Gary Gensler: The SEC is working hard to protect investors

During a hearing of the House Financial Services and General Government Subcommittee, SEC Chairman Gary Gensler said the SEC is working to bring a protection framework for investors in cryptocurrency exchanges “similar to” that of regulated institutions such as the New York Stock Exchange or Nasdaq.

Gensler explained, "Without a regulator, without some sort of regulation, it is much easier for market operators to use illegal tactics like 'front running' to get ahead of investors."

In the cryptocurrency market, "front-running" is inserting another transaction into the first place in the execution queue before a known future transaction occurs. A simple example is the trading process of an exchange. Suppose someone wants to buy a large amount of ETH on Uniswap (enough to cause the price of ETH to rise). One way to make a profit is to buy ETH before the price rises, and then sell ETH after the large-scale buying transaction drives the price of ETH up.

“We’ve all heard of Bitcoin, but there are now more than 80 coins with a market cap of more than $1 billion and 1,700 with a market cap of more than $1 million,” Gensler told the subcommittee. “The new data analysis will help the SEC monitor the industry, but it will also expand our funding.”

In prepared remarks to the committee, Gensler described cryptocurrencies as a "highly volatile and speculative asset class," making oversight of trading platforms critical. He noted that recent reported cryptocurrency trading volumes range from $130 billion to $330 billion per day, but that data is unreliable because it is unaudited and includes trades from unregistered cryptocurrency exchanges.

Among other cryptocurrency-related challenges facing the SEC, Gensler mentioned crypto lending platforms and decentralized finance (DeFi) platforms, which "pose a number of challenges for investors and SEC staff trying to protect them."

He added that the SEC is also seeking comments on brokers’ cryptocurrency custody arrangements.

Gensler’s appointment was welcomed by many in the cryptocurrency space, as he taught a blockchain course at MIT and in a 2019 op-ed he described cryptocurrencies and blockchain as “catalysts for change.”

Since he was confirmed as SEC chairman, he has taken a more measured line on cryptocurrencies, saying at the 2021 National Finance Industry Association conference that the SEC as a regulator "should be prepared to handle cases involving issues such as cryptocurrencies."

In his speech to the House of Representatives, he also stressed the need for "regulatory rules and regulators" to protect the legitimate interests of investors.