Securities and Exchange Commission (SEC) Chairman Gary Gensler was in the hot seat Tuesday (April 18), and so was the cryptocurrency industry’s legally viable, go-forward future in the United States.
During more than four hours of testimony before the House Financial Services Committee in a hearing titled, “Oversight of the Securities and Exchange Commission,” the regulatory chair staunchly defended his agency’s rulemaking and ongoing enforcement of the cryptocurrency industry in the face of at-times combative criticism from lawmakers.
Gensler repeated his mantra that “nothing about the crypto markets is incompatible with the securities laws,” emphasizing that in his view, “the vast majority” of crypto tokens are securities.
“Given that most crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC,” he wrote in his prepared remarks, adding that the crypto industry currently entails “risks and conflicts the commission does not allow in any other marketplace.”
Over the past six years, regulators have taken enforcement action against more than 100 crypto defendants. Gensler has chaired the SEC since 2021.
“It’s the law; it’s not a choice,” the SEC chair said. “Calling yourself a DeFi platform, for instance, is not an excuse to defy the securities laws.”
Many lawmakers, including House Financial Services Chairman Patrick McHenry of North Carolina raised any of the points that crypto industry firms have rallied around, namely that the SEC’s disclosure rules were designed for traditional markets and when applied to the digital currency landscape create a round-peg, square-hole dilemma.
“To date, the SEC has forced digital asset market participants into regulatory frameworks that are neither compatible with the underlying technology nor applicable,” wrote the committee republicans in a letter to Gensler published before the hearing.
Citing a “willful misrepresentation of the SEC’s non-existent registration process,” lawmakers added in the letter that the SEC has “failed to provide a path that allows digital asset trading platforms to register.”
“The only entity to blame for the lack of registrants is the SEC itself,” the letter stated.
In response, Gensler said that the SEC has, “a clear regulatory framework built up over 90 years… [The exchanges are a group] of intermediaries in this market that think they have a choice. They don’t have a choice. They’re noncompliant, generally, and they need to come into compliance.”
Read also: Crypto’s Existential Crisis Continues as SEC Issues Investor Warning
“A Commission serious about regulating — and not destroying — this market would reflect on this near unblemished record of regulatory failure and do something about it,” wrote SEC Commissioner Hester Pierce in a dissent titled “Rendering Innovation Kaput.”
The point under contention is that, from their perspective, crypto exchanges have built innovative new ways to trade securities, and rather than adapting the rules to those innovations, the SEC is demanding that those exchanges abandon the innovations and conform to the traditional rules.
“Chair Gensler’s testimony perfectly reflects the SEC’s approach to the crypto economy: confusing, unclear, opaque, and ultimately blind to the harm its regulation by enforcement strategy is doing to lawful companies in this country,” Kristin Smith, CEO of the Blockchain Association, tweeted.
“Chair Gensler’s testimony perfectly reflects the SEC’s approach to the crypto economy: confusing, unclear, opaque, and ultimately blind to the harm its regulation by enforcement strategy is doing to lawful companies in this country.”-@KMSmithDC for @WSJ https://t.co/1Ck3oTMZeM
— Blockchain Association (@BlockchainAssn) April 19, 2023
The SEC issued an update on a proposed rule Friday (April 14) that evolved the definition of an “exchange” to cover DeFi crypto exchanges. Public comment on the proposed change is open for 30 days.
See also: Things Are Getting Real, but Not Real Good, for Crypto
House Majority Whip Tom Emmer of Minnesota called Gensler an “incompetent cop on the beat” during the hearing and said the SEC chair is trying to drive the crypto industry overseas.
As PYMNTS reported, San Francisco-based Coinbase, the largest crypto exchange in the U.S., has indicated it may eventually be driven to move offshore by unclear regulations at home.
Throughout his testimony, Gensler declined to discuss the specifics of the SEC’s Wells notice to Coinbase last month that the crypto exchange is under investigation.
If the SEC’s current posture is the final answer on regulation of the industry within the U.S., firms may be faced with two choices: apply for SEC registration or leave.
That’s because under existing securities laws, as potentially enforced, it would no longer be legal to raise money for crypto projects, offer new crypto tokens, or operate a digital asset exchange that trades in assets outside of bitcoin or ether.
The political situation for crypto is not a warm or welcoming one, but the upcoming presidential election may bring a new SEC chair whose views could differ from Gensler’s, and there remains the possibility and ability of Congress to rein in the SEC’s authority.
It will take time to get to wherever the U.S. eventually ends up concerning crypto oversight, but while the present state of crypto regulation has been described as lacking clarity, some could say the path the SEC is currently taking is crystal clear.
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