Genslers Crypto testimonial: 6 key points to remember

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U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler was in the hot seat Tuesday at a House Financial Services Committee watch hearing, and many committee members, including 19, took advantage of the opportunity to ask Gensler about the regulation of crypto.

Committees focusing on crypto have revealed the fascination and frustration accumulated with the growing crypto industry and the role of the SEC in its regulation.

Gensler’s testimony covered crypto exchanges, stablecoins, decentralized finance (DeFi) and more. CoinDesk breaks it down below.

Rep. Patrick McHenry (RN.C.), the committee’s top Republican, asked Gensler about his disturbing and contradictory statements about crypto regulation and whether the SEC has the authority it needs to regulate cryptography.

In May, Gensler told Congress that the SEC would need additional legislation to regulate and define digital assets and exchanges, but McHenry pointed out on Tuesday that in subsequent interviews with the media, Gensler’s position on this Subject has changed: The SEC chairman is now postulating that the SEC has the authority it needs to regulate crypto under existing law.

I think the SEC authorities in this space are clear, Gensler told McHenry. I think Congress painted the definition of security with a broad brush and included 30 or 35 separate areas that go into the definition of security to protect the public from fraud.

Gensler told McHenry that Congress could help close the coordination gap between the SEC and the Commodity Futures Trading Commission (CFTC).

Despite the seemingly ongoing turf war between the CFTC and the SEC over crypto regulation, Gensler was clear in his view that Congress did not need to create another regulator to oversee crypto.

We don’t need another regulator, he said. There are things that can be done to ensure fluidity between the two agencies even if Congress is not acting.

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Gensler also commented on the SEC’s budget cut and reiterated its demand that Congress provide additional funding for the SEC so that it can hire more staff and upgrade its data analysis software.

We’ve gone down about 4% or 5% in the last four or five years. I would have hoped we would have increased by 4 or 5% during this period, Gensler said. I know resources are limited, but it would help us fulfill our mission.

When asked by McHenry and other committee members if he viewed cryptocurrencies like bitcoin and ether as securities, Gensler dodged the question. I’m not going to go into any tokens, Gensler said. But I think the securities laws are pretty clear. If you are fundraising from someone else and the investing public has a reasonable expectation of profit based on the efforts of others, that is securities law.

Gensler said that most of the 5,000 to 6,000 existing cryptocurrencies fall under the definition of a security and therefore are subject to SEC regulation in a similar position to its predecessor Jay Clayton.

Representative Tom Emmer (R-Minn.), Chairman of the Congressional Blockchain Caucus and a staunch supporter of the crypto industry, objected to Gensler’s claim, saying he considers most cryptos to fall under the definition of a commodity or currency.

Rep. Warren Davidson (R-Ohio), another member of the blockchain caucus, asked Gensler what it would take for cryptocurrencies to shift from securities to commodities or currencies, referring to 2018 statements in which Gensler said the ether could be off the hook. to be considered a security because it had moved to a decentralized network.

You’ve said many times that you think initial coin offerings (ICOs) are securities, Davidson said. Can you clarify when a token is decentralized enough to no longer be a security in your opinion?

Gensler declined to comment on the Ether or any specific token, saying instead that any token that passed Howey’s test would be considered a title.

In response to a question from Rep. Jim Himes (D-Conn.), Gensler explained their rationale for focusing on the regulation of trading and lending platforms, including decentralized platforms.

Investors essentially give up property rights. They transfer what is called a private key to the platform and the platforms take custody of it, Gensler said.

Gensler went on to say:

I think such a amount of activity is going on there, and it’s a place where we could get better investor protection, even in decentralized platforms, or DeFi platforms, there is a centralized protocol. . And while they don’t take custody the same way, these are the places where we can get the most out of public policy.

Gensler has repeatedly urged exchanges to register with the SEC, which it has done in previous appearances, and has denounced the exodus of exchanges to more friendly jurisdictions.

I think companies should just come and sign up, Gensler said. But what has happened in the last four or five years is that they either chose not to or they got up in Singapore or Malta or Hong Kong or other places. countries and offered their services indirectly through a virtual private network.

Rep Anthony Gonzalez (R-Ohio) pointed out that simply showing up and registering with the SEC might not be possible for some exchanges.

I have spoken with several companies in the space, and the common theme of these discussions is that they want to come and describe their product to the SEC; However, they fear these meetings could lead to possible enforcement action, Gonzalez said. This kind of friendly open-door conversation is not something they think they are experiencing.

When asked what he thinks about investment platforms like Robinhood that offer digital assets alongside stocks, Gensler emphasized the need for crypto exchanges to register with the SEC.

I think if we don’t get these exchanges, these public policy lending platforms, a lot of people are going to be hurt, Gensler said. I think it’s clear that many of these projects fall under securities law. Were going to use our authorities to try to get more of these projects and companies to register and be under investor protection.

Although Gensler repeatedly asserted during Tuesday’s hearing that the SEC already has sufficient authority to regulate cryptocurrencies, he suggested that Congress could be helpful in deciding how to regulate coins. of stable value.

When asked if he viewed stablecoins as a systemic risk to the U.S. economy, Gensler doubled down on his previous analogy of comparing stablecoins to poker chips in a crypto casino.

I think the $ 125 billion in stablecoins we have right now is like a casino’s poker chips, and I think it creates risk in the system, Gensler said. Yes, I think if it continues to grow and has increased tenfold in the past year, it may present these system-wide risks.

The statements came hours after CoinDesk first revealed that Circle, one of USDC’s main backers stablecoin with Coinbase, was under a subpoena to investigate the division of SEC enforcement.

You can see where that could start to undermine things if it continues to grow, Gensler said. [How it could] undermine traditional banking systems if it is not integrated into the remit of the bank.

Read more: SEC Subpoenas USDC Stablecoin Backer Circle

Gensler, however, seemed to suggest that dollar-backed stablecoins with clear and clean reserves might be different from what one representative called junk coins with unknown reserves.

Wrapping something around fiat money graphically could be different, it could be directly around deposits in a bank, or, on the other end of the spectrum, it could look a lot like a money market fund, Gensler said. It really depends on the underlying assets.

Gensler also pointed out that part of the SEC’s problem with stablecoins is that they have been used in trading in part to avoid laws regarding tax compliance and illegal activity.

Gensler also doubled down on previous statements he made to the Washington Post that he did not see a long-term future for the majority of crypto projects.

5,000 or 6,000 forms of private money are unlikely to persist. Economic history tells us that is unlikely. A handful might compete with gold or silver as a store of digital speculative value, but few of them. Most of them are vehicles of speculative assets.

Although Gensler has repeatedly said that he will not comment on any particular token, he has called bitcoin a store of value.

Bitcoin is a highly speculative asset, but it is a store of value that people want to invest in like some would invest in gold, he said.

Representative Ted Budd (RNC) spoke about China’s latest crackdown on cryptocurrencies and crypto mining, and asked Gensler if the SEC plans to implement similar bans.

After initially objecting, Gensler was forced to respond when Budd again asked directly:

No, that would be in Congress, Gensler said.

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