US SEC Chairman’s pessimistic tone: Cryptocurrency businesses often non-compliant, filled with opacity and risk

US SEC Chairman is pessimistic about cryptocurrency industry: businesses are often non-compliant, lack transparency, and are risky.

Original Article: “SEC’s Gensler says crypto markets are ‘generally noncompliant’ and based on ‘false narrative’ of decentralization” by TheBlock

Translation by Wu Blockchain

During a Q&A session at the 27th annual Financial Markets Conference hosted by the Federal Reserve Bank of Atlanta yesterday, when asked about the SEC’s dispute with Coinbase and the general regulation of cryptocurrencies, SEC Chairman Gensler gave a pessimistic evaluation of the legal situation of the entire crypto economy:

●Their business models often rely on non-compliance, mixing customer funds, and conflicts of interest.

●In contrast, the SEC will never allow the New York Stock Exchange to operate like a crypto platform, where an exchange may trade its own ledger on its own platform, act as a market maker or hedge fund, or borrow its own tokens without publicly disclosing what it is doing.

●Gensler also pointed out that three out of the four recent bank failures in the United States “had a lot of cryptocurrency exposure,” emphasizing that the closer the connection between the traditional financial world and the crypto world, the greater the possibility of “financial market risk.”

On Coinbase and the “generally non-compliant” crypto market

The conference began with a speech about the Securities and Exchange Commission’s efforts to prevent systemic contagion in the traditional banking system. When talking about digital banks, Gensler said, “I am not talking about a 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 (possibly based on suspicion that Coinbase may have marketed unregistered securities), and in response, Coinbase has sued the agency in an attempt to force it to create new rules for the crypto industry.

Barkin: “Why won’t the SEC create rules for this market?”

“Because the rules are already there, and it should be clear that this is an area where the vast majority of operations are not compliant. Our agency has already issued rules on exchanges, broker-dealers, asset custodians, and how to register securities offerings. These rules already exist, and new technologies do not make them inconsistent with the public policies established by Congress.”

“They are full of conflicts.”

“We have reviewed the intermediaries in the middle,” he said. “Financial intermediaries play a nodal role in it, and if securities are on their platforms, they need to comply with compliance requirements.”

“We are ready to help those intermediaries meet compliance requirements at any time. But I have to say that their business models are often built on non-compliance. Their business models tend to mix customer funds together, and there are many conflicts of interest. Tom, if the New York Stock Exchange operates as a market maker, hedge funds operate directly on the exchange, and all these things are mixed together, and funds are raised, leveraged, and borrowed through tokens without proper disclosure, we will not allow it. The only requirement we have for tokens is registration and comprehensive, fair, and truthful disclosure, and intermediaries also need to be registered. Deal with conflicts of interest and ensure that they have time-tested anti-fraud and anti-manipulation rules.”

Then, Gensler elaborated on the SEC’s concept of how securities regulation relates to cryptocurrency, summarizing a legal principle called the Howey test. “If the public invests funds and expects to profit from the efforts of others in a common enterprise, it is a security, an investment contract.”

“We still don’t know who Satoshi Nakamoto is”

He also extensively discussed the disconnect between the crypto-native ecosystem and how governments view their industry, stating that most “decentralized” platforms or protocols are actually run around a small number of operators to some extent.

“We still don’t know who Satoshi Nakamoto is, she, he, or they? This is a field built on a certain concept, that is, not using centralization, even though finance has tended to be centralized since ancient times. To be decentralized, it needs to be lacking in authority, anti-commercial banks, anti-central banks, and off-grid methods worldwide. However, when they go bankrupt and enter bankruptcy court, it depends heavily on the law. You know what we see.”

“But there is a field where the public invests 7X24 hours a week, globally-not only in the US market but also mainly in the international market-investing their hard-earned money and hoping for a better future, which includes the core of securities…Claiming that these things are very decentralized is a wrong statement. They tend to be centralized.”

“Three recent bank failures in the United States are related to cryptocurrency”

At the end of his speech, Gensler talked about the increasing connection between cryptocurrency and traditional finance, which was done in the context of considering whether there might be “fires” in a potentially out-of-control area.

The collapses of First Republic Bank, Silicon Valley Bank, and Signature Bank are the second, third, and fourth largest bank failures in U.S. history. Another smaller bank, Silvergate, also failed. SVB, Signature, and Silvergate all have significant exposure to cryptocurrency customers and assets.

“The recent banking issues, where two of the four failed banks had significant cryptocurrency businesses, one of which was a stablecoin issuer who put their deposits in that account, leading to the stablecoin USDC briefly coming off its peg. So at least three such banks have some sort of connection between the cryptocurrency market and cryptocurrency participants.” Gensler said.

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