SEC Chair Calls for Comprehensive Rules to Be Applied to Digital Assets

Key Insights:

• Chairman of the US SEC has pointed out that most cryptocurrencies constitute securities.
• Gensler said cryptocurrencies “are like digital gold, and therefore commodities.”
• The SEC chief also raised issues with stablecoins.

Gary Gensler, Chairman of the Securities and Exchange Commission (SEC) has underlined the need for comprehensive rules to be applied to digital assets.

In a speech on reducing risk and increasing transparency of derivatives, during the International Swaps and Derivatives Association Annual Meeting on Wednesday, Gensler said most cryptocurrencies constitute securities as the current administration looks to regulate digital assets.

According to Yahoo! Finance, Gensler continues to stake a claim for the SEC’s authority and oversight amidst a debate over which financial regulators should oversee cryptocurrencies. Gensler said in his speech:

“Most crypto tokens involve a group of entrepreneurs raising money from the public in anticipation of profits — the hallmark of an investment contract or a security under our jurisdiction. Most crypto tokens are investment contracts under the Supreme Court’s Howey Test.”

Crypto legislation on the way

The news comes amid a turbulent time for the cryptocurrency market. However, Gensler made his position on cryptocurrencies very clear stating that they “are like digital gold, and therefore commodities,” implying that the SEC should have greater jurisdiction over cryptocurrencies instead of the Commodities Futures Trading Commission, which currently regulates commodities.

At the same time, Senator Cynthia Lummis, along with Senator Kirsten Gillibrand, is preparing comprehensive legislation to regulate cryptocurrencies. Lummis believes that most cryptocurrencies are commodities, which would put them under the jurisdiction of the CFTC for trading spot markets and futures markets.

Lummis added, however, that crypto products should be bundled into securities, which would see them subjected to the Howey Test, a case law test that helps determine a security, and therefore falls under the SEC.

Further, in his speech, Gensler outlined how a derivative contract called a swap is based on a crypto asset, which makes it a security-based swap and subject to SEC oversight. Gensler added that derivative trading platforms — centralized or decentralized – that offer security-based swaps must register with the SEC.

“It’s important to recognize that if the underlying asset is a security, the derivative must comply with securities regulations,” Gensler concluded.

Concerns regarding stablecoins

What’s more, in a recent interview with Bloomberg News, Gensler said he was concerned that crypto exchanges aren’t putting up proper walls between different parts of their businesses such as custody, market-making, and offering a trading venue. He told the news outlet that the “commingling” of services may not be in clients’ best interests. 

“Crypto’s got a lot of those challenges – of platforms trading ahead of their customers,” Gensler said. “In fact, they’re trading against their customers often because they’re market-marking against their customers.” 

The SEC chief also raised issues with stablecoins, digital assets that are typically pegged to fiat currency. He pointed out that the three largest stablecoins – Tether, USD Coin, and Binance USD – are all affiliated with exchanges.

“I don’t think that’s a coincidence,” he said. “Each one of the three big ones were founded by the trading platforms to facilitate trading on those platforms and potentially avoid AML and KYC,” he added, referring to know-your customer controls and anti-money laundering.