On the morning of March 4th, EST, Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), delivered a speech on the crypto market at his alma mater, the University of Pennsylvania. Gensler believes that the possibility of crypto platforms not trading any securities is almost zero, the SEC is considering how to jointly regulate crypto trading platforms with the Commodity Futures Trading Commission (CFTC), and calls for stablecoins, crypto companies custody and market making business Set up a new regulatory “firewall”.
The following is the full text of the speech:
It was a pleasure to be with you all at this event, especially since the University of Pennsylvania is my alma mater. What I know about law school is that library shelves are a great place to study and it’s quiet, although I don’t know if that’s still the case.
As is customary, I would like to point out that the following represents my own personal views and is not speaking on behalf of the Committee or SEC staff.
Today, you invited me to talk about the roughly $2 trillion crypto market.
In February, you may have all noticed a Super Bowl ad for several crypto platforms. This isn’t the first time we’ve seen some new innovations play out at the biggest TV event of the year.
Seeing these commercials reminds me of subprime lender AmeriQuest advertised at the Super Bowl on the eve of the financial crisis, and then it folded in 2007. A few years ago, the media Axios reported that “during the Super Bowl in 2000, 14 Internet companies advertised, most of which are now out of business”. I know many in my audience were probably young at the time, but the Internet was relatively new in 2000. However, the bursting of the dot-com bubble caused a huge shock in our markets.
Therefore, advertising does not equal credibility. In the crypto space, there is a lot of innovation, but also a lot of hype. As in other startup fields, many projects can fail. This is just part of American entrepreneurship.
The SEC’s role is to oversee capital markets and our three-part mission: protecting investors, promoting capital formation, and maintaining fair, orderly, and efficient markets. In the context of policy, regulators are also concerned with preventing illegal activity, a role that is very important to us and our partners at the Treasury and Justice Departments; with regard to financial stability, this is important to all financial regulators.
There is no reason to treat the crypto market differently just because different technologies are used. We should be technology neutral.
Therefore, I would like to mention three areas where the SEC plays a role in this market: platforms, stablecoins and crypto tokens.
The first is crypto trading and lending platforms, whether they call themselves centralized or decentralized (DeFi).
These platforms have scale, with more than $100 billion worth of cryptocurrencies being traded on a daily basis recently.
The crypto market is highly concentrated, with most transactions taking place on only a few platforms. Among cryptocurrency-only exchanges, the top five platforms accounted for 99% of all transactions, with the two largest platforms accounting for 80% of transactions. In crypto-to-fiat transactions, 80% of the transactions take place on five exchanges. Likewise, the top five DeFi platforms account for nearly 80% of the platform’s total trading volume.
Additionally, these platforms may be trading securities. A typical trading platform has at least dozens of tokens. In fact, many people own more than 100 tokens. As I’ll mention later, many of the tokens traded on these platforms likely meet the definition of “securities.” While the legal status of each token depends on its own facts and circumstances, given the Commission’s experience with various security tokens and the trading of so many tokens, the likelihood that a crypto platform will not trade any securities is virtually nil.
Therefore, I asked employees to participate in some platform-related projects.
The first is to have the platform itself be registered and regulated like an exchange . Congress has given us a broad framework to regulate exchanges, and these crypto platforms play a role similar to traditional regulated exchanges. Therefore, investors should be protected in the same way.
The U.S. has the largest capital markets because investors have confidence in them. We set the rules for maintaining market integrity, preventing fraud and manipulation, and facilitating capital formation. If a company builds a crypto market that protects investors and meets our gold standard of market regulation, customers will be more likely to trust and have more confidence in that market.
In my opinion, regulation both protects and enhances investor confidence, just as traffic laws protect and enhance driver confidence. It is at the heart of how markets work.
Some have asked whether the current exemption for so-called Alternative Trading Systems (ATS) generally applies to crypto platforms. However, ATSs for equity and fixed income markets are typically used by institutional investors. This is quite different from crypto asset platforms, which have millions or even tens of millions of retail customers buying and selling directly on the platform without going through a broker. Therefore, I have asked staff to consider whether and how the protections afforded to other investors on exchanges with which retail investors interact apply to crypto platforms.
Second, crypto platforms currently list crypto commodity tokens and crypto security tokens, including crypto tokens as investment contracts and/or notes. Currently, SEC-regulated venues are used only for securities transactions. Therefore, I ask employees to consider how best to register and regulate platforms where securities and non-securities transactions are intertwined.
In particular, I have asked staff to work with the Commodity Futures Trading Commission (CFTC) to explore how we can use our respective mandates to work together on platforms that may trade crypto-based security tokens and commodity tokens.
The third area is around cryptocurrency custody . Unlike traditional exchanges, current centralized crypto trading platforms typically host their clients’ assets. Last year, more than $14 billion in value was stolen. I’ve asked staff how they can work with platforms to get them registered and regulated and best ensure the protection of client assets, especially if segregated custody is appropriate.
In addition, unlike traditional stock exchanges, crypto trading platforms can also act as market makers, so they can trade on the other side of the client for their own accounts on their own platforms as principals. Therefore, I ask employees to consider whether it is appropriate to separate the market-making function .
