Securities and Exchange Commission (SEC) Chairman Gary Gensler has warned that cryptocurrency exchanges that do not trade with SEC approval can expect to see more enforcement action.
"These platforms are doing a lot more than just trading," he told a conference on Sunday (December 12), according to The Wall Street Journal, noting that, in addition to taking custody of client tokens, "sometimes they also they are trading against their customer base. And they are technologically configured differently than traditional stock exchanges. "
Gensler, who called trading platforms one of the two "big challenges" facing the SEC in asserting its regulatory control of the cryptocurrency industry, cautioned that any company working in this field should at least go in and talk to the agency.
Repeating his claim that cryptocurrency is the "wild west" of finance, Gensler said Sunday that the SEC's "primary goals are to protect the investing public, capital formation and markets, to protect against fraud and manipulation. ". He added that with "regarding these digital currencies, if you are raising money from the public, that is still subject to securities laws."
When asked if the cryptocurrency market is governable, Gensler said: โWe have a lot of tools. The challenge here is that many projects are global. They could also be located offshore. "
He added that saying that American citizens were not allowed to participate in projects is not enough. "The public finds their way to the platform through a virtual private network or something like that." More generally, Gensler noted that even "bona fide" actors believed they found loopholes or that being abroad kept them out of the SEC's purview.
"There are too many projects that try to circumvent international standards," Gensler said. โNot just in the US, they are trying to circumvent anti-money laundering laws in many countries, or circumvent tax compliance in many countries. But I would like to point out this: few technologies in history since ancient times can persist for long periods of time outside of a public policy framework. "
Who is listening?
"I've said publicly, 'Come in, work with the SEC, sign up,'" Gensler said Sunday. โThey are fundamentally exchanges, but they also have this other activity within them. It's really important to get that protection for investors. "
Many exchanges are heeding that advice, he suggested, noting that the SEC has "had a lot of interesting meetings in recent months."
However, one of the highest-profile exchanges, publicly traded Coinbase, has complained that speaking with the agency did not provide much help, or even explanations of its position. In June, it announced a new cryptocurrency lending product, Coinbase Lend, which would allow clients to earn up to 4% interest on some cryptocurrencies found on the platform, starting with the USDC stablecoin.
In September, the company's shares fell (albeit in a bear market) after the project was shelved, revealing in a blog post that the SEC had threatened to sue if Coinbase Lend went ahead. Coinbase's Chief Legal Officer Paul Grewal's post was titled โThe SEC has told us they want to sue us for the loan. We do not know why ".
Saying that the company had "proactively engaged" with the SEC, Grewal wrote that the company wanted to "be transparent with you about the course of events that led up to it." He said the formal warning, known as a Wells notice, was a complete surprise "after months of effort on Coinbase's part to participate productively."
Arguing that Coinbase Lend did not qualify as a security, Grewal said that the June announcement of a waiting list for Coinbase Lend led to a formal investigation that included asking for details of each person who had signed up.
"The SEC has repeatedly asked our industry to 'talk to us, come on in,'" Grewal said. โWe did that here. But today, all we know is that we can keep Lend out of the market indefinitely without knowing why or we can be sued. A healthy regulatory relationship should never leave the industry in such a bind without an explanation. Dialogue is at the heart of good regulation โ.
Other attorneys took a different view of the case. At the time, Lee Reiners, executive director of the Center for Global Financial Markets at Duke University School of Law, told Roll Call that Coinbase Lend was clearly a securities offering under the authority of the SEC.
"When you ask a regulator if you can do something and they tell you that something is illegal, that does not mean that they are bothering you or pointing fingers at you," he said. "It means they are doing their job."
