SEC’s Gary Gensler Promotes Oversight of Digital Asset Markets

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To speech at the University of Pennsylvania Law School’s Capital Markets Association on April 4, 2022, SEC Chairman Gary Gensler took the opportunity to again promote his strong desire to add regulation and increased scrutiny to the digital asset and cryptocurrency markets. While reminding the public of the SEC’s mission to protect investors, facilitate capital formation, and maintain fair, orderly, and efficient markets, Gensler added two additional policy considerations: guarding against illicit activity and maintaining stability. financial. With that in mind, Gensler focused his remarks on three specific areas of focus for the SEC: platforms, stablecoins, and crypto tokens.

Platforms

Gensler first discussed crypto-based trading and lending platforms, both centralized and decentralized. Specifically, he noted that he instructed SEC staff to:

  • Propose regulations for the registration and monitoring of crypto platforms, in line with those of traditional regulated exchanges, including alternative trading systems, in order to preserve market integrity, protect against fraud and facilitate training capital;

  • Addressing registration and regulation of platforms where securities and non-securities trading is intertwined, including coordination with the Commodity Futures Trading Commission in relation to platforms that may trade cryptographic security tokens and certain material tokens primary, regardless of agency jurisdiction;

  • Consider separation of custody for centralized crypto trading platforms that hold client assets; and

  • Since many crypto trading platforms also act as market makers, consider separating market making functions.

Stable Coins

Gensler argued that stablecoins are generally not used commercially (at least in the US) and are not legal tender. Nevertheless, he claims that stablecoins compete with bank deposits and money market funds, which raises important policy concerns: financial stability, use for illicit activities, and the need to protect investors. Gensler advocated for greater oversight of stablecoin usage given concerns around anti-money laundering, tax compliance, penalties, and more, as well as perceived conflicts of interest. and market integrity issues. It was unclear from his statements whether he had tasked SEC staff with a proposal in this area or whether he would otherwise defer to the Treasury Department and the Reserve Board. Federal, although he noted the SEC’s particular interest in money market funds and other types of securities.

Tokens

The largest area of ​​SEC enforcement to date has been related to the supply and sale of crypto tokens which involve the Supreme Court’s 1946 “Howey Test”. Like his predecessor, Jay Clayton, Gensler asserted that most crypto tokens will pass the Howey test as investment contracts, highlighting the use of these instruments to raise funds from the public in hopes that an ecosystem will then be constructed to support the token and draw. project users. This is where Gensler made clear his goal of getting crypto tokens that are SEC-registered securities with the same “market integrity rulebook” as other securities.

Concluding his remarks, Gensler noted that the “robust” investor protection regime that currently exists in mainstream US markets should be applied to the crypto market, and in doing so, regulatory arbitrage and loopholes should be eliminated. The SEC has not released a timeline for proposed rules in this area. However, given that the Biden administration expects a coordinated regulatory approach to digital assets to be on the president’s desk by September 2022, the next few months could indeed be interesting.

Additionally, Gensler’s stated intention to regulate cryptocurrency trading platforms as securities dealers may create a federal and state regulatory turf battle over who can license, regulate and supervise such platforms. forms because (i) the Office of the Comptroller of the Currency for at least five years has tried to implement a national “fintech charter”, (ii) approximately 50 state financial regulators currently regulate trading platforms cryptocurrency under their respective state monetary service trade codes, and (iii) the Treasury Department’s Financial Crimes Enforcement Network has anti-money laundering regulatory authority over all trading platforms of cryptocurrency. Many of these federal and state authorities will want to preserve and, in some cases, expand their existing regulatory dominance over digital asset trading firms, regardless of Gensler’s intention.

©2022 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume XII, Number 97

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