digital asset activities out of regulated financial institutions where consumers are best protected.”
“On one hand, we have seen bipartisan votes in Congress to provide clear rules of the road and real consumer protection,” he said. “On the other, we’ve seen your ad hoc, regulation-by-enforcement approach to digital assets on a losing streak in the courts.”
McHenry also said the SEC has refused “to be transparent with Congress regarding [their] interactions with FTX and Sam-Bankman Fried [SBF],” and suggested that he may try to subpoena the SEC over documents related to the SEC’s communications with SBF and FTX.
He noted that the committee had “made multiple requests” for documents regarding the timing of SBF’s arrest given a previously scheduled appearance before Congress, but has yet to receive the requested information.
“Seven months later, the committee has not received a single non-public document that was not part of a [Freedom of Information Act] production,” said McHenry. “As I said, our patience is wearing thin. The SEC is not above the law nor is it unique. Other financial regulators have routinely complied with congressional oversight.”
“So let me be clear, I do not want to be the first Chairman of the Financial Services Committee to issue a subpoena to the SEC,” he said. “And you should not want to be the first SEC Chair to receive a congressional subpoena. Either we find a path forward where the SEC recognizes Congress as a co-equal branch of government and is responsive to our oversight duties, or my only option is to issue a subpoena.”
McHenry said Gensler should “consider the lasting consequences [his] actions have on the SEC’s reputation, [as his] time in this role may be temporary, [but] the repercussions of [his] actions may be permanent for the agency.”
In one exchange that bodes well for the possibility of Bitcoin eventually getting a listed spot ETF, McHenry asked Gensler about his stance that Bitcoin is not a security.
“I think Bitcoin is not a security because it does not comply with the Howey test,” Gensler said.