SEC Chairman Testifies About Digital Assets
In a wide-ranging hearing before the House Financial Services Committee on May 6, 2021, SEC Chairman Gary Gensler addressed a number of SEC regulatory priorities, including the recent short-squeeze on so-called “meme stocks,” gamification of securities trading, broker-dealer payment for order flow, and climate change disclosure. During his first testimony before Congress as SEC chair, Gensler also answered a series of questions on cryptocurrency and digital asset regulation. The statements on crypto regulation begin to shed some light on his official approach to regulating the digital asset security ecosystem.
Responding to questioning from Rep. Patrick McHenry (R-NC), Chairman Gensler said that the cryptocurrency market, which he noted is valued at more than $2 trillion, could benefit from “greater investor protection” under the SEC’s existing authority to regulate securities and asset managers. He referred to the agency’s recent request for public comment on broker-dealer custody of digital assets as an example of the SEC’s ongoing efforts in the space.
But Gensler also urged Congress to provide further authority to the SEC. As to the issue of investor protection in the crypto markets, Gensler testified, “I think it’s only Congress that could really address it. It would be good to consider whether to bring greater investor protection to the crypto exchanges.” Gensler noted, “Right now, the exchanges trading in these crypto assets do not have a regulatory framework, either at the SEC or our sister agency, the Commodity Futures Trading Commission. That could instill greater confidence.” He concluded Rep. McHenry’s questioning by saying, “There’s not a market regulator around these crypto exchanges, and thus there’s really not protection against fraud and manipulation.”
Rep. Warren Davidson (R-OH), noting Gensler’s prior experience teaching blockchain courses at MIT, later asked him about the steps the SEC could take to help the U.S. maintain its lead in the cryptocurrency space. Rep. Davidson also cited his own bi-partisan Token Taxonomy Act. Gensler replied that “there are things that we can do better and get done” at the SEC, but that Congress could also help fill regulatory gaps. Gensler added, “If one trades bitcoin in America today, . . . there’s not an investor protection regime that really protects as I think would be appropriate.”
Later, Rep. Josh Gottheimer (D-NJ), a co-sponsor of the Token Taxonomy Act, asked what the U.S. can do to maintain its preeminence in the capital markets, particularly with respect to digital assets. Gensler responded that “Our capital markets for decades have been part of our economic success story.” He continued, “Technology comes along, markets change, but we want to make sure we enhance our rules and get ahead . . . in the crypto space as well as in the traditional securities space, and always refresh our rules.”
In a hearing that lasted nearly four hours and featured two other witnesses, Gensler took the lion’s share of questioning from committee members on a host of topics not just limited to digital assets. In the area of crypto regulation, it is becoming more clear that Gensler sees a role for the SEC, but also recognizes some inherent limitations in the SEC’s current statutory authority. In response to questioning, he did not seem hesitant to tell Congress that it may need to act to broaden investor protections. And Gensler also seemed focused on both the role crypto exchanges play as well as their lack of a federal market regulator. At no point did he suggest that the SEC would be retreating from positions it has staked out under his predecessors. Only three weeks into his term, we expect to hear a great deal more from Gensler on these issues in the months to come.