SEC Chairman Writes: Crypto Companies Must Operate Within the Law or Not at All

Author: Gary Gensler, Chairman of the U.S. Securities and Exchange Commission

Compiled by: BitpushNