SEC Chair: Cryptocurrency business models are built on "non-compliance"
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SEC Chair: Cryptocurrency business models are built on "non-compliance"
At the financial markets conference, SEC Chair Gensler said that cryptocurrency market business models are often built on non-compliance and involve numerous conflicts of interest.
Navigating Web3 tides with focused insightsAuthor: Jim Edwards, The Block
Translation: Wu Shuo Blockchain
During a Q&A session at the Federal Reserve Bank of Atlanta's 27th annual Financial Markets Conference yesterday, U.S. SEC Chair Gensler offered a pessimistic assessment of the legal status of the entire crypto economy when asked about the SEC’s dispute with Coinbase and broader cryptocurrency regulation:
● Their business models are often built on non-compliance, built on customer funds, commingling assets, and rife with conflicts.
● In contrast, the SEC would never allow the New York Stock Exchange to operate like a crypto platform—where an exchange might trade its own tokens on its own platform, act as a market maker or hedge fund, or lend out its own tokens without publicly disclosing what it is doing.
● Gensler also pointed out that three of the four recent U.S. bank failures involved “significant exposure to cryptocurrency,” a comment intended to highlight that the closer traditional finance becomes tied to crypto, the greater the potential for “financial market risk.”
On Coinbase and the “Widespread Non-Compliance” of the Crypto Market
The conference began with a speech on the SEC’s role in preventing systemic spillovers in traditional banking. When discussing digital banking, Gensler said: “I’m not talking about the generally non-compliant crypto market.”
Then Tom Barkin, President and CEO of the Federal Reserve Bank of Richmond, asked him to comment on the dispute with Coinbase. The SEC has issued a Wells Notice to Coinbase (potentially based on suspicions that Coinbase may have marketed unregistered securities). In response, Coinbase sued the agency, attempting to force it to establish new rules for the crypto industry.
Barkin: “Why won’t the SEC issue rules for this market?”
“Because the rules already exist. And let me be clear—this is an area where most operations are non-compliant. Our agency has already issued rules regarding exchanges, broker-dealers, asset custody advisors, and how to register securities offerings. These rules are already in place. New technology doesn’t make them inconsistent with the public policies established by Congress.”
“They’re full of conflicts.”
“We’ve examined the intermediary institutions in between,” he said. “Financial intermediaries play a node-like role—if there are securities on their platforms, they need to meet compliance requirements.”
“We stand ready to help those intermediaries achieve compliance. But I must say, their business models are often built on non-compliance. Their business models tend to commingle customer funds and are filled with conflicts of interest. Tom, we would never allow the New York Stock Exchange to operate as a market maker or hedge fund directly on its own exchange, mix all these functions together, and raise capital, use leverage, and lend through tokens without proper public disclosure. The only thing we require with tokens is registration and full, fair, and truthful disclosure. Intermediaries must also register. Conflicts of interest must be properly managed, and they must have time-tested rules against fraud and manipulation.”
Gensler then elaborated on the SEC’s view of how securities regulation applies to cryptocurrencies, summarizing a legal principle known as the Howey Test: “If the public invests money, expecting profits derived from the efforts of others in a common enterprise, that is a security—an investment contract.”
“We Still Don’t Know Who Satoshi Is”
He also spoke broadly about the disconnect between the crypto-native world and how governments view the industry, arguing that most so-called “decentralized” platforms or protocols are actually centralized to some degree around a small number of operators.
“We still don’t know who Satoshi Nakamoto is—she, he, or they? This field is built on the idea of avoiding centralization, even though finance throughout history has tended toward centralization. To be decentralized requires a lack of authority, being anti-commercial bank, anti-central bank, and operating off-grid globally. Yet when they go bankrupt and enter bankruptcy court, they become highly dependent on the law. You know what we’ve seen.”
“But here’s a domain that has emerged—one where retail investors 24/7, around the globe—not just in U.S. markets but primarily international ones—are investing their hard-earned money hoping for a better future, and at the core of this are securities… It’s misleading to claim these systems are highly decentralized—they tend to be centralized.”
“Three of the Recent U.S. Bank Failures Were Tied to Cryptocurrency”
At the end of his remarks, Gensler discussed the growing linkages between cryptocurrency and traditional finance, framed within the context of whether a runaway sector could spark a “fire.”
The collapses of First Republic Bank, Silicon Valley Bank, and Signature Bank were the second-, third-, and fourth-largest bank failures in U.S. history. Another smaller bank, Silvergate, also failed. SVB, Signature, and Silvergate all had significant exposure to crypto clients and assets.
“The recent banking problems—we had two of the four failed banks with significant crypto operations, one of which was a stablecoin issuer depositing funds there, leading to the stablecoin USDC briefly de-pegging. So at least three of these banks had some form of interconnectedness with the crypto market and crypto participants,” Gensler said.
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