Ensuring Crypto Firms Do Their Job Within the Boundaries of the Law

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When I taught a course on blockchain and money at Massachusetts Institute of Technology, I asked my students every semester who they thought Satoshi Nakamoto was.

To this day, no one knows. Nakamoto’s anonymous identity is part of the myth of creating finance without a trusted third party – a new way to transfer value over the internet, with the aim that there is no government control or central intermediaries such as banks.

Since ancient times, however, the financial world has been built on trust and the rule of law. Moreover, finance has tended to become centralized, concentrated and interconnected, from banks to stock exchanges.

The crypto market is no exception. It has many “trusted” – albeit non-compliant – intermediaries. Today, crypto is dominated by a handful of trading, lending, staking, and other financial intermediaries. The investing public trusts these entities to be responsible for the assets of investors. According to some data, the three largest crypto trading platforms allegedly account for almost three quarters of all trading volume.

Crypto entrepreneurs might claim in their own marketing materials that they are transparent and regulated. But make no mistake: very few, if any, are actually registered with the SEC and fully compliant with federal securities laws.

Lack of compliance puts investors’ hard-earned assets at risk. Investors lack fundamental information about the crypto assets themselves and the companies that execute their trades and hold their assets: what do the companies do with client assets? How do they finance the promised returns? Are they reaching into investors’ pockets? When you buy or sell a token, are you trading for the house? What are the rules to protect against manipulation and fraud? Without disclosure and other investor protections, we simply don’t know.

Essentially, these companies are saying “trust us”. Plus, when companies go bankrupt (as many have recently), they turn to the bankruptcy courts to settle their mess. Given Nakamoto’s original vision – in essence, this code is law – it’s somewhat ironic.

As Chairman of the Securities and Exchange Commission, I have one goal when it comes to the crypto markets: to ensure that investors and markets receive all the protections they would receive in any other securities market. . How?

First, intermediaries and tokens should achieve compliance on their own. Crypto intermediaries must structure their business to comply with our laws governing stock exchanges, broker-dealers and clearing houses; they could put in place rules that protect against fraud and manipulation. Crypto security issuers must file registration statements and make required disclosures.

These are the same rules that everyone in the securities markets has played for decades.

I find the point of discussion that there is a lack of clarity in securities laws to be unconvincing. Some crypto companies might point out that the laws are unclear rather than admit that their platforms lack sufficient investor protection.

We have been clear that most entrepreneur-backed crypto tokens, among other characteristics, are likely to be securities. We have clearly explained how lending and staking platforms fall under securities laws. We have made it clear that platforms listing crypto securities must register with the SEC. Additionally, securities laws make it clear that these platforms must not combine functions under one umbrella, which creates conflict and risk for investors.

A common feature of crypto firms that offer trading, lending, or staking as a service is that they generally require users to surrender control of their crypto assets to the platforms (not your keys, not your pieces). Thus, SEC staff clearly explained how companies should account for the crypto assets they hold for their users, and staff provided guidance on disclosure obligations arising from recent bankruptcies and financial difficulties of market participants. crypto assets.

We have also been clear that, based on the general operation of crypto platforms, investment advisers cannot rely on them today as qualified custodians. We have also proposed rules that would require all assets invested with investment advisers, including crypto assets that are not funds or securities, to be held with qualified custodians.

Frankly, however, crypto intermediaries aren’t exactly lining up to register with the SEC and comply with laws enacted by Congress. It may just be that their business models are built on non-compliance. At times, it felt like some were looking for a stamp of approval for non-compliant activity, rather than changing a fundamentally non-compliant conflict-ridden business model.

Of course, another tool in our toolbox is to eliminate non-compliance through investigation and enforcement action.

The SEC has brought or successfully settled more than 100 cases against crypto intermediaries and token issuers, including some that operated Ponzi or pyramid schemes, engaged in illegal solicitation, or committed other forms of fraud . We recently filed fraud charges against the CEO and other executives of FTX, as well as Terraform and its founder.

Enforcement takes time and resources. This is especially true in crypto, as companies are often uncooperative, claim foreign jurisdiction despite offering products to US investors, and are well funded for protracted litigation, including potentially using money raised from investors in and on their platforms. However, we will remain true to our mission to eradicate wrongdoing in the marketplace.

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Some have criticized the SEC for bringing cases — or even just investigating — crypto issuers and intermediaries. Some have said we should let innovation flourish or risk it going overseas. But giving up investor protection jeopardizes real-life savings. The application is a tool, not the destination. The objective is to bring market participants into compliance with the laws and rules and to protect our “clients”: the American investors.

The fact is, even if Nakamoto’s identity is unclear, the laws are. Crypto companies should do their job within the bounds of the law, or they shouldn’t do it at all.

Gary Gensler is Chairman of the United States Securities and Exchange Commission.

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