Regulate Crypto Platforms Like Exchanges

Platforms for cryptocurrency trading and lending should be registered and regulated like traditional securities exchanges, argues U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler. On April 4, 2022, he announced that SEC staff is working on this during his keynote address to a conference on digital assets, cryptocurrency, and blockchain held by the University of Pennsylvania Carey School of Law.

Gensler observed that many tokens trading on these platforms meet the definition of “securities.” He also remarked that these crypto platforms play roles similar to traditional regulated exchanges. Thus, he believes that investors should be protected in the same way.

‘We Should Be Technology-Neutral’

Gensler said: “The SEC’s remit is overseeing the capital markets and our three-part mission: protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient markets … regulators also care about guarding against illicit activity … There’s no reason to treat the crypto market differently just because different technology is used. We should be technology-neutral.”

Highly Concentrated Market

Gensler stated that the crypto market is worth about $2 trillion, with daily trading volume of more than $100 billion. He also stated that, among crypto-only exchanges, the top five platforms account for 99% of all trading, and just two platforms make up 80%. In crypto-to-fiat transactions, 80% of trading is on five platforms. Regarding trading on decentralized finance (DeFi) platforms, the top five account for almost 80% of total trading.

‘These Platforms Likely Are Trading Securities’

Gensler noted that a typical trading platform has dozens of tokens on it, and many have more than 100 tokens. Moreover, he believes that many of these tokens may meet the definition of “securities.” Specifically, he stated that most crypto tokens involve a group of entrepreneurs raising money from the public in anticipation of profits, which is exactly what traditional investment contracts or securities under SEC jurisdiction do.

He cited the U.S. Supreme Court’s 1946 Howey Test (actually about orange groves), which asserts that an investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. Gensler believes that most crypto tokens are investment contracts under the Howey Test, and thus he wants crypto tokens treated as securities to be registered with the SEC.

‘Stablecoins Raise Three Sets of Policy Issues’

Gensler observed that stablecoins, a $183 billion and growing market, are generally used strictly on crypto platforms, and rarely for commerce. He said that they potentially may compete with bank deposits and money market funds, and they raise three important sets of policy issues.

The first is public policy considerations around financial stability and monetary policy. The second is how they can be used for illicit activity. The third is investor protection issues.

Regarding investor protection, he noted that stablecoins are mainly used on crypto platforms, where they are involved in about 80% to 85% of their trading and lending activity. Moreover, these tokens actually are often owned by the platforms, giving their customers a counterparty relationship. Noting that U.S. retail investors have no direct right of redemption for the two largest stablecoins by market capitalization, Gensler finds conflicts of interest and market integrity questions that warrant more oversight.