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US Securities and Exchange Commission Chairman Gary Genlser appeared before European lawmakers Wednesday to discuss cryptocurrency regulation, digital engagement practices and the controversial payment for order flow practice. Given the borderless nature of today’s financial system, Gensler said, collaboration between nations is essential.
“Our global markets are inextricably linked, with money flowing between them in microseconds,” said Gensler via Zoom during a European Parliament committee hearing on economic and monetary affairs. “New financial technologies continue to change the face of finance for investors and businesses.”
Gensler acknowledged growing investor interest in the digital asset space, but warned that without greater regulatory oversight, the industry will not advance.
“While I’m technology-neutral, I am anything but public policy-neutral, and as new technologies come along, we need to be sure they’re achieving core public policy goals,” he said. “I’d like to note that financial innovations throughout history don’t thrive outside the public policy framework — they just don’t last that long unless we bring them inside.”
When thinking about oversight around the cryptocurrency space, Gensler said, consumer protection is at the forefront, especially if tokens are considered securities, which under the current framework, they are.
“I think that many of these crypto tokens have entrepreneurs behind them and the investing public is looking and hoping for profit based upon the efforts of that entrepreneurial group or the sponsors and the like. Under our US laws, reviewed by our Supreme Court, that often makes those investment contracts under our laws a security, because that’s how Congress wrote our securities laws in the 1930s,” said Gensler.
Under US securities laws, securities must maintain high investor disclosure in order to protect against fraud, Gensler said.
The SEC head also discussed payment for order flow, the controversial practice where brokers are compensated for directing client trades to market makers. The practice is disadvantageous to traders and there is a problem of concentration in the market, Gensler said.
“It’s really spread around this small handful of market makers that are buying a significant portion of the retail activity in the US,” he said “We have probably approximately half of our market now not going to the lit exchanges, but rather going to the dark poles and the wholesalers that are also dark. It is an inherent conflict.”
The discussion follows Gensler’s comments from earlier this week, when he revealed that banning payment for order flow is a possibility. Shares of Robinhood, which earns a significant profit from payment for order flow and allows the application to offer commission-free trading, fell on the news. Robinhood stock fell almost 7% Monday before rising and trading slightly higher Wednesday.
“We’re learning from what you’re doing and trying to adopt,” Gensler said, referring to trading regulation in European markets. “Of course, we have different laws and different legal authorities, but we are hoping to adopt some of the good work you’ve done there and learn from it.”