SEC.gov | Prepared Remarks of Gary Gensler On Crypto Markets Penn Law Capital Markets Association Annual Conference
thank you. it’s great to be with all of you at this event, particularly since the university of pennsylvania is my alma mater. i was at wharton, and what i knew from law school is that the library shelves were a great place to study. it was so quiet there, though I don’t know if that’s still the case.
As usual, I would like to point out that my views are my own and I am not speaking on behalf of the commission or the sec staff.
Reading: Gary gensler bitcoin
Today, you invited me to talk about the roughly $2 trillion crypto markets.
In February, you all may have noticed the super bowl announcements for various crypto platforms. this wasn’t the first time we’d seen some new innovations at the biggest TV event of the year.
Seeing these ads reminded me that, in the run-up to the financial crisis, subprime lender Ameriquest advertised in the Super Bowl. it disappeared in 2007. A few years before that, according to Axios, “fourteen dotcom companies announced during the 2000 super bowl, most of which are no longer in existence.” I know many in the audience may have just been little kids at the time, but the internet was relatively new in the year 2000. However, the bursting of the dot-com bubble created significant tremors in our markets.
Ads therefore do not equate to credibility. In crypto, there is a lot of innovation, but a lot of hype. As in other start-up fields, many projects are likely to fail. that’s just part of the entrepreneurial spirit in the us. uu.
The SEC’s mandate is to oversee the capital markets and our three-part mission: to protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets. within the perimeter of policy, regulators are also concerned with protection against illicit activity, a role that is very important to us and our partners at the treasury department and the justice department; and on financial stability, which is important to all financial regulators.
There is no reason to treat the cryptocurrency market differently just because a different technology is used. we must be technologically neutral.
I would like to mention three areas related to the sec’s work in this area: platforms, stablecoins and crypto tokens.
First there are the cryptocurrency lending and trading platforms, whether they are called centralized or decentralized (defi).
These platforms have scale, recently trading over $100 billion worth of cryptocurrencies per day.
The cryptocurrency market is highly concentrated with most trading taking place on just a few platforms. among crypto-only exchanges, the top five platforms account for 99 percent of all transactions, with just two platforms accounting for 80 percent of transactions. in cryptocurrency to fiat transactions, 80% of transactions take place on five trading platforms. similarly, the top five defi platforms account for nearly 80% of trading on those platforms.
In addition, these platforms are likely to trade securities. a typical trading platform has dozens of tokens, at least. in fact, many have more than 100 chips. As I will discuss later, many of the tokens that are traded on these platforms may meet the definition of “securities”. while the legal status of each token depends on its own facts and circumstances, given the commission’s experience with various tokens that are securities and with so many trading tokens, the likelihood of any given platform not holding securities is quite remote.
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Therefore, I’ve asked the staff to work on a number of platform-related projects.
first is to register and regulate the platforms themselves similar to exchanges. Congress gave us a broad framework to regulate exchanges. These crypto platforms perform similar functions as traditional regulated exchanges. therefore, investors must be protected in the same way.
the united states has the largest capital markets because investors have faith in them. we have rules regarding safeguarding market integrity, protection against fraud and manipulation, and facilitating capital formation. If a company creates a crypto market that protects investors and meets the gold standard of our market regulations, then customers will be more likely to trust and trust that market.
In my opinion, regulation protects investors and promotes investor confidence, in the same way that traffic laws protect drivers and promote driver confidence. it is the core of what makes markets work.
Some have asked whether the current exemptions for so-called alternative trading systems (ATSs) might be generally available to crypto platforms. However, institutional investors typically use ATS for the equity and fixed income markets. this is quite unlike crypto asset platforms, which have millions and sometimes tens of millions of retail customers who buy and sell directly on the platform without going through a broker. therefore, I have asked the staff to consider whether and how the protections provided to other investors on exchanges that retail investors interact with should apply to crypto platforms.
Second, crypto platforms currently list crypto commodity tokens and crypto security tokens, including crypto tokens that are investment contracts and/or notes. Currently, the venues overseen by the SEC only trade securities. therefore, I asked the staff to consider how best to register and regulate platforms where securities and non-securities trading intertwine. In particular, I asked staff to work with the Commodity Futures Trading Commission (CFTC) on how we can jointly address such platforms that could trade both crypto-based security tokens and some commodity tokens, using our respective authorities.
The third area is about crypto custody. Unlike traditional exchanges, currently centralized crypto trading platforms generally take custody of their clients’ assets. last year, more than $14 billion in value was stolen. I have asked staff how to work with platforms to register and regulate them to better ensure the protection of client assets, in particular whether segregated custody would be appropriate.
Furthermore, unlike traditional stock exchanges, cryptocurrency trading platforms can also act as market makers and thus principals who trade on their own platforms for their own accounts on the other side of their customers. therefore, I have asked staff to consider whether it would be appropriate to segregate market making functions.