We recently accused BlockFi of failing to register the offering of its retail crypto lending products, among other violations, as it involved a crypto lending platform. The settlement makes clear that the crypto market must comply with time-tested securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940. It further demonstrates the Commission’s willingness to work with crypto platforms to determine how they comply with those laws.
BlockFi agreed to try to bring its business into compliance with the Investment Company Act, and its parent company announced its intention to register offers and sales of new loan products under the Securities Act of 1933.
The second area is the $183 billion (and growing) stablecoin market. Stablecoins are generally not used in the commercial world except for their use on crypto platforms. Typically, you wouldn’t use them to buy coffee at Good Karma on the way from the city center to class. They are not issued by the central government, nor are they legal tender.
However, stablecoins raise three important sets of policy questions while providing functions similar to, and potentially competing with, bank deposits and money market funds.
First, stablecoins raise public policy considerations around financial stability and monetary policy . These policy considerations are the basis for bank regulators’ oversight of deposits and our oversight of money market funds and other types of securities at the SEC. Many of these issues were discussed in the most recent Presidential Task Force report. For example, what backs these tokens so that we can ensure that these assets are actually convertible to USD one-to-one? Furthermore, stablecoins are an integral part of the crypto ecosystem, and a loss of a peg or issuer failure could jeopardize one or more trading platforms and could have repercussions in the wider crypto ecosystem.
Second, stablecoins raise questions about how they might be used for illicit activities . Stablecoins are primarily used for crypto-to-crypto transactions and as such may help platforms and users avoid or delay entry or exit from the fiat banking system. As such, the use of stablecoins on platforms may help those seeking to sidestep a range of public policy goals associated with our traditional banking and financial systems: anti-money laundering, tax compliance, sanctions, and more.
Third, stablecoins raise issues of investor protection. Stablecoins were first adopted and continue to be used primarily in crypto trading and lending platforms. About 80% to 85% of transactions and lending on these platforms involve stablecoins. When trading on the platform, the tokens are often owned by the platform, and the customer and the platform are only counterparties. The three major stablecoins are created by trading or lending platforms themselves. American retail investors do not have direct redemption rights for the two largest stablecoins by market value. There are conflicts of interest and market integrity issues and will benefit from more supervision.
Then, from a policy standpoint, are all the other crypto tokens. The truth is that most crypto tokens involve a group of entrepreneurs raising money from the public in the hope of making a profit — a sign of an investment contract or a security in our jurisdiction. Some, maybe only a few, are like digital gold; they may not be securities. Even less, if anything, actually operates like money.
Our existing laws will not disappear when new technologies emerge.
In the 1930s, Congress slashed the definition of securities. Since then, our laws have been revised many times, Congress has a broader brush, and the Supreme Court has weighed it many times. They all said that basically, in order to protect the public from fraud, to protect the public from scammers, people who raise money from the public have to register and make basic disclosures at the “police department”: the SEC.
You may be wondering: How do crypto tokens become securities?
The Supreme Court’s 1946 Howey test stated that an investment contract exists when funds are invested in an ordinary enterprise with a reasonable expectation of profit from the efforts of others.
Jay Clayton, former chairman of the SEC, said it, and I repeat: without prejudging any one token, most crypto tokens are investment contracts under the Howey test. Even before the Howey test, in the early years of our federal securities laws, some entrepreneurs were told they had to register their chinchillas, whiskey-backed collateral, oyster beds and live silver fox products as securities,” according to Claiming that the sale of…property is just a camouflage, not the substance of the transaction.”
Today, many entrepreneurs raise funds from the public by selling crypto tokens, with the expectation that managers will build an ecosystem where the tokens are useful and attract more users to the project.
Therefore, it is important that we strive to have crypto tokens registered as securities with the SEC. Issuers of crypto tokens that are securities must register their offers and sales of these assets with the SEC and comply with our disclosure requirements, or satisfy an exemption. Issuers of all types in every market are successfully registering and providing disclosures on a daily basis. If there are indeed forms or disclosures that cryptoassets are truly unable to comply with, our staff will discuss and assess those issues here. Under our laws, any token that is a security must comply with the same rules of market integrity as other securities.
In short, new technologies are emerging all the time. The question is how do we adapt to this new technology. But make no mistake: we already live in a digital age, and this is nothing new. We can already buy a cup of coffee with money stored in a smartphone app, and the days of physical stock certificates ended decades ago. People raising money to fund their projects is nothing new. Crypto may provide new ways for entrepreneurs to raise capital and trade for investors, but we still need investor and market protection.
We already have strong ways to protect investors who trade on the platform. When entrepreneurs want to raise capital from the public, we have strong ways to protect investors.
We should apply these same protections in the crypto market without risking breaking the ’90 securities laws and creating some regulatory arbitrage or loopholes.
thank you all.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/the-full-text-of-the-speech-at-penn-the-chairman-of-the-us-sec-exploring-the-joint-supervision-of-the-platform-with-the-cftc/
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