09.14.2021

Gensler: Crypto Needs More Robust Investor Protection

From the testimony of Gary Gensler Before the United States Senate Committee on Banking, Housing, and Urban Affairs Sept. 14, 2021 Washington, D.C.

Good afternoon, Chairman Brown, Ranking Member Toomey, and members of the Committee. I’m honored to appear before you today for the first time as Chair of the Securities and Exchange Commission. I’d like to thank you for your support in my confirmation this spring. As is customary, I will note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.

We are blessed with the largest, most sophisticated, and most innovative capital markets in the world. The U.S. capital markets represent 38 percent of the globe’s capital markets.1 This exceeds even our impact on the world’s gross domestic product, where we hold a 24 percent share.2

Furthermore, companies and investors use our capital markets more than market participants in other economies do. For example, debt capital markets account for 80 percent of financing for non-financial corporations in the U.S. In the rest of the world, by contrast, nearly 80 percent of lending to such firms comes from banks.3

Our capital markets continue to support American competitiveness on the world stage because of the strong investor protections we offer.

We keep our markets the best in the world through efficiency, transparency, and competition. These features lower the cost of capital for issuers, raise returns for investors, reduce economic rents, and democratize markets. That focus on competition is in every part of the SEC’s work, particularly with respect to market structure.

We can’t take our remarkable capital markets for granted, though. New financial technologies continue to change the face of finance for investors and businesses. More retail investors than ever are accessing our markets. Other countries are developing deep, competitive capital markets as well.

The SEC is a remarkable organization. In just under five months, I have gotten to know many of the dedicated 4,400 people across 12 offices. Our agency covers nearly every part of the $110 trillion capital markets. Those markets touch many Americans’ lives, whether they’re investing for their future, borrowing for a mortgage, taking out an auto loan, or taking a job with a company that’s tapping our capital markets. We engage with companies raising money and with the key parties that sit in between companies and investors, including accountants, auditors, and investment managers.

While just last month we authorized voluntary return to office, we’ve largely been remote for 18 months now. I cannot compliment the dedication of this staff enough for their service to the American public.

In this testimony, I will cover some of the broad themes from the SEC’s unified agenda,4 before closing with a few words on our enforcement and examinations divisions.

• Market Structure

• Predictive Data Analytics

• Issuers and Issuer Disclosure

• Funds and Investment Management

Market Structure

I’ll start with market structure.

In every generation, we have to look at how we can revisit our rule sets to better enhance efficiency and competition in our markets. Markets work best when they are transparent and competitive. Issuers and investors alike benefit from that competition because it lowers the cost of capital.

I have asked staff to take a look at five market structure-based projects across our $110 trillion capital markets: the Treasury market, non-Treasury fixed income markets, equity markets, security-based swaps, and crypto asset markets.

Treasury Market

First, let me turn to the Treasury market. This $22 trillion market5 is integral to our overall capital markets as well as to global markets. It is the base upon which so much of our capital markets are built. Treasuries are embedded in money market funds; myriad other markets and financial products are priced off of Treasuries; and they are an essential part of our central bank’s toolkit. They are called the “risk-free asset” not just here in the U.S. but globally. They are how we, as a government and as taxpayers, raise money: we are the issuer.

During the start of the Covid crisis, liquidity conditions in the Treasury market deteriorated significantly. This wasn’t the first time we observed challenges in this market, though. Back in October of 2014, there was the Treasury “Flash Crash.” In the fall of 2019, we had significant dislocations in Treasury funding markets, called the Treasury repo market.

I’ve asked staff to work with our colleagues at the Department of the Treasury and the Federal Reserve on how we can better enhance resiliency and competition in these markets. To the extent that this market is more efficient, that could potentially save money for U.S. taxpayers and lower the cost of our debt.

To the extent that this market is more resilient, it is less likely to add to systemic risks during times of stress.

We will seek to consider some of the recommendations that external groups, like the Group of Thirty 6 and Inter-Agency Working Group for Treasury Market Surveillance, 7 have offered around potential central clearing for both cash and repo Treasuries.

Further, I’ve asked staff to reconsider some initiatives on Treasury trading platforms, and also to consider how to level the playing field by ensuring that firms that significantly trade in this market are registered as dealers with the SEC.

Crypto Assets Market

I’ll turn to a newer market structure issue: crypto assets.

Right now, large parts of the field of crypto are sitting astride of — not operating within — regulatory frameworks that protect investors and consumers, guard against illicit activity, and ensure for financial stability.

Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending. Frankly, at this time, it’s more like the Wild West or the old world of “buyer beware” that existed before the securities laws were enacted. This asset class is rife with fraud, scams, and abuse in certain applications. We can do better.

I have asked SEC staff, working with our fellow regulators, to work along two tracks:

One, how can we work with other financial regulators under current authorities to best bring investor protection to these markets?

Two, what gaps are there that, with Congress’s assistance, we might fill? At the SEC, we have a number of projects that cross over both tracks:

  • The offer and sale of crypto tokens
  • Crypto trading and lending platforms
  • Stable value coins
  • Investment vehicles providing exposure to crypto assets or crypto derivatives
  • Custody of crypto assets

With respect to investor protection, we’re working with our sibling agency, the CFTC, as our two agencies each have relevant, and in some cases, overlapping jurisdiction in the crypto markets. With respect to a broader set of policy frameworks, we’re working with not only the CFTC, but also the Federal Reserve, Department of Treasury, Office of the Comptroller of the Currency, and other members of the President’s Working Group on Financial Markets on these matters.11

Further, I’ve suggested that platforms and projects come in and talk to us. Many platforms have dozens or hundreds of tokens on them. While each token’s legal status depends on its own facts and circumstances, the probability is quite remote that, with 50, 100, or 1,000 tokens, any given platform has zero securities. Make no mistake: To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they qualify for an exemption.

I am technology-neutral. I think that this technology has been and can continue to be a catalyst for change, but technologies don’t last long if they stay outside of the regulatory framework. I believe that the SEC, working with the CFTC and others, can stand up more robust oversight and investor protection around the field of crypto finance.

The entire testimony can be read here.

Source: Senate Committee on Banking, Housing, and Urban Affairs

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