CryptocurrencyInvestingBanksReal Estate

‘A lot of these tokens will fail’: SEC Chair Gary Gensler fears crypto losses will undermine confidence in traditional markets

May 19, 2022, 6:23 PM UTC

Since the start of the year, the crypto market has lost roughly $1 trillion in value, following the stock market lower amid a slew of macroeconomic concerns.

The collapse of the stablecoin TerraUSD (UST) dealt another blow to the struggling market last week. And on Thursday, crypto investors awoke to the news that it’s not just UST that’s having problems.

A new stablecoin, DEI, which was created by crypto derivatives trading platform Deus Finance and is designed to hold its value at a 1-to-1 peg to the U.S. dollar, is showing signs of destabilizing.

It’s a risk that Securities and Exchange Commission (SEC) Chairman Gary Gensler warned about after a House Appropriations Committee panel hearing on Wednesday. He worries that more investors could experience significant losses in a crypto market downturn if stablecoins continue to falter.

“I think a lot of these tokens will fail,” he told reporters on Wednesday. “I fear that in crypto…there’s going to be a lot of people hurt, and that will undermine some of the confidence in markets and trust in markets.”

The SEC chairman isn’t the only regulator concerned that a crypto crash could lead to contagion in financial markets.

Rostin Behnam, chairman of the Commodity Futures Trading Commission (CFTC), said on Monday that he believes a true crypto crash would lead to a “knock-on effect on traditional assets and traditional markets.” In response, Behnam signaled he would increase enforcement in crypto-related cases at the CFTC.

U.S. Treasury Secretary Janet Yellen also sees potential for crypto market sell-offs to spread to traditional markets.

“Digital assets may present risks to the financial system and increased and coordinated regulatory attention is necessary,” she told the Senate banking committee last week.

Gensler isn’t the only crypto critic arguing the vast majority of tokens will ultimately fail either. For years regulators and Fed officials have warned of the risks in the speculative crypto market.

Federal Reserve Bank of St. Louis President James Bullard told Yahoo Finance in May 2021 that investors should be “careful” when buying cryptocurrencies because “most of them are worthless.”

And even noted crypto bull Mike Novogratz, who runs the crypto merchant bank Galaxy Digital, said in an interview with CNN in September that the majority of cryptocurrencies would likely fail. 

“I would bet 75% of cryptos don’t make it,” he said.

Novogratz has seen his net worth plummet by roughly $6 billion since early November amid the cryptocurrency bear market. The CEO was once a supporter of TerraUSD and its accompanying cryptocurrency Luna, saying at the Bitcoin Miami 2022 conference that he is “probably the only guy in the world that’s got both a Bitcoin tattoo and a Luna tattoo.”

But even after the collapse of Luna and significant losses, Novogratz remains a crypto optimist.

“Crypto is not going away…Our community is resilient, has a shared belief in a new way of doing things, and the assurance that this is the very early innings,” he wrote in a Wednesday letter to investors, breaking his silence after TerraUSD’s collapse.

Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.