By Gabriel Edelman, Managing Director
Yesterday, former Securities and Exchange Commissioner (SEC) Chair Jay Clayton joined current SEC Chair Gary Gensler for the keynote address at the DACOM 2021 Digital Asset Compliance & Market Integrity Summit. They touched on several familiar themes, as summarized below.
SEC’s Core Role of Investor Protection
The speakers immediately agreed on the overarching theme that investor protection is a key touchstone for the SEC. Chair Gensler reiterated his belief that while the field shows “great promise,” it can develop “only in an environment of trust.” He expanded on his oft-used “wild west” description of crypto assets, noting a lot of projects have tried to circumvent regulatory authority.
In an interestingly pointed query, the current Chair asked about the challenges former Chair Clayton faced getting the “wild west” to register platforms back in 2017-2018. Clayton explained that, while traditional trading gravitates toward a single venue, digital assets have not centralized in that manner, being more globally dispersed and, thus, harder to pin down. Clayton noted that a lot of players thought they “could throw a fastball” past regulators. However, he praised the work done by the SEC at that time, including the SEC’s DAO Report, laying out that “just because you call it a token does not mean it is not a security.” They also returned to the theme of asymmetric information, with Chair Gensler stating: “investors get to decide how much risk to take,” but they should get “fair and full disclosure.”
Much Promise, Within Bounds
Chair Gensler noted that he is by no means a blockchain minimalist and, while his job was to stay “technology neutral,” that blockchain technology has been a catalyst for changes to payment systems. He lauded the technology for driving innovation outside cryptocurrency, as well. For example, he offered that trading platforms can be more accessible with the innovations currently underway. Still, he tempered this by returning to his point that while Decentralized Finance (DeFi) innovations “could be real, [they] won’t survive outside the public policy framework.” Regarding the long-term future of the assets class and related projects, he concluded that “technology does not last outside public policy norms.”
Other innovations touched upon included stablecoins, with Clayton complimenting Chair Gensler and his colleagues regarding their guidance in this area. Gensler noted they are working with various other agencies, “maybe hopefully with Congress as well,” and that stablecoins are “the poker chip at the casinos.” created “to make trading platforms more efficient.” But, he lamented that stablecoins “also allowed people around the globe to avoid anti-money laundering and tax compliance in jurisdiction after jurisdiction.”
Gensler raised that “similar activities should have similar regulation.” He compared current technology regulations to the development of the internet and how that was evaluated, noting that the same protections for anti-manipulation should be in effect for both retail and institutional markets that were adopted by Congress back in the 1930s.
Focus On Custody and Crypto Asset Exchanges
Much like when Clayton was the SEC Chair, it was apparent that custody and crypto asset exchanges remain top concerns for the agency. With regards to custody, Gensler noted that institutional investors want more progress in custodial services and that there are “a bunch of places to make progress,” including “ensuring [blockchain] is within the public policy framework.”
Regarding crypto asset exchanges, whether for trading or lending, traditional, centralized, or decentralized, Gensler highlighted the need for public policy and investor protection. He warned that if exchanges cannot be fully registered, they should work with the SEC to find ways to abide by rules and guard against manipulation while increasing transparency. He cautioned that where appropriate, the SEC will use the “enforcement tool,” but the “better path for these platforms is to work to get registered within the law.”
Gensler commented that trading is global and not always within the United States registered areas, thus, harder to monitor. He reiterated that platforms need to “come in, get registered” and that “they know what the list [of possible concerns] is.”
Agencies Working in Accord
Another theme was continued cooperation between United States regulatory and banking agencies. Former Chair Clayton noted regulatory cooperation between the SEC, CFTC, Treasury, Federal Reserve, and others. Chair Gensler stated that the lines of communication are good regarding cross-agency staffs, that the CTFC and SEC are working together to the extent that some tokens do not meet time-tested security definitions, and that the agencies continue sorting through the various blockchain product permutations. Still, Chair Gensler noted much work remains, and that “right now the public is not protected as it could be or ought to be in this space.”
Gatekeepers Are Key
Finally, Chair Gensler homed in on gatekeepers such as lawyers and accountants, noting their important role in preventing fraud and manipulation, ensuring that their clients’ new projects are brought to the SEC early in the process. He concluded the discussion with a direct message to such gatekeepers, advising them to think about the public interest, bring conversations to regulators early, do it within existing frameworks and laws, and that the “gatekeeper function is real.”