Securities and Exchange Commission Chairman Gary Gensler has asked agency staff to study how to extend investor protections to cryptocurrency platforms and how to register and regulate platforms where securities and non-securities are traded together.
Cryptocurrency exchange and lending platforms, whether centralized or decentralized, have recently traded more than $100 billion worth of cryptocurrencies daily, with the top five trading platforms handling 99% of all transactions. DeFi, or decentralized finance, is similarly concentrated with the top five platforms accounting for almost 80% of trading, he said.
Because the SEC oversees platforms that trade securities, Gensler said he has asked SEC staff "how best to register and regulate platforms where securities and non-securities trading intersect." He said that the SEC and the Commodity Futures Trading Commission, using their respective authorities, should jointly address platforms that could trade cryptocurrency-based security tokens and some commodity tokens.
“These crypto platforms perform similar functions as traditional regulated exchanges,” he said. "Therefore, investors must be protected in the same way."
Gensler said that if a company creates a crypto market that protects investors from fraud and manipulation and safeguards the integrity of the market, "then customers will be more likely to trust and have greater confidence in that market."
If someone is offering a security to the public and doesn't register it or doesn't make the required disclosures, he said he would tell them, "Come in, work with us and register."
Gensler made the comments Monday at the Penn Law Capital Markets Association annual conference at the University of Pennsylvania Carey School of Law.
The regulator, a former Wall Street executive and MIT professor, said he wants crypto platforms to be registered and regulated to protect client assets. Unlike traditional exchanges, centralized crypto trading platforms take custody of their clients' assets, Gensler noted. And last year $14 billion was stolen.
Cryptocurrency trading platforms can also act as market makers, trading for their own accounts against client transactions. That raises conflicts of interest and is not acceptable practice on traditional exchanges like the New York Stock Exchange. Gensler asked if the market making functions of the crypto platforms should be separated.
He also said that crypto tokens that are securities must be registered with the agency. "Issuers of cryptographic tokens that are securities must register their offerings and sales of these assets with the SEC and comply with our disclosure requirements, or comply with an exemption."
However, token issuers face a chicken and egg problem; they are unlikely to attempt to register as securities without an exchange that can list them, giving them little incentive to go through the expensive registration process.
"Until the platforms are registered and regulated, I don't think the tokens will come in and register meaningfully," Gensler said during a Q&A session.
If crypto assets have forms or disclosures that they "really can't comply with, our staff is here to discuss and assess those concerns," he said.
“Any token that is a security must abide by the same market integrity rule book as other securities under our laws,” Gensler said.
Crypto may offer new ways for entrepreneurs to raise money to fund their projects and for investors to trade, but "when a new technology comes along, our existing laws don't go away," he said.
Generally speaking, Gensler reiterated a call for comprehensive regulations to both protect investors and allow the market to thrive with clear rules. The auto industry, he pointed out, benefited from speed limits, cops on the beat and stoplights. “If we hadn't done that, would we have sold as many cars? No way,” he said. "Our capital markets and our economy benefit from some basic rules of the road."
Write Janet H. Cho at janet.cho@dowjones.com