U.S. SEC Chairman Gensler made his first major statement on cryptocurrency since taking office, emphasizing the urgency of regulation and investor protection

At the Aspen Security Forum on Tuesday, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler stressed the need for stricter and more effective investor protections for cryptocurrencies.

“Right now, we don’t have adequate investor protection in crypto,” Gensler said. “Frankly, at this point in time, it’s more like the Wild West.”

He noted that the crypto asset class is rife with fraud, scams and abuse in certain applications and requires more congressional authority to prevent transactions, products and platforms from falling into regulatory loopholes.

Gensler, a former Goldman Sachs partner, served as chairman of the U.S. Commodity Futures Trading Commission (CFTC) under President Obama; today’s speech was his first major statement on cryptocurrencies since taking over the SEC in April.

Gensler said that while most cryptocurrencies do not meet the traditional three-part definition of "currency" (i.e. medium of exchange, unit of account and store of value), the blockchain technology behind them may have an intrinsic value.

He said this is what he learned while teaching a cryptocurrency course at MIT: “In that job, I came to believe that, despite a lot of hype masquerading as reality in the crypto space, Satoshi’s innovation was real.”

He believes that the blockchain revolution launched by Satoshi Nakamoto in 2008 is not just a fashion, but a real value proposition for the future of the Internet.

He said: "I think there is something real about distributed ledger technology, which can transfer value on the internet... Essentially, Satoshi Nakamoto was trying to create a form of private money without a central intermediary, like a central bank or commercial bank... First of all, crypto assets provide a digital, scarce vehicle for speculative investment. So in that sense, one could say that they are a highly speculative store of value."

Gensler touched on several aspects of the crypto business during his speech.

Digital tokens: Gensler said many digital tokens, because they are investment contracts, are offered and sold as securities and should be regulated. “I believe we now have a crypto market where many tokens may be unregistered securities that are not subject to disclosure or market oversight. This leaves prices vulnerable to manipulation and leaves investors vulnerable,” he said. He said he has urged staff to continue protecting investors in the case of unregistered securities sales. Gensler believes that the vast majority of crypto tokens and initial coin offerings (ICOs) violate U.S. securities laws.

Crypto trading platforms: Gensler noted that there are more than 50 tokens listed on a typical trading platform, and that these platforms have major gaps in investor protection. The question is whether any of these tokens are securities that fall under the SEC's jurisdiction. "To the extent that these trading platforms are securities, they must be registered with the SEC under our laws unless they qualify for an exemption," he said.

Stablecoins: Gensler noted that crypto-to-cryptocurrency transactions are often done using stablecoins, which are crypto tokens pegged to the value of fiat currencies. Gensler is concerned that these stablecoins could be used as part of a broader effort to circumvent anti-money laundering and tax compliance laws, and could also affect national security. He said these stablecoins could also be securities and investment companies, and if so, should fall under the SEC’s jurisdiction.

Bitcoin ETF: Several companies have sought SEC approval for a Bitcoin ETF, but all have been rejected. However, Gensler noted that there are already many vehicles that invest in Bitcoin, such as the closed-end Grayscale Bitcoin Trust, and mutual funds that invest in Bitcoin futures. He expects companies to apply for ETFs under the existing Investment Company Act of 1940, which regulates mutual funds and closed-end funds and provides important investor protections. He said, "Given these important protections, I look forward to the staff's review of such filings (Bitcoin ETFs), especially if they are limited to Bitcoin futures traded on the CME."

Custody of Crypto Assets: Gensler said the SEC is seeking comment on broker-dealers’ crypto custody arrangements and issues related to investment advisers. “Custody protections are key to preventing the theft of investor assets, and we will seek to maximize regulatory protections in this area,” he said.

Gensler dodged questions about Ethereum’s regulatory status, declining to comment on whether it was a security.

Gensler is seen as a champion of financial innovation, and for good reason. He said crypto “has been and will continue to be a catalyst for change in the financial and monetary sectors.”

However, he made it clear that the crypto space is in desperate need of additional regulation before it can move forward. "For those who want to encourage crypto innovation, I would point out that throughout history, financial innovation has flourished outside of our public policy frameworks. If this space is to continue, or fulfill its potential to be a catalyst for change, we would do well to bring it into a public policy framework."

Gensler said in an interview with Bloomberg today that his extensive background in blockchain and cryptocurrency does not mean he will make any concessions for the nascent industry. He stressed that while he is neutral and even "interested" in the technology, he is "not neutral on investor protection."

“I’ve asked the staff to use all of our authorities wherever possible,” he said in the interview, but he did not comment on the possibility of approving a bitcoin ETF.