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Gensler to Sen. Warren: SEC Needs More Authority to Regulate Crypto

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What You Need to Know

  • The SEC needs more power to prevent transactions, products and platforms from falling between regulatory cracks, Gensler said.
  • Investors using these crypto platforms are not adequately protected, the SEC chief told Warren.
  • Regulators would benefit from added plenary authority to write rules for and attach guardrails to crypto trading and lending, he said.

The Securities and Exchange Commission needs additional powers to regulate the cryptocurrency arena, specifically to “prevent transactions, products and platforms from falling between regulatory cracks,” SEC Chairman Gary Gensler told Sen. Elizabeth Warren, D-Mass.

The SEC also needs “more resources to protect investors in this growing and volatile sector,” Gensler told Warren in a recent letter.

“In my view, the legislative priority” should center on crypto trading, lending and centralized and decentralized finance, or DeFi, platforms, Gensler said.

Gensler was responding to a July 7 letter from Warren in which she asked if Congress needs to act to give the SEC “the proper authority to close existing gaps in regulation that leave investors and consumers vulnerable to dangers” in the highly opaque and volatile digital assets market.

In his Aug. 5 letter to Warren, released Tuesday, Gensler noted his recent remarks before the Aspen Security Forum, in which he warned that there isn’t “enough investor protection in crypto” and that “it’s more like the Wild West.”

Right now, Gensler told Warren, “I believe investors using these platforms are not adequately protected. The world of crypto finance now has platforms where people can trade tokens and other venues where people can lend tokens. The American public is buying, selling, and lending crypto on these venues, both centralized and decentralized finance (‘DeFi’) platforms.”

These various platforms, he continued, “not only can implicate the securities laws, some platforms can also implicate the commodities laws and the banking laws. This raises a number of issues related to protecting investors and consumers, guarding against illicit activity, and ensuring financial stability. A typical trading platform has more than 50 tokens on it.”

In fact, Gensler said, “many have well in excess of 100 tokens. While each token’s legal status depends on its own facts and circumstances, the probability is quite remote that, with 50 or 100 tokens, any given platform has zero securities.”

In the crypto market, “many tokens may be unregistered securities, without required disclosures or market oversight,” Gensler said. “Certain rules related to crypto assets are well-settled. The test to determine whether a crypto asset is a security is clear.”

Other Views

Rep. Patrick McHenry, R-N.C., ranking minority member on the House Financial Services Committee, argued in a Wednesday statement on Gensler’s letter to Warren that the SEC chairman’s “latest move to ask Congress for jurisdiction over non-securities exchanges is a blatant power grab that will hurt American innovation. Given the distinct nature of digital assets, policymakers must be thoughtful and deliberative in legislating in this space.”

McHenry added that his bill, H.R. 1602, the Eliminate Barriers to Innovation Act, which would require the SEC and Commodity Futures Trading Commission to establish a working group on digital assets, would “bring regulatory certainty to market participants and regulators.”

The SEC will continue to use its authority as far as it goes, Gensler told Warren. “Over the years, the SEC has brought dozens of actions in this area, prioritizing token-related cases involving fraud or other significant harm to investors,” he said. “We haven’t yet lost a case.”

To the extent that there are securities on these trading platforms, Gensler added, “under our laws they have to register with the Commission unless they meet an exemption. If a lending platform is offering securities, it also falls into SEC jurisdiction.”

Regulators, Gensler said, “would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending. We stand ready to work closely with Congress, the administration, our fellow regulators, and our partners around the world to close some of these gaps.”