Gensler: SEC plans to regulate crypto exchanges

The Securities and Exchange Commission (SEC) is planning a series of changes that could aggressively tighten its regulation of the cryptocurrency industry, including in the oversight and operation of centralized and decentralized exchanges.

In a speech Monday (April 4) at the University of Pennsylvania Law School, SEC Chairman Gary Gensler spoke about the need to provide greater protection for investors on “asset platforms cryptocurrencies, which have millions, if not tens of millions, of retail customers who buy and sell directly on the platform without going through a broker.

The commission, he announced, plans to regulate centralized and decentralized exchanges involved in trading or lending cryptocurrencies by requiring them to register with the agency.

See also: Gensler: SEC is coming for crypto exchanges

The SEC chairman also suggested that he heard the central message of President Biden’s executive order on cryptocurrency regulation: the various competing government agencies must work together to come up with a common regulatory framework for digital assets.

Gensler revealed that he ordered his agency to make peace with the Commodity Futures Trading Commission (CFTC), with which the SEC had been at odds for six months over whether cryptocurrencies are securities or raw material.

Share and share alike

The two regulatory agencies with a strong case for policing cryptocurrency activity have been contesting the issue for years. Gensler, like his predecessor Jay Clayton, argues that virtually all “crypto tokens are investment contracts” as defined by law.

However, in his Monday speech, Gensler said something that may well mark a sea change in the SEC’s outlook on the matter.

“Crypto platforms currently list both crypto commodity tokens and crypto security tokens,” he said, “including crypto tokens that are investment contracts and/or notes.” .

Following this, Gensler said he asked SEC staff to consider how “we might jointly approach these platforms that could trade both crypto-based security tokens and certain commodity tokens. , using our respective authorities”.

Overall, Gensler’s SEC has had the upper hand in the battle for control of crypto: it can, and frequently does, take enforcement action against cryptocurrency issuers and exchanges for sale illegal unregistered titles. It recently expanded that to include crypto lending programs, forcing BlockFi to cough up a $100 million settlement on its lending offer.

Related: BlockFi’s $100M Settlement With SEC Sparks Internal Discussion

The CFTC has no real reason to do this if a cryptocurrency is a commodity token – so the SEC, by dint of what the crypto industry denounces as “regulation by enforcement”, creates precedents – although none have yet been tested in court.

Last month, CFTC Chairman Rostin Behnam made an aggressive plea for more crypto authority before a clearly supportive Senate Agriculture Committee, pointing out what he called a “notable shortcoming.” in the law on “what constitutes a security and what constitutes a commodity”. .”

Read more: In Senate Hearing, CFTC Chairman Behnam Escalates Battle With SEC Over Crypto Oversight

Behnam also requested more resources to create an enforcement and monitoring division.

Real control

On the other hand, by seeking control of crypto exchanges, Gensler would make the CFTC a de facto junior partner, at best.

As for exchange registration and regulation, Gensler suggested that might not be too difficult to accomplish, noting that the top five crypto-only trading platforms account for 99% of the market. He added that the top five exchanges with on-ramping and off-ramping crypto-to-fiat account for 80% of the market, and the top five decentralized exchanges (DEXs) also account for 80% of that market’s activity.

Two changes could have a substantial impact on how cryptocurrency is bought and sold. First, the SEC is considering forcing exchanges to separate custody of crypto assets – something virtually all are doing through “hosted” wallets.

But with more than $14 billion stolen last year, Gensler said the SEC is looking to “ensure the best possible protection of client assets, in particular, whether it would be appropriate to separate custody.”

Second, Gensler said the agency is considering directing both lending and trading exchanges to “separate market-making functions” — something that could have a profound impact on decentralized finance (DeFi). DEXs operate through automated market makers, usually referred to as AMMs.

MAs replace investor pools that lock cryptocurrency into lending pools that provide the liquidity that traditional exchanges provide through market-making firms. It’s unclear if Gensler specifically included DeFi AMMs in this proposal, but it would be difficult to mine DEXs without them.

See also: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?

These AMM liquidity pools are also a primary source of DeFi investments, in the form of liquidity mining.

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