Regulation
Gensler slams cryptocurrencies after House passes bill opening ‘regulatory loopholes’
Dive summary:
- Securities and Exchange Commission Chairman Gary Gensler blasted the cryptocurrency market for “frauds and scams” a day after the House of Representatives passed legislation that he said would create a flawed legal framework for digital assets.
- “It all comes down to the risk of non-compliance with U.S. law,” Gensler said Thursday, referring to his concerns about lax regulation of cryptocurrencies. “It all comes down to fraud and scams — this is an area where some of the leaders in the industry are currently in jail, or awaiting jail or extradition.”
- The world’s 15,000 to 20,000 cryptocurrencies function more as ransomware tools than currencies, with “a number of very significant players in the middle of this market,” Gensler said at an Investment Company Institute eventSo-called exchanges “operate in an adversarial manner,” he said, adding: “We would never let a traditional exchange trade against its customers and be an active market maker.”
Dive Overview:
A growing number of companies in the United States and other countries have turned to digital assets as an alternative to conventional currencies, according to Deloitte.
“A growing number of businesses around the world are using bitcoin and other crypto and digital assets for a variety of investment, operational and transaction purposes,” Deloitte said in a June 2023 report, adding that as of the end of 2022, approximately 2,352 U.S. businesses accepted bitcoin.
Businesses may find that cryptocurrencies open up access to new demographics, including “a more tech-savvy, forward-thinking customer base with disposable income for luxury goods and services,” Deloitte said, citing a survey that found 85% of merchants see crypto payments as a way to reach new customers.
Additionally, corporate use of cryptocurrencies can increase staff awareness of the technology and prepare staff for a possible broader rollout of central bank digital currencies, Deloitte said.
At the same time, weak or non-existent regulation of digital assets can lead to instability in global finance, according to the World Economic Forum.
“At their current level, cryptoassets represent a small part of the global financial system, but even so, the lack of regulation in some jurisdictions and the absence of a harmonized regulatory framework raise concerns about whether this market could pose a threat to global financial stability,” the World Economic Forum said in a May 2023 report.
“The impact on the macroeconomic environment could lead to ripple effects, market contagion, liquidity crises, sudden job losses and loss of funds for investors,” the forum said.
In the U.S. House of Representatives, sponsors of the 21st Century Financial Innovation and Technology Act said the legislation would clarify the regulatory landscape for digital assets while enabling innovation and market growth.
The law would establish a “regulatory framework for digital assets that protects consumers and investors while ensuring the United States is a leader in blockchain innovation,” said Rep. French Hill, an Arkansas Republican and one of the bill’s sponsors. said in a statement after its adoption on Wednesday.
Gensler disagrees. In a statement before the House vote, he said the legislation “would create new regulatory loopholes and undermine decades of precedent in investment contract oversight, exposing investors and financial markets to immeasurable risks.”
Among its many flaws, the bill would remove blockchain investment contracts from the statutory definition of securities, depriving investors “of the time-tested protections of most federal securities laws,” Gensler said.
The legislation would remove cryptocurrency investment contracts from SEC oversight by allowing issuers of cryptocurrency investment contracts to “self-certify that their products are a ‘decentralized’ system” and qualify as a special class of digital products, he said.
“The self-certification process contemplated by the bill jeopardizes investor protections, and not just in the cryptocurrency space,” Gensler said. “It could harm the broader $100 trillion financial markets by providing a pathway for those trying to evade rigorous disclosures, prohibitions against the loss and theft of customer funds, SEC enforcement, and investors’ private rights of action in federal courts.”
The House of Representatives approved the digital asset legislation by a vote of 279 to 136. It is not yet clear whether the Senate will consider the legislation.