Congress is divided into crypto and payment for the order flow

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SEC Chairman Gary Gensler testifying before the Senate Banking Committee on Tuesday. EVELYN HOCKSTEIN / POOL / AFP / Getty Images

Senators focused on order flow and cryptocurrency payment in questions to Gary Gensler, chairman of the Securities and Exchange Commission, at a hearing on Tuesday, signaling that Congress is already in the weeds on issues the SEC will likely consider for months to come.

A battle that might otherwise be played out in the fine print of securities rules is now unfolding in a larger political arena, meaning that agency decisions are likely to be subject to continued pressure.

Gensler’s statements make it clear that he believes entire sections of the crypto industry are already playing off bounds. The SEC’s recent actions against companies like Coinbase Global (COIN) have shown that it is ready to take on the most powerful players in the industry.

Amid lobbying from the crypto industry in recent months and executive concerns about ransomware and hacking, Congress is more involved in crypto than ever and is asking regulators sharper questions.

Sen. Pat Toomey, the Republican from Pennsylvania, grilled Gensler over stablecoins, a kind of cryptocurrency that is normally tied to the dollar and therefore does not fluctuate as much as Bitcoin and its ilk. Stablecoins aren’t the sexiest part of crypto, they tend to stay the same price because of their dollar peg, but they’re an important lubricant on the wheels of the industry as they make it easier to trade between countries. cryptos. Toomey argued that stablecoins do not appear to be securities, which means they should be able to be traded freely without having to meet securities registration and disclosure requirements.

Stablecoins don’t have an inherent expectation of profit, Toomey said. They are just tied to the dollar. Now you can use them to try to make a profit. But it is a second-rate activity. Do you think that the stablecoins themselves can be titles?

I think, senator, it could well be securities, Gensler replied, citing the variety of financial instruments that the SEC considers to be securities. Toomey said he doesn’t think the pieces meet those tests, and at the very least, the agency needs to be more specific on how they rate them.

As a layman who can read English, when I read these tests, the stable coins don’t seem to meet this test for me, Toomey said.

In general, Republicans on the panel were friendlier to crypto in their comments and wanted more clarity from the agency on what is legal and what is not. Toomey said he was concerned that the SEC might not be clear in advance about its cryptocurrency rules, which means that companies dealing in crypto are unclear whether what they are doing will take them to court.

This is regulation by application, and it’s very reprehensible, and I’m concerned it could stifle national innovation, Toomey said.

Gensler urged crypto companies to come speak to the agency before launching any new products. And he argued that there are some crypto issues that need to be addressed on a case-by-case basis, instead of issuing general rules. Gensler also believes that most cryptocurrencies are securities, which means they shouldn’t be sold to the investment community without risk disclosure. There are a small number that are not securities, he said.

A key payment source for brokers like Robinhood Markets (HOOD) has also been hotly debated. Payment for order flow, or the payments that brokers receive from market makers to route their clients’ orders to those market makers, must be considered, said Senator Jack Reed, the Democrat of Rhode Island. , who was concerned about conflicts of interest in Payments.

Gensler recently told Barrons that a ban on payment for order flows is on the table, along with several other changes in the structure of the market.

It has been about 16 years since we undertook a major rewrite of the structure of the domestic market, the SEC chief said on Tuesday.

A rewrite could also result in restrictions on the discounts that exchanges pay for orders, for example.

Republicans were generally less supportive of payment restrictions for the flow of orders. Sen. Tim Scott, the Republican of South Carolina, said the restriction on payments could result in the return of initial brokerage commissions, which would reduce access to trading for groups that previously did not have access to the markets.

When we hear things like banning payment for the flow of orders, it sends shivers down the spines of people who have been waiting for that day to come, he said.

Write to Avi Salzman at [email protected]

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