When it comes to crypto lending platforms, we recently accused blockfi of failing to register the offering of its retail crypto lending product, among other infractions. The agreement made it clear that crypto markets must comply with time-tested securities laws such as the Securities Act of 1933 and the Investment Company Act of 1940. It further demonstrates the commission’s willingness to work with crypto platforms. to determine how they can comply with those laws.
blockfi has agreed to try to bring its business into compliance with the investment company law, and its parent company has announced that it intends to register under the securities act of 1933 the offer and sale of a new loan product.
The second area is the $183 billion (and growing) stablecoin market. Outside of use on crypto platforms, stablecoins are generally not used for trading. he generally doesn’t use them for a good karma cup of coffee on his way to class from downtown. they are not issued by a central government and are not legal tender.
however, stablecoins, by offering characteristics similar to and potentially competing with bank deposits and money market funds, raise three important sets of policy questions.
First, stablecoins raise public policy considerations around financial stability and monetary policy. Such policy considerations underlie the regulations that bank regulators have regarding deposits and that we have in the SEC regarding money market funds and other types of securities. many of these issues are discussed in the recent report of the president’s task force. for example, what is backing these tokens so that we can make sure that these holdings can actually be converted to dollars one at a time? furthermore, stablecoins are so integral to the crypto ecosystem that loss of peg or issuer failure could jeopardize one or more trading platforms and can reverberate throughout the broader crypto ecosystem.
Second, stablecoins raise issues of how they can potentially be used for illicit activities. stablecoins are primarily used for crypto-to-crypto transactions, potentially making it easier for platforms and users to avoid or defer an on-ramp or off-ramp with the fiat banking system. therefore, the use of stablecoins on platforms can make it easier for those seeking to circumvent a number of public policy objectives related to our traditional banking and financial system: anti-money laundering, tax compliance, sanctions, and the like.
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Thirdly, stablecoins pose problems for investor protection. stablecoins were first adopted and continue to be predominantly used in cryptocurrency lending and trading platforms. around 80 to 85 percent of transactions and loans on these platforms involve stablecoins. when trading on a platform, the tokens are typically owned by the platforms, and clients only have a counterparty relationship with the platform. The three largest stablecoins were created by the trading or lending platforms themselves, and the US. uu. retail investors have no direct right of redemption for the two largest stablecoins by market cap. there are conflicts of interest and market integrity issues that would benefit from more oversight.
then third, from a political perspective, there are all the other crypto tokens. the fact is that most crypto tokens involve a group of entrepreneurs who collect money from the public in anticipation of profits, the hallmark of an investment contract or a security under our jurisdiction. some, probably only a few, are like digital gold; they may not be values. even fewer, if any, are actually operating as money.
When new technology comes along, our existing laws don’t go away.
In the 1930s, Congress painted the definition of security with a broad brush. Our laws have been amended many times since then, Congress has painted with an even broader brush, and the Supreme Court has weighed in numerous times. they all said, basically, to protect the public from fraud, to protect the public from scammers, people who were collecting money from the public had to register and do basic disclosures with a cop on the go: the sec.
you might ask yourself: how could a cryptographic token be a security?
the supreme court’s 1946 howey test, which concerned orange groves, says that an investment contract exists when money is invested in a joint venture with a reasonable expectation of profit from the efforts of others. [9 ]
my predecessor jay clayton said it and i will reiterate it: without prejudging any token, most crypto tokens are investment contracts under the howey test. even before the howey test, in the early years of our federal securities laws, some businessmen were notified that they had to register their offerings of chinchillas, whiskey depository receipts, oyster beds, and live silver foxes as securities offerings,  as “the alleged sale of the…property was merely a camouflage and not the substance of the transaction”.
Nowadays, many entrepreneurs are raising money from the public by selling crypto tokens, with the expectation that administrators will build an ecosystem in which the token will be useful and attract more users to the project.
therefore, it is important that we work so that the cryptographic tokens that are values are registered in the sec. Issuers of crypto tokens that are securities must register their offerings and sales of these assets with the SEC and comply with our disclosure requirements, or meet an exemption. Issuers of all kinds in a variety of markets successfully register and provide information every day. if there are, in fact, forms or disclosures that crypto assets cannot really comply with, our staff is here to discuss and assess those concerns. any token that is a security must comply with the same market integrity rulebook as other securities under our laws.
In conclusion, new technologies appear all the time; the question is how we adapt to this new technology. but make no mistake: we already live in a digital age. that’s not new here. we can already buy a cup of coffee with money stored in an app on our smartphones. The days of physical stock certificates are over decades ago. There is nothing new about people raising money to finance their projects. Crypto may offer new ways for entrepreneurs to raise capital and for investors to trade, but we still need protection for investors and the market.
We already have strong ways to protect investors who trade on platforms. and we have strong ways to protect investors when entrepreneurs want to raise money from the public.
We should apply these same protections in the crypto markets. let’s not risk undermining 90 years of securities laws and creating any regulatory arbitrage or loopholes.
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