Securities and Exchange Commission (SEC) Chair Gary Gensler recently stated that he plans to heighten regulatory oversight of crypto markets in the name of protecting investors. In 2021, digital asset holders lost over $14 billion due to scams and cyber attacks. With President Biden having just issued an executive order in which he outlined the need for proper regulation of the cryptocurrency industry, Gensler is poised to regulate exchanges in a manner similar to how traditional asset exchanges are regulated.
The SEC will work in conjunction with the Commodity Futures Trading Commission to police platforms that trade crypto-based commodity and security tokens. At the Penn Law Capital Markets Association’s annual conference, Gensler stated that he believes that digital asset trading platforms are similar to equity and fixed income trading platforms and should be regulated as such. The main difference between cryptocurrency platforms is that retail customers can buy and sell assets without going through a broker. Whether Gensler will propose that these exchanges require broker’s licenses is unclear.
Gensler also addressed stablecoins at the conference. Stablecoins are crypto tokens that are pegged to the value of traditional fiat currencies like the U.S. Dollar. The current market cap of stablecoins is $183 million, and Gensler fears that these tokens can be used for illicit activity. Gensler said that peer-to-peer stablecoin transactions allow users to skirt banks, which makes it harder for regulatory agencies like the SEC to “track money laundering, taxes, and compliance,” according to CNBC. Because many stablecoins are issued by crypto platforms, Gensler believes that they could create conflicts of interest and, therefore, require more oversight.
Regarding other crypto tokens, Gensler feels that many fit the description of securities according to the Howey Test. This test comes from a 1946 Supreme Court ruling that stipulated that a security is defined as an investment contract when people put money into a “common enterprise with a reasonable expectation of profits.” Gensler believes that securities laws created nearly a century ago are sufficient to use as a governance mechanism in the digital asset space even though crypto is a new type of asset.