Amid last week’s collapse in the crypto markets, Gary Gensler, Chairman of the Securities and Exchange Commission (SEC), sent a serious warning to crypto investors. He called cryptocurrency a “highly speculative asset class” and reiterated the insufficient investor protection. From his perspective, regulating cryptocurrency now, at a time of market decline, is necessary.
During a speech at the FINRA Annual conference in Washington, D.C., on May 16, he suggested that investors do not have access to full and fair disclosure and that crypto regulation should be conducted on a securities basis.
“The investment public is not getting disclosures…When you make other asset purchases, we have this basic bargain, you the investing public can make your choices about what risks you take. There’s supposed to be full and fair disclosure, and people aren’t supposed to lie to you. Right now, many of these entrepreneurs come up with an idea … and they want to raise money from you,” Gensler commented.
The chairman warned investors against mistakenly believing that their cryptocurrency belongs to them. He noted that by using a digital wallet they basically transfer the ownership of crypto to the platform of such wallet. However, we are talking about custodial wallets.
“If the platform goes down, guess what? You just have a counter-party relationship with the platform. Get in line at bankruptcy court,” Gensler stated.
The SEC Chairman argued that crypto is not that decentralized, referring to several large trading and credit exchanges that handle most of the transactions. He insisted that basic investor protections should be ensured, such as market integrity, a ban on front-end clients, and measures to prevent fraud and manipulation.
He added that there are numerous cases when cryptocurrency platforms trade and make markets against investors.
“When [the platforms] take your custody, when they take those tokens, they can use them, they can trade them. It’s not like when you trade in the equity markets. They’re actually making markets against you,” Gensler said.
Gensler’s comments about cryptocurrency pitfalls came after TerraUSD’s Stablecoin and sister token Luna fell to near zero last week.
The SEC Chairman made the case for regulating stablecoins. Among other comments, he mentioned that the stablecoins which are used to trade various digital currencies often belong to trading platforms and that individual investors have no direct right to redeem the two largest stablecoins by market cap.
Gensler has been a supporter of crypto regulation and has often attempted to assert authority over asset class regulation by considering it within the definition of securities. However, the SEC and its Chairman have not announced specific rules to control the crypto market, instead encouraging crypto platforms to voluntarily subscribe to the SEC or undertake action against those players who do not comply with securities laws.