Gary Gensler, the Securities and Exchange Commission chairman, has said that exchanges should register certain digital assets with the regulatory agency. He also noted that the agency is stepping up its enforcement efforts.
Crypto Exchanges Regulation
Gensler has criticized the activities of digital asset exchanges, noting that they are not following proper rules and are allegedly betting against their customers.
In an interview with Bloomberg News, US Commodity Futures Trading Commission chairman Gary Gensler said he was concerned that crypto exchanges weren’t putting up proper walls between their various businesses. These range from market-making, custody, and offering a trading venue. He said the competing interests of their clients could lead to conflicts of interest.
Gensler noted that there are many challenges that crypto platforms face when it comes to competing with other companies. For instance, they often trade against their customers because they market-mark against them.
A good example is CampBX, a crypto exchange based in Atlanta. In 2018, Georgia’s banking and finance department issued a cease and desist order against CampBX for violating financial transaction regulations. Almost four years since the exchange suddenly shut down, its customers are still waiting for their money.
In response to the issue, CampBX has contacted a number of its customers who still don’t have their bitcoin back, according to Keyur Mithwala, the exchange’s founder. He said that most of its customers had received their balances in full.
Mithwala also refuted reports that CampBX would not return its customers’ funds. He noted that the number of people still waiting for refunds is less than 200. The exchange still has 190 of its former customers still issuing complaints on CampBX’s Know Your Customer (KYC) checks. Even though the company has shut down its operations, the queries of its customers’ assets remain unanswered.
Mithwala claimed that CampBX returned all of its bitcoin to its users. Richard, however, refuted this claim, stating that he had not seen proof of this. He also noted that one other person had received bitcoin from the company.
Regulating Crypto as Securities
Gary Gensler, the Securities and Exchange Commission chairman, is doubling down on his claim that digital assets are securities. He continues to maintain his claim to have the authority to oversee the regulation of cryptocurrencies.
In his speech at an industry conference on Wednesday, Gensler noted that most cryptocurrencies are not securities. Instead, they are investment contracts subject to the Supreme Court’s Howey Test. Entrepreneurs typically use these contracts to raise money for their projects.
Gensler also noted that cryptocurrencies are different from gold and other commodities. He suggested that the SEC have more authority over them than the commodities commission.
Senator Cynthia Lummis of Wyoming and Senator Kirsten Gillibrand of New York are working on a bill that would regulate cryptocurrencies. She believes that most of them are commodities and would fall under the jurisdiction of the Securities and Exchange Commission. However, they would have to follow a case law test, the Howey Test, to determine securities.
When it comes to derivatives, such as derivatives based on cryptocurrencies, the Securities and Exchange Commission would have to oversee them. Also, platforms that offer security-based swaps would need to register with the agency. According to Gary Gensler, the derivatives trading platforms should comply with the agency’s regulations.
Security or Not?
In 2015, the Securities and Exchange Commission charged app developer Abra for failing to register as a broker-dealer and conducting proper due diligence when selling security-based swaps to investors. The agency’s chairman, Gary Gensler, warned that they might bring more cases as it adds more enforcement to curb such misconduct.
The US Securities and Exchange Commission sued Ripple for allegedly offering illegal securities through the XRP. It argued that XRP is a virtual currency instead of an investment contract such as a stock.
The agency claimed that the XRP is considered a security because of its nature, which means the firm used it to fund its operations. In addition, the crypto also enriched the company’s executives, they said.
Hiding Behind “Regulated Securities”
Last year, the US Securities and Exchange Commission stated that it was considering new regulations related to the use of stock-trading apps following a frenzy involving GameStop.
The agency said the market’s recent volatility was not a threat to the system. However, it noted that the sudden surge of trading could have affected the efficiency of the market. It also suggested that regulators take a look at ways to improve the efficiency of the market.
In January 2021, shares of GameStop spiked from $39 to $347 after retail investors started buying the stock. Many of them were attracted to the company by Robinhood, which allows users to trade stocks for free.
Due to the sudden increase in the stock price, some investors started bidding up the stock prices of GameStop and short-sellers, who were betting that the price would fall. It led to several brokerage firms halting trading and other popular companies.
Hence, lawsuits, consumer outrage, and congressional hearings came up. Due to this, the SEC said it would look more into the events that could make a brokerage restrict stock trading.
The Stablecoins Issue
The SEC also raised concerns about stablecoins, digital assets typically linked to a fiat currency. The three biggest stablecoins are Binance USD, USD Coin, and Tether. According to Gensler, these three companies are all associated with exchanges.
Gensler noted that the three companies were not a coincidence. They were all founded by the trading platforms, which allowed them to avoid anti-money laundering and Know Your Customer controls.
One of the biggest stablecoins, Tether, has over $83 billion and ties to Bitfinex. Another primary stablecoin, known as USDC, is issued by a group of companies, including Coinbase Global Inc. Binance, the world’s largest exchange, and is also associated with Binance USD.
In response to Gensler’s comments, Binance said that its stablecoin adheres to strict guidelines and is transparent with its users. Other companies such as Bitfinex and Coinbase did not comment.
Members of Congress have also raised concerns about stablecoins in the US Congress. For instance, after TerraUSD, a primary stablecoin, lost its dollar peg over the weekend, some members of the House of Representatives demanded that the government stop supporting these currencies.
Senator Mark Warner of Virginia said the situation highlighted a framework to ensure that stablecoins are not overvalued. In an interview on Tuesday, he noted, “the market disruption may have taken some of the air out of the overheated balloon.”