Securities and Exchange Commission (SEC) Chairman Gary Gensler visited Penn U on Monday to share his ideas about crypto regulation at the Penn Law Capital Markets Association’s annual conference. The speech was both down-to-earth and elaborate, giving us an expansion on President Biden’s executive order a month earlier, though not an all-encompassing one.
Breaking down Gensler’s speech
The Chairman referenced a number of things dating over the last century to highlight why crypto can very much fit into the existing regulatory framework.
A caution that the dotcom bubble played a tangential role in the 2008 financial crisis.
A note that the Securities Act of 1933 and the Investment Company Act of 1940 function just as well now as they did back then.
And a reminder that digital assets, online trading and the like have been around for decades.
Gensler split his speech across three focal points of the crypto market:
- platforms
- stablecoins
- cryptocurrencies themselves
In general, his overall sentiment applies equally to all three. With the speech being lengthy, a brief overview is difficult, but not impossible.
Crypto platforms and exchanges
The Chairman, in essence, wants crypto platforms to register and operate like stock exchanges. We’ve seen efforts by many of them to do just that as of late, no doubt in a preemptive move.
He provided some interesting numbers on just how centralized today’s platforms are:
The crypto market is highly concentrated, with the bulk of trading taking place on only a handful of platforms. Amongst crypto-only exchanges, the top five platforms make up 99 percent of all trading, and just two platforms make up 80 percent of trading. In crypto-to-fiat transactions, 80 percent of trading is on five trading platforms. Similarly, the top five DeFi platforms account for nearly 80 percent of trading on those platforms.
Basically, his argument come down to drawing a parallel between a cryptocurrency exchange and a stock exchange. The latter is a well-established legal entity, highly regulated, with multiple customer protections in place. What would be easier than taking the existing legal and regulatory framework and applying it to crypto trading platforms?
Stablecoins
He’d like to get some kind of a grip on stablecoins, starting with ensuring that they have the required backing. He argues that, because stablecoins are used in the crypto world similarly to the way bank deposits or money market funds are used in the traditional finance world, they have to meet a higher level of requirements.
Like stock exchanges, banks and money market fund issuers are tightly legislated and regulated. If it looks like a duck and quacks like a duck, Gensler says, we should tax it like a duck.
His concern is the impact on the global market if a stablecoin issuer slips up in some manner. Admittedly, this would be bad! We’ve seen stablecoin failures in the last year or so, though not among top-tier names.
Here’s the thing: the more Gensler talked about stablecoins, the more we realized the same objections apply to currencies. Why exactly should one be privileged over the other? Isn’t a currency just a “stablecoin” issued by a nation? And don’t we see a whole lot more volatility in those old-fashioned paper stablecoins than in the modern, cryptocurrency versions?
Well, these are interesting questions that we can’t answer today. Surely the debate will spring up later on down the road.
Cryptocurrencies themselves
Tying into the whole dotcom bubble thing, Gensler reiterated that he’d like scrutiny into product offerings. He, as do we all, wants to avoid a dotcom bubble scenario where capital is raised, a product is launched, investors are brought in but promises aren’t fulfilled. To this end, he mentioned how the SEC recently charged BlockFi with violations over their product launches, and how the company is making efforts to comply with existing regulations.
Since the beginning, the SEC has been suspicious of the way cryptocurrencies are presented. They’ve cracked down on a number of high-profile initial coin offerings (ICOs). It comes down to the almost existential question, What is a security?
And this is also a practical question, because if cryptocurrencies are in fact securities, they can be regulated as such. The benefit of such regulation is primarily geared toward investor protection.
The overarching theme of the speech wasn’t about regulation or laws, but about customer protection.
Gensler not only wants investors informed of the product they’re purchasing, but he’s also not satisfied with the track record exchanges have with breaches and losses of assets. It seems the SEC and similar governing bodies would prefer amendments to digital asset custody so that these are stored in a more secure manner.
So how does this affect the crypto market?
Just to give you an idea, here’s the conclusion of Gensler’s speech:
In conclusion, new technologies come along all the time; the question is how we adjust to that new technology. But make no mistake: We already live in a digital age. That’s not what’s new here. We already can buy a cup of coffee with money stored in an app on our smartphones. The days of physical stock certificates ended decades ago. There’s nothing new about people raising money to fund their projects. Crypto may offer new ways for entrepreneurs to raise capital and for investors to trade, but we still need investor and market protection.
We already have robust ways to protect investors trading on platforms. And we have robust ways to protect investors when entrepreneurs want to raise money from the public.
We ought to apply these same protections in the crypto markets. Let’s not risk undermining 90 years of securities laws and create some regulatory arbitrage or loopholes.
It’s pretty plain – Gensler isn’t anti-crypto at all. He’s anti-fraud, and pro-customer.
We are now seeing a peculiar turn of events with experts saying that regulations stand to increase both the price and value of crypto assets. The “regulation threats-price drop-regulations-another price drop” path has beaten in for so long.
Could we hope that rolling out crypto regulation is actually going to achieve the opposite, and provide one of those historic price boosters to the market? All the while, without compromising it?
Well, quite possibly! Gensler’s arguing that these new, scary technologies should be treated like familiar, established institutions. By applying existing legislation and regulation to exchanges, stablecoins and cryptocurrencies, we’d not only help protect investors from getting scammed, we’d be familiarizing the unfamiliar.
“Crypto exchange” sound scary? Call it a “brokerage.” Say, “It’s like a stock exchange, but for crypto.”
What we’re looking at is a total change in the way America’s legislators and regulators look at cryptocurrencies. And if the rest of us follow? Well, we talk a lot about new crypto on-ramps. Gensler isn’t quite building a new on-ramp for crypto. Instead, what he’s doing is making sure all the familiar road signs and pavement markings are in place. He’s looking out for the driver, making sure they know how and where they’re driving.
Gensler may not be offering a new on-ramp, but it sure looks like he’s determined to help the traffic on existing on-ramps move even faster and more confidently. And that may result in an unprecedented wave of nationwide adoption. If we’re right about this, and you see the coming tidal wave of crypto adoption as well, it might be a good idea to learn more about a digital IRA for cryptocurrency investing right now…
