SEC Chairman Doubles Down on Vows to Force Crypto Platforms to Register Tokens as Securities
Gary Gensler, the head of the U.S. Securities and Exchange Commission, called crypto a casino and warned Thursday that the crackdown on crypto is just beginning.
“The runway is getting shorter,” Gensler said in an interview with Bloomberg News. “The casinos in this Wild West are non-compliant intermediaries.”
Guilty
Gensler made the comments as Sam Bankman-Fried, the co-founder and former CEO of FTX, faces securities fraud and conspiracy charges and two of his former colleagues pleaded guilty to defrauding clients of the #2 crypto exchange a few weeks ago.
The SEC is also suing Bankman-Fried and two former executives, Caroline Ellison and Gary Wang, for securities fraud. The agency appears astutely treating FTX’s native token, FTT, as collateral. In the interview, Gensler reiterated his view that most cryptographic tokens are unregistered securities that are subject to applicable law and must be registered with the agency like stocks.
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“[Insiders] Selling an idea to the public while they may fraudulently pump up stocks,” Gensler said. “That creates skewed incentives and further puts the public at risk.”
The SEC Chairman’s comments underscore an extraordinary time for the fledgling crypto industry as it faces numerous enforcement actions from multiple federal agencies.
Prosecution
The Commodity Futures Trading Commission also prosecutes companies that fail to register crypto products that qualify as derivatives. The US Treasury Department sanctioned Tornado Cash, the crypto mixer, after it was found to facilitate the laundering of billions of dollars worth of cryptocurrencies resulting from illegal activities. And with FTX law enforcement, the Department of Justice is stepping up law enforcement in this sector.
FTX filed for bankruptcy on November 11 after facing a run on its reserves. Federal authorities say more than $8 billion in client funds is missing after Bankman-Fried, Ellison and Wang looted deposits to offset losses at Alameda Research, a crypto hedge fund they control.
On Wednesday, Ellison, the former CEO of Alameda Research, and Wang, an FTX co-founder and former CTO, pleaded guilty to their involvement in the failure of FTX.
Non-Compliant Businesses
Bankman-Fried, the exchange’s co-founder and former CEO, was extradited from the Bahamas to the United States the same day and is currently living at his parents’ home in California after posting $250 million bail on Dec. 22 .
Gensler said he hopes the charges against FTX’s former executives will send a message to other exchanges violating securities laws, warning that noncompliant companies could soon face enforcement action as well. The SEC chairman said many centralized exchanges do not properly segregate customer funds.
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The collapse of FTX has thrown a spotlight on the practices of centralized exchanges, with many in the industry demanding that CEXs publish regular reports demonstrating their “evidence of reserves to support their crypto assets.”
However, Gensler believes reports demonstrating reserves do not prove a platform is solvent. “Evidence of reserves is not a full accounting of a company’s assets and liabilities, nor does it satisfy segregation of customer funds under securities laws,” he said.
segregation of funds
Gensler added that firms that want to prove they hold client funds should simply comply with the SEC’s custody, segregation of client funds, and accounting rules.
Many analysts believe lawmakers will seek to impose strict regulations on the Web3 sector after spectacular failures by centralized entities like Celsius, Three Arrows Capital and FTX.
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Coinbase, the top centralized U.S. exchange, said the crypto turmoil of 2022 gave lawmakers a “sense of urgency” to introduce basic risk controls for crypto-asset activity in its “Crypto Market Outlook 2023” report.
The exchange urged policymakers to understand that the drama in the markets was people-driven and not some quality inherent only to blockchain technology.
“The regulatory framework should balance the need for appropriate standards for centralized entities with the need to protect freedom of innovation at the base layer,” Coinbase said.
cause for concern
Tim Lehes, the co-founder of Swarm Markets, told The Defiant he agrees the sector will strengthen in 2022 as a clear consequence of the dramas, but doesn’t think oversight from regulators is a cause for concern.
“This should not be feared by the industry, but welcomed as a crucial foundation upon which to build renewed trust and acceptance among institutional and private users,” said Lehes. “From a mass adoption perspective, users need regulatory clarity as well as clear licensing to prove projects viable. This is the only way for users to avoid some of the questionable projects that are still operating in the crypto space, with people’s funds at risk.”
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