Gary Gensler is officially circling the crypto market with the sirens on. In other words: The party may be ending soon.
From stock tokens to DeFi, the U.S. Securities and Exchange Commission’s top official issued a sweeping and damning proclamation Aug. 3 that the crypto asset class is “rife with fraud, scams, and abuse in certain applications.” Gensler, who was sworn in as SEC chair earlier this year after being nominated to the position by President Biden, vowed that the regulator will use the full extent of its powers and even pursue more authority through Congress in order to “prevent transactions, products, and platforms from falling between regulatory cracks.”
“Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West,” Gensler said during a speech at a national security conference hosted by the Aspen Institute. “If we don’t address these issues, I worry a lot of people will be hurt.”
The speech marks the first time Gensler has publicly and comprehensively detailed his thoughts on the world of digital assets as SEC chair. It comes on the heels of a year in which cryptocurrencies have seen buy-in like never before: Bitcoin has traded north of $60,000 at certain points; platforms focused on DeFi (short for “decentralized finance”) are continually cropping up to capitalize on the push to decentralize Wall Street; and NFTs are all the rage in the art world right now.
Gensler’s nomination earlier this year was heralded in corners of the crypto world by people who perceived him as friendly to the technology, making Tuesday’s speech a likely disappointment for some. The prices of major coins plunged Tuesday after Bloomberg News published a preview of Gensler’s speech. Bitcoin, for instance, was down more than 4% as Gensler spoke, while Ethereum had dropped 6%; each subsequently pared their losses. Gensler, the former head of the Commodity Futures Trading Commission, had spent much of the past few years examining the technological possibilities that digital assets and blockchain represent while teaching at MIT.
But in his speech Tuesday, Gensler expressed doubts that crypto can ultimately act as a substitute for fiat currency today, saying that no single digital asset “broadly fulfills all the functions of money,” and later adding that crypto assets instead are being used as “highly speculative stores of value.”
For Gensler, the crypto space’s evolution from here will rely on sound regulation—something that some major crypto platforms and their executives, including FTX CEO Sam Bankman-Fried, have publicly acknowledged themselves. “At the heart of finance is trust. And at the heart of trust in markets is investor protection,” Gensler said. “If this field is going to continue to grow, or reach any of its potential to be a catalyst for change, we better bring it into public policy frameworks.”
The chair’s remarks set the stage for what could be a contentious fight between the crypto industry and Washington, D.C. Lawmakers have already expressed a myriad of concerns about what is taking place in digital assets. Sen. Elizabeth Warren, the Massachusetts Democrat, recently explained her reservations about DeFi to Fortune, saying, “Anonymous developers can scam investors with rug pulls, pump and dumps, and other schemes without transparency and accountability.” But Brian Brooks, the former banking regulator turned CEO of Binance.US, argued in a Fortune op-ed that DeFi could offer a superior outcome compared with the traditional financial system, which he calls “the devil we know.”
What exactly the SEC ends up pursuing—and how—are to be determined. Under the SEC’s purview today, Gensler said the regulator is currently exploring issues like unregistered securities masquerading as tokens, whether DeFi platforms are lending out such assets, and crypto asset custody. But Gensler also wants more oversight, saying in his remarks that Congress should be prioritizing granting financial regulators clear oversight of crypto trading, lending, and DeFi platforms, as well as the ability to write their own rules on digital assets.
“Standing astride isn’t a sustainable place to be,” Gensler said. “For those who want to encourage innovations in crypto, I’d like to note that financial innovations throughout history don’t long thrive outside of our public policy frameworks.”
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