SEC Turning Attention To Crypto Exchanges

Securities and Exchange Commission (SEC) Chairman Gary Gensler warned that cryptocurrency exchanges that don’t operate with SEC approval can expect to see more enforcement actions.

“These platforms are doing a lot more than just trading,” he said at a conference on Sunday (Dec. 12), according to The Wall Street Journal, noting that aside from taking custody of clients’ tokens, “they’re also sometimes trading against their customer base. And they’re set up technologically differently than traditional stock exchanges.”

Calling trading platforms one of the two “big challenges” the SEC faces in asserting its regulatory control of the cryptocurrency industry, Gensler warned that any firm working in this field must at least come in and talk to the agency.

Repeating his claim that the cryptocurrency is the “Wild West” of finance, Gensler on Sunday said that the SEC’s “main goals are around protecting the investing public, capital formation and the markets, protecting against fraud and manipulation.” He added that with “regard to these digital currencies, if you’re raising money from the public, that still comes under the securities laws.”

Asked if the crypto market was governable, Gensler said, “We have a lot of tools. The challenge here is that many projects are global. They might be located offshore as well.”

He added that saying U.S. citizens were not allowed to participate in projects doesn’t cut it. “The public finds their way to the platform through a virtual private network or something like that.” More broadly, Gensler noted that even “good-faith” actors believed they found loopholes, or that being offshore kept them out of the SEC’s purview.

“There are too many projects trying to sidestep international standards,” Gensler said. “Not just in the U.S. — they’re trying to sidestep the anti-money laundering laws in many countries, or sidestep tax compliance in many countries. But I would note this: Few technologies in history since antiquity can persist for long periods of time outside a public-policy framework.”

Who’s Listening?

“I’ve said publicly, ‘Come in, work with the SEC, get registered,’” Gensler said on Sunday. “They’re fundamentally exchanges, but they also have this other activity going on inside of it. It’s really important to get that investor protection.”

Many exchanges are heeding that advice, he suggested, noting that the SEC has “had a lot of interesting meetings in the last handful of months.”

However, one of the highest-profile exchanges, publicly listed Coinbase, has complained that talking to the agency didn’t provide much in the way of help, or even explanations of its position. In June, it announced a new crypto lending product, Coinbase Lend, that would allow customers to earn up to 4% interest on some cryptocurrencies held on the platform, starting with the stablecoin USDC.

In September, the company’s shares dropped (albeit in a bear market) after it shelved the project, revealing in a blog post that the SEC had threatened to sue if Coinbase Lend moved forward. The post by Coinbase Chief Legal Officer Paul Grewal was titled “The SEC has told us it wants to sue us over Lend. We don’t know why.”

Saying the company had been “proactively engaging” with the SEC, Grewal wrote that the company wanted “to be transparent with you about the course of events leading up to it.” He said that the formal warning, known as a Wells notice, came as a complete surprise “after months of effort by Coinbase to engage productively.”

Arguing that Coinbase Lend did not qualify as a security, Grewal said the June announcement of a waiting list for Coinbase Lend led to a formal investigation that included asking for details of every person who’d signed up.

“The SEC has repeatedly asked our industry to ‘talk to us, come in,’” Grewal said. “We did that here. But today, all we know is that we can either keep Lend off the market indefinitely without knowing why or we can be sued. A healthy regulatory relationship should never leave the industry in that kind of bind without explanation. Dialogue is at the heart of good regulation.”

Other lawyers took a different view of the case. At the time, Lee Reiners, the executive director of the Global Financial Markets Center at the Duke University School of Law, told Roll Call that Coinbase Lend was clearly a securities offering under the SEC’s authority.

“When you ask a regulator if you can do something, and they tell you that something is illegal, that does not mean they are picking on you or singling you out,” he said. “It means they are doing their job.”