The chairman of the US Securities and Exchange Commission has warned that cryptocurrency trading platforms are jeopardising their own future unless they comply with the country’s legal framework.
According to Gary Gensler of the Financial Times, while he remains “technology neutral,” crypto assets are no different than any other when it comes to public policy imperatives such as investor protection, preventing criminal conduct, and ensuring financial stability.
“At roughly $2 trillion in global value, it’s at the size and nature where, five and ten years from now, it’s going to be within a public policy framework,” he said. “History tells us that it doesn’t survive long outside. Ultimately, finance is about trust.”
Gensler was disappointed with the industry’s response to his request that trading platforms register with the SEC since a sufficient percentage of cryptocurrencies qualified as securities.
“Speak with us, come in,” he said. “There are many platforms in operation today that would do better interacting, but unfortunately there is a little of… pleading for forgiveness rather than asking for permission.”
In the United States, cryptocurrency trading platforms are big business—New York-listed Coinbase posted a $1.6 billion profit in the second quarter. It is unclear, however, whose US financial regulator is required to supervise them. Gensler has asked Congress to make such authority clearer.
Because he taught a course on the subject at the Massachusetts Institute of Technology, Gensler’s crypto views have extra weight. He is scheduled to appear before the European Parliament’s economic and monetary affairs committee on Wednesday about cryptocurrency and other topics.
Gensler stated that he has been focusing on cryptocurrency trading platforms because 95 percent or more of the activity in this “highly speculative asset” takes place in such venues, which he described as “really sparse” in terms of investor protections.
He stated that cryptocurrency and decentralised finance (DeFi) platforms provide a dilemma for regulators since they do not exist in the classic sense of traditional brokers to whom regulations can be easily applied. Instead, they allow investors to interact more directly with one another.
However, he stated that regulators will have authority over even ostensibly decentralised sites. He contended that DeFi was “not really a novel concept,” but rather a variation on the peer-to-peer lending businesses that had sprung up earlier in the century.
He described the DeFi platforms as having “a significant level of centralization,” including governance processes, pricing models, and incentive systems, similar to how there was “a firm in the centre” of peer-to-peer lending.
Gensler also expressed his concerns about Chinese companies listing in the United States. According to him, the listed vehicles are often shell corporations headquartered in offshore locales such as the Cayman Islands that enter into service agreements with Chinese running companies.
“Does real money flow from the running company in China to make payments or not?” he asked. “There is a service agreement in place, and in general, those payment companies do not pay dividends.”
The SEC is also finalising rules that would prevent such businesses from trading if their auditors refused to allow US officials to audit their records. These corporations have until 2024 to comply with such regulations under the Trump administration’s Holding Foreign Companies Accountable Act.
Congress is considering moving the deadline up by a year. According to Gensler, the commission will be ready to execute those rules under the accelerated timeline, which means that Chinese corporations might face increased scrutiny as early as 2023.