Crypto currency assets are a catalyst for change, but they need greater government oversight, Securities and Exchange Commission Chair Gary Gensler told the Senate Banking Committee today.
“We just don’t have enough investor protection on in crypto finance, issuance, trading, or lending…This asset class is rife with fraud, scams, and abuse in certain applications. The crypto area is trying to stay outside of investor protection…We can do better,” Gensler told a Banking Committee hearing.
Doing better, he added, would be enhanced with more funding from Congress for more people to regulate crypto assets.
Gensler said he wants the SEC, the Federal Reserve, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission; and the Treasury Department to see which of these areas they can do by themselves and which ones they would need additional authority from Congress:
• The offer and sale of crypto tokens
• Crypto trading and lending platforms
• Stable value coins
• Investment vehicles providing exposure to crypto assets or crypto derivatives
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• Custody of crypto assets
He said clarity is needed from Congress on how the federal regulatory agencies can work together on crypto issues such as transfer agents and custody.
Speaking on crypto during the hearing, Senator Elizabeth Warren (D-MA) said high unpredictable fees can make crypto assets dangerous to investors and the regulators need to step up.
But Montana Republican Steve Daines asserted overregulation could drive job overseas.
The lead Republican on the Banking Committee, Patrick Toomey of Pennsylvania, criticized Gensler for not having the SEC publicly announce what characteristics make a cryptocurrency a security or not a security.
“Why wait to make the SEC’s views known only when it swoops in with an enforcement action, in some cases years after the product was launched? This regulation by enforcement is extremely objectionable and will kill domestic innovation,” Toomey charged.
Gensler told the Senators the SEC, Treasury and the Federal Reserve are working together to see how resiliency and competition can be improved in the market for Treasuries which deteriorated in the pandemic after taking hits in the “Flash Crash” of 2014 while the Treasury repo market had significant dislocations in 2019.
He explained Chinese companies conducting business in certain industries, such as internet and technology, are prohibited from selling their ownership stake to foreigners in the U.S., but. as a workaround, they use structures called variable interest entities to raise capital on U.S. exchanges through shell companies in the Cayman Islands and other jurisdictions
On another issue, Gensler said the Commission is working to ensure the heightened risks of firms operating in China are clearly and prominently disclosed to investors.
Gensler said he wants the Commission to enhance disclosures from private fund managers have on conflicts of interest to help give pension funds and other investors the information they need to make investment decisions.
During the session, Gensler said the SEC can be consistency and comparability climate disclosures for the investors who are increasing speaking loudly about the issue:
“It will help investors make decisions and companies make money.”
He called reach for yield one of the biggest financial systemic risks the nation is facing.
On special purpose acquisition companies (SPACs), Gensler said one of the problems is retail customers often left holding the costs of the banker and promoters
In bringing up the importance of the SEC, Gensler noted the U.S. capital markets represent 38 percent of the globe’s capital markets, nearly double the nation’s 24 percent half of the world gross domestic product.
At the same time, he said debt capital markets account for 80 percent of financing for non-financial corporations in the U.S. while in the rest of the world, nearly 80 percent of that lending comes from banks.