Gensler: SEC Is Coming for Crypto Exchanges

Securities and Exchange Commission (SEC) Chair Gary Gensler is making another push to bring cryptocurrency exchanges within his agency’s remit.

Gensler, who spent several years teaching cryptocurrency and blockchain at MIT before taking up the top SEC post, has been a fierce advocate of tougher regulation. Notably, he has repeatedly called crypto the “Wild West” of finance, suggesting that it is lawless.

Following a Wednesday (Jan. 19) speech on “Dynamic Regulation for a Dynamic Society,” Gensler argued that it is vital for crypto investors to get the kind of protections long afforded stock traders.

“I’ve asked staff to look at every way to get these platforms inside the investor protection remit,” Gensler said, according to Bloomberg. “If the trading platforms don’t come into the regulated space, it’d be another year of the public being vulnerable.”

The move comes as Crypto.com, a top exchange, revealed that it had been hit by a hacker who drained $34 million from 483 user accounts. While the exchange announced increased security measures on Twitter and covered users’ losses, it is the latest in a long string of exchange and blockchain hacks.

Gensler’s primary focus has been the regulation of cryptocurrencies themselves, arguing that nearly all qualify as securities to be regulated by his agency.

Read more: SEC’s Gensler Cautions $2T Crypto Space Needs Oversight for Survival

Gensler has continued his predecessor’s legal battles in this regard, most notably continuing a lawsuit accusing international payments processor Ripple of the nine-year-long sale of illegal securities in the form of its XRP tokens.

See more: Ripple Lawyer Confident SEC Case Will Wrap in April

The Ripple suit is notable because the company is determined to fight the suit at trial rather than settle for a fine. This means the lawsuit could eventually end up being regulation by litigation if Congress does not agree on the definition of when a cryptocurrency is and is not a security before the judgement comes.

Exchange Focus

Notably, the SEC turned its focus on leading U.S. cryptocurrency exchange Coinbase in September. In a regulatory filing, the public company revealed that the SEC had threatened to sue if Coinbase went ahead with the launch of Coinbase Lend, an interest-bearing product offering a starting rate of 4% annual percentage yield (APY).

Read more: SEC Turning Attention to Crypto Exchanges

Lending/borrowing programs similar to this one are a primary decentralized finance (DeFi) product. They allow borrowers to lock cryptocurrency as collateral — generally 125% to 150% of the amount borrowed. Due to the volatility of crypto prices, margin calls that see borrowers lose substantially are fairly common.

However, Coinbase would not have been the first exchange to offer a centralized lending program. Gemini, another U.S.-based exchange that also has a long history of actively cooperating with regulators, has one — Gemini Earn.

While Coinbase quickly acquiesced and canceled Coinbase Lend, CEO Brian Armstrong accused the SEC of “really sketchy behavior” in a Sept. 7 Twitter thread.

Noting that many other companies offer similar products, Armstrong complained that the SEC refused “to tell us why they think it’s a security … and then tell us they will be suing us if we proceed to launch, with zero explanation as to why.”

Armstrong said a lawsuit might provide regulatory clarity, but “regulation by litigation should be the last resort for the SEC, not the first.”

See more: Coinbase Asks Congress to Create Crypto-Regulator

He later called for Congress to create a new, independent crypto regulatory agency.

Taking Action

Gensler has spoken about the subject before, notably in December, when he advised crypto exchanges to register with the SEC.

Calling exchanges “the second big challenge” after treating cryptocurrencies as securities, he said “these platforms are doing a lot more than just trading; they’re also holding the crypto tokens. They’re also sometimes trading against their customer base.”

He added that it is “really important to get that investor protection.”

Read more: Six Crypto Execs Warn Congress Not to Overregulate Crypto

Congress has been increasing its focus on crypto recently with a split opening up as Democrats — generally — call for regulation with stronger consumer protections while Republicans (and a few Democrats) want a lighter touch focused more on supporting innovation.

In late December, Sen. Cynthia Lummis, a longtime bitcoin investor and crypto advocate, promised to bring a comprehensive crypto regulatory bill before congress.

See more: Sen. Lummis’ Christmas Present to Crypto Is Clear Regulation in the New Year

That bill would split jurisdiction of cryptocurrencies between the Commodity Futures Trading Commission (CFTC) and the SEC, providing clear guidance on when to classify digital assets as securities, as well as regulating stablecoins — which will be a very big topic in 2022 — clarifying crypto taxation, and creating consumer protections.

Read also: Powell, Yellen Clash Over Stablecoin Regulation at Senate Hearing

There is an ongoing turf war between the SEC and CFTC over regulatory control of cryptocurrency, and Armstrong’s call for an independent agency is unlikely to gain traction as it’s been criticized even in the crypto community.

However, Gensler’s actions are another sign that the SEC thinks it will get control of crypto. That’s despite Lummis’ legislation — which PYMNTS predicted in its 2022 crypto outlook is the most likely outcome.

See more: 10 Predictions About What’s Next for Crypto in 2022