‘These are not laundromat tokens.’ SEC chief sends warning to crypto industry

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Gary Gensler had strong words for the cryp­to indus­try in a Thurs­day speech, telling an audi­ence of lawyers that the “vast major­i­ty” of the near­ly 10,000 exist­ing cryp­to tokens are secu­ri­ties, being issued to the pub­lic in vio­la­tion of fed­er­al laws. 

“The invest­ing pub­lic is buy­ing or sell­ing cryp­to secu­ri­ty tokens because they’re expect­ing prof­its derived from the efforts of oth­ers in a com­mon enter­prise,” the chair­man of the Secu­ri­ties and Exchange Com­mis­sion said accord­ing to pre­pared remarks, para­phras­ing the def­i­n­i­tion of a “secu­ri­ty” in U.S. case law. 

Gensler took aim at those in the indus­try who say that exist­ing secu­ri­ties law is incom­pat­i­ble with cryp­tocur­ren­cies and who have asked for new set of rules tai­lored specif­i­cal­ly for the industry.

He argued that through state­ments and dozens of enforce­ment actions, the SEC has made clear how exist­ing law applies to the indus­try, and that no such rules are forthcoming.

“Not lik­ing the mes­sage isn’t the same thing as not receiv­ing it,” Gensler said. 

“These are not laun­dro­mat tokens. Pro­mot­ers are mar­ket­ing and the invest­ing pub­lic is buy­ing most of these tokens, tout­ing or antic­i­pat­ing prof­its based on the efforts of oth­ers,” he added. 

Gensler said investors deserve dis­clo­sure to help them sort between invest­ments that they think will either flour­ish or flounder. 

“Investors deserve to be pro­tect­ed against fraud and manip­u­la­tion. The law requires these pro­tec­tions,” he said. 

The SEC has been adding to its enforce­ment staff ded­i­cat­ed to pro­tect­ing investors in the cryp­to mar­ket, announc­ing in May that it was adding 20 new posi­tions in the new­ly named Cryp­to Assets and Cyber Unit, near­ly dou­bling its size. 

Gensler specif­i­cal­ly called out cryp­to exchanges and oth­er inter­me­di­aries dur­ing the speech, argu­ing that they should be reg­is­tered with the SEC as secu­ri­ties exchanges and broker-dealers.

Coin­base Glob­al Inc.
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the largest pub­licly trad­ed cryp­to exchange, said in its most recent quar­ter­ly report that the com­pa­ny is under inves­ti­ga­tion by the SEC, and has received queries about how it choos­es which dig­i­tal assets to list and how it clas­si­fies them. 

The SEC brought charges in July against a for­mer Coin­base prod­uct man­ag­er for insid­er trad­ing, iden­ti­fy­ing nine tokens it alleges are secu­ri­ties, which were list­ed on the exchange. Coin­base has said that it dis­agrees with the SEC’s classification. 

In Feb­ru­ary, the cryp­to lend­ing plat­form Block­FI agreed to pay a $100 mil­lion for fail­ing to reg­is­ter with the agency. 

Gensler said that the SEC will have to come up with new pro­ce­dures for reg­is­ter­ing cryp­to exchanges because they also offer cus­to­di­al and bro­ker-deal­er ser­vices, unlike typ­i­cal stock mar­ket exchanges. 

Cryp­to exchanges also dif­fer from stock exchanges in that they may offer both secu­ri­ties and com­modi­ties on the same plat­form, and Gensler said he has direct­ed staff “to sort through how we might best allow” investors to trade both on the same exchange.

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