Crypto frenzy is rampant with peddlers, scammers

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SEC Chairman Gary Gensler testifies before the US Senate Committee on Banking, Housing, and Urban Affairs during an oversight hearing on Capitol Hill in Washington, DC on September 15, 2022.

Evelyn Hockstein | Reuters

The current crypto frenzy is “reminiscent of what we had in the 1920s before federal securities laws were put in place,” said U.S. Securities and Exchange Commission Chairman Gary Gensler. “Heddlers. Fraudsters. Swindlers. Ponzi schemes. The public lined up in bankruptcy court.”

Speaking remotely at the Piper Sandler Global Exchange and FinTech Conference in New York, Gensler said most crypto tokens are securities and fall under the jurisdiction of the SEC. He also reiterated that exchanges that list these tokens must register with the regulatory agency.

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“Crypto securities markets should not be allowed to undermine the well-deserved trust the public has in capital markets,” Gensler said. “Crypto markets should not be allowed to harm investors.”

The SEC filed separate lawsuits this week against Binance and Coinbase, alleging they illegally offered securities intermediation functions without registering them with the regulator. The agency also alleged that Coinbase mixed its exchange, brokerage and clearinghouse functions. The SEC also accused Binance of mixing investor assets.

Gensler: most tokens are securities

“Congress included a long list of more than 30 items in the definition of a title, including the term ‘investment contract,'” Gensler said.

He added that “the vast majority of crypto tokens pass the investment contract test. Thus, crypto security issuers must register the offer and sale of their investment contracts with the SEC or meet the requirements of the SEC. ‘a waiver’.

Gensler has aggressively pushed back against those in the crypto industry who say the SEC hasn’t defined what is and isn’t a security.

“When crypto asset market participants go on Twitter or on TV and say they weren’t ‘duly informed’ that their conduct might be illegal, don’t believe it,” he said. “They may have made a calculated economic decision to take the risk of the app as the cost of doing business.”

Gensler also reiterated that crypto exchanges fall under the jurisdiction of the SEC. “Since most crypto tokens are subject to securities laws, it follows that most crypto intermediaries must also comply with securities laws,” he said.

“These alleged failures deprive investors of essential protections, including rules that prevent fraud and manipulation, proper disclosures, segregation of client assets, safeguards against conflicts of interest, oversight by an self-regulation and routine inspection by the SEC.”

Gensler blasted crypto exchanges that failed to separate from brokerage duties.

“Rich, if any of your previous speakers said they were combining these functions or surreptitiously trading against their clients without complying with our rules, no one in this room would tolerate that,” Gensler told Rich. Repetto, the Piper Sandler Conference chair and the firm’s senior research analyst.

Gensler says crypto firms ‘know how to register’

In a Q&A segment with Repetto, Gensler dismissed complaints from crypto firms that the path to registration is unclear, saying these firms “know how to register.”

Gensler was also asked if Congress should pass comprehensive crypto legislation. He did not answer the question directly but dismissed arguments that the rules on which assets are or are not securities are too obscure.

“Disliking the answer doesn’t equate to a lack of clarity,” he said.

Gensler made no reference to claims by Binance lawyers that he offered to serve as an advisor for the crypto exchange in 2019. At that time, Gensler was teaching at the Sloan School of Management at the Massachusetts Institute of Technology.

No time frame on market structure, payment order flow rules

Separately, Gensler said the proposed market structure rules, including one regarding payment for order flow, generated 20,000 comment letters. He declined to offer a timeline indicating when a final decision on adopting the rules would be made.

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