On April 4, 2022, Securities and Exchange Commission (“SEC”) Chair Gary Gensler spoke on the crypto markets at his alma mater, the University of Pennsylvania, for the Penn Law Capital Markets Association Annual Conference. While the speech did not break much new ground, it served as a reminder of the SEC’s priorities in the crypto space. During his speech, Gensler stressed that the increased visibility of crypto markets to everyday investors does not equal increased credibility of the market and its various platforms and reiterated his view that the crypto market should be overseen by the SEC and other financial market regulators in a technologically agnostic manner (i.e. classifying by function rather than the technology that facilitates such function). As such, he said the same robust protections that safeguard traditional markets should be applied to the crypto market.
During his remarks, Gensler touched on three areas related to crypto markets that the SEC is currently working on: (1) platforms; (2) stablecoins; and (3) crypto tokens. Below is a summary of his remarks on each area:
Platforms. Gensler addressed crypto trading and lending platforms, both centralized and decentralized (DeFi). He mentioned that the crypto market is highly concentrated with a bulk of trading taking place on only a few platforms (both centralized and DeFi) and that these platforms are likely trading many tokens that may meet the definition of “securities.” As such, Gensler has asked his staff to:
- Focus on getting platforms registered and regulated similar to traditional market exchanges. With regard to alternative trading systems (“ATSs”) specifically, which are exempt from the definition of an exchange (17 CFR 240.3a1-1(a)(2)) and regulated separately (17 CFR 242.301), Gensler noted that he does not view any crypto platforms as sufficiently similar to an ATS to deserve the same low regulated treatment due to their large customer base of retail investors. If a crypto platform wants to operate, it would have to register with the SEC as an exchange, not an ATS.
- Work with the Commodity Futures Trading Commission (“CFTC”) to consider how best to register and regulate platforms where the trading of securities and non-securities are intertwined. As we have noted in a prior post, the CFTC has also been seeking to regulate the crypto-market;
- Register and regulate centralized crypto trading platforms that take custody of customer assets to maximize customer protection, potentially including segregating out custody; and
- Consider whether it would be appropriate to segregate out market making functions to prevent crypto trading platforms from acting as principals trading on their own platforms from their own accounts on the other side of their customers.
Stablecoins. Gensler next addressed the growing stablecoins market. He mentioned that stablecoins offer features that are similar to and potentially competitive with bank deposits and money market funds which raise three important sets of policy issues:
- Public policy considerations around financial stability and monetary policy, such as what stablecoins are ultimately pegged to, referencing the President’s Working Group report, which we have written on elsewhere.
- Stablecoins potential use in illicit activity, such as money laundering, tax evasion, sanctions evasion, and the like; and
- The lack of investor protection pointing specifically to large stablecoin issuers that do not provide a direct right of redemption to U.S. retail investors who invest in stablecoins. Gensler believes there are conflicts of interest and market integrity questions that would benefit from more oversight.
Crypto tokens. Finally, Gensler addressed crypto tokens and the definition of a “security.” As he has in the past, Gensler pointed to the Howey test, stating that “most crypto tokens involve a group of entrepreneurs raising money from the public in anticipation of profits” which is “the hallmark of an investment contract or a security under [the SEC’s] jurisdiction.” In his view, only a few tokens act like “digital gold” that might not be securities, and fewer still, if any, that operate like money. As such, crypto tokens that are securities should register with the SEC to ensure that any token that is a security is playing by “the same market integrity rulebook as other securities under our laws.” To the extent some forms or disclosures may not be feasible, Gensler stated that the SEC would discuss and evaluate.
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