SEC Chair Gary Gensler wants the agency staff to look at extending investor protections to crypto exchanges.
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Securities and Exchange Commission Chair Gary Gensler has asked the agency’s staff to study how to extend investor protections to cryptocurrency platforms and how to register and regulate platforms where securities and non-securities trade together.
Crypto trading and lending platforms, whether centralized or decentralized, have recently traded more than $100 billion worth of crypto a day, with the top five trading platforms handling 99% of all trading. DeFi, or decentralized finance, is similarly concentrated with the top five platforms accounting for nearly 80% of trading, he said.
Because the SEC oversees platforms that trade securities, Gensler said he has asked SEC staff “how best to register and regulate platforms where the trading of securities and non-securities is intertwined.” He said the SEC and the Commodity Futures Trading Commission, using their respective authorities, should jointly address platforms that might trade both crypto-based security tokens and some commodity tokens.
“These crypto platforms play roles similar to those of traditional regulated exchanges,” he said. “Thus, investors should be protected in the same way.”
Gensler said if a company builds a crypto market that protects investors against fraud and manipulation and safeguards market integrity, “then customers will be more likely to trust and have greater confidence in that market.”
If somebody is offering a security to the public and not registering it or making the requisite disclosures, he said he would tell them: “Come in, work with us, and get registered.”
Gensler made these remarks on Monday at the annual conference of the Penn Law Capital Markets Association at the University of Pennsylvania Carey Law School.
The regulator, a former Wall Street executive and MIT professor, said he wants crypto platforms to be registered and regulated to protect customers’ assets. Unlike traditional exchanges, centralized crypto trading platforms take custody of their customers’ assets, Gensler noted. And last year $14 billion was stolen.
Crypto trading platforms can also act as market makers, trading for their own accounts against customer trades. That poses conflicts of interest and isn’t acceptable practice at traditional exchanges like the New York Stock Exchange. Gensler asked if crypto platforms’ market-making functions should be separated.
He also said crypto tokens that are securities should be registered with the agency. “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.”
Yet token issuers face a chicken-and-egg problem; they’re unlikely to try and register as securities without an exchange that could list them, giving them scant incentive to go through the costly registration process.
“Until the platforms are registered and regulated, I don’t think the tokens will significantly come in and register,” Gensler said during a Q&A session.
If crypto assets have forms or disclosures with which they “truly cannot comply, our staff is here to discuss and evaluate those concerns,” he said.
“Any token that is a security must play by the same market integrity rulebook as other securities under our laws,“ Gensler said.
Crypto may offer new ways for entrepreneurs to raise money to fund their projects and for investors to trade, but “when a new technology comes along, our existing laws don’t just go away,” he said.
Broadly, Gensler reiterated a call for comprehensive regulations both to protect investors but also to allow the market to flourish with clear rules. The auto industry, he noted, benefitted from speed limits, cops on the beat, and traffic lights. “If we hadn’t have done that, would we have sold as many cars? No way,” he said. “Our capital markets and our economy benefit from some basic rules of the road.”
Write to Janet H. Cho at janet.cho@dowjones.com
