 | Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day's top stories directly to your inbox. Sign up here! |
(Kitco News) - Securities and Exchange Commission (SEC) Chair Gary Gensler testified in front of the House Financial Services Committee on Tuesday, answering questions about a variety of topics including the agency’s recent crackdown on cryptocurrency firms.
In his prepared remarks, the SEC head started off by reiterating his stance that “the vast majority of crypto tokens are securities.”
“Congress gave the Commission a mandate to protect investors, regardless of the labels or technology used,” Gensler said. “Nothing about the crypto markets is incompatible with the securities laws. As I’ve said numerous times, the vast majority of crypto tokens are securities.”
According to Gensler, those in the general public who are buying crypto tokens are doing so because they expect to make a profit and improve their financial outlook.
“These thousands of tokens often are supported by websites and social media accounts, and generally there are entrepreneurs backing them,” he said. “The public generally is counting on the efforts of other humans behind these tokens to generate profits on their investment. Given that most crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC.”
Gensler highlighted that both centralized and decentralized crypto intermediaries provide a variety of services – such as exchange functions, broker-dealer functions, custodial and clearing functions and lending functions – that are typically separated from each other in the rest of the securities markets.
“The commingling of the various functions within crypto intermediaries creates inherent conflicts of interest and risks for investors – risks and conflicts the Commission does not allow in any other marketplace,” he said.
Gensler again cited Justice Thurgood Marshall, who said, “Congress’s purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.”
“It’s the law; it’s not a choice,” Gensler said. “Calling yourself a DeFi platform, for instance, is not an excuse to defy the securities laws.”
He stated that crypto investors, like equities investors, should benefit from protections against fraud, manipulation, front-running, wash sales, and other misconduct.
“Right now, unfortunately, this market is rife with noncompliance,” he said. “This noncompliance not only puts investors at risk, but also puts at risk the public’s trust in our capital markets.”
Gensler went on to note that a recent proposal put forward by the agency would update the current investment advisor custody rule to cover all crypto assets and enhance the protections that qualified custodians provide.
In prepared remarks from the Republicans on the House Committee, the legislators derided the SEC's approach to regulating the digital asset ecosystem under Gensler’s tenure.
“To date, the SEC has forced digital asset market participants into regulatory frameworks that are neither compatible with the underlying technology nor applicable because the firms’ activities do not involve an offering of securities,” they wrote. “Both approaches hamper the digital asset ecosystem’s ability to realize the unique benefits the new technology offers, which harms consumers, investors, and the economy as a whole.”
|
| Lawmakers push back against SEC 'exchange' rule change and call for Gensler's ouster |
The Representatives emphasized the fact that while the SEC and Gensler have repeatedly encouraged digital asset trading platforms to ‘come in and register’ under the national securities exchange (NSE) framework, “at the same time, you have failed to provide a path that allows digital asset trading platforms to register.”
“As you know, many digital assets are developed for the purpose of being used within a developing system, are capable of being used in non-securities transactions, and are meant to be consumed and used in the protocol for which it was designed,” they wrote. “Existing regulations under the NSE framework do not contemplate these features.”
Because only securities offered in compliance with securities laws can be listed by the NSE, the inability to register makes the current NSE framework ill-suited for digital asset trading platforms, the letter said. “Moreover, the lack of clarity provided by the SEC as to what digital assets are considered securities also limits what an NSE can list. It is not clear whether an NSE could list non-securities assets even if such assets were otherwise in compliance with the law.”
For these reasons, the representatives said that Gensler’s push for firms to ‘come in and register’ is “a willful misrepresentation of the SEC’s non-existent registration process.”
“The only entity to blame for the lack of registrants is the SEC itself,” they wrote. “The SEC should take this opportunity to work with Congress to ensure innovators and investors have the regulatory clarity and protections that they deserve. We look forward to continuing our discussion on these critical issues.”
Following the prepared remarks, the classification of Ether was a point of focus early in the hearing on Tuesday. Representative McHenry called for Gensler and the SEC to give a definitive answer on whether Ether is a security or a commodity, which has been a point of contention for some time.
“Clearly an asset cannot be both a commodity and a security,” said McHenry. “I’m asking you, sitting in your chair now, to make an assessment under the laws as exist. Is Ether a commodity or a security? You have pre-judged on this: you’ve taken 50 enforcement actions. We’re finding out as we go, as you file suit, as people get Wells notices, on what is a security in your view, in your agency’s view.”
Gensler refused to make a specific assessment on Ether, reiterating instead that securities laws are clear and that the SEC enforces securities laws that require disclosures to investors on investment vehicles.
