In a speech yesterday, SEC Chair Gary Gensler stated his views on regulating cryptocurrency exchanges. He believes exchanges need to separate roles, such as acting as a broker versus custodian into separate entities. He also suggested some stablecoins are securities.
Gensler started off by reiterating his stance that the vast majority of cryptocurrencies are security tokens. However, he conceded that the small number that are not securities represent a significant proportion of cryptocurrency value. He only specifically mentioned Bitcoin, although an SEC Commissioner previously stated that Ethereum was in that category. He pushed back about requests for greater SEC guidance, saying the SEC’s stance has been consistent.
The SEC Chair also asserted that some stablecoins might be shares of a money market fund or another kind of security. He gave non-exhaustive criteria for classifying them as based on:
- whether they pay interest, directly or indirectly, through affiliates or otherwise
- the mechanisms to maintain the value
- how the tokens are offered, sold, and used.
Cryptocurrency exchanges
A key part of Gensler’s speech focused on centralized and decentralized cryptocurrency exchanges. On the decentralized front, he asked the lawyer’s in the room with crypto clients whether their engagement was with a specific client or a “dispersed, unidentified group of individuals.”
He believes the public deserves the same protections for securities of all types. “Crypto investors should benefit from exchange rulebooks that protect against fraud, manipulation, front-running, wash sales, and other misconduct,” said Gensler.
Most cryptocurrency exchanges perform multiple functions: trading, broker-dealer functions, custody, clearing and lending.
“The commingling of the various functions within crypto intermediaries creates inherent conflicts of interest and risks for investors,” said Gensler. “Thus, I’ve asked staff to work with intermediaries to ensure they register each of their functions — exchange, broker-dealer, custodial functions, and the like — which could result in disaggregating their functions into separate legal entities to mitigate conflicts of interest and enhance investor protection.”
Dividing up crypto duties between the CFTC, SEC
The cryptocurrency community has been keen to get the Commodity Futures Trading Commission (CFTC) involved in regulating the sector, even though the industry differs from many physical commodities markets. But the SEC asserts that it’s the one with securities experience, so crypto securities should fall under its remit.
There is also a regulatory gap for the non-security tokens. Bitcoin is considered a commodity, and the CFTC has regulatory authority over Bitcoin derivatives but can only take enforcement action in the cash market when there’s manipulative or fraudulent behavior. It’s not the cash market supervisor or regulator.
According to Gensler, cryptocurrency exchanges are active in both security and non-security tokens.
“To the extent the Commodity Futures Trading Commission (CFTC) needs greater authorities with which to oversee and regulate crypto non-security tokens and related intermediaries, I look forward to working with Congress to achieve that goal consistent with maintaining the regulation of crypto security tokens and related intermediaries at the SEC,” said Gensler.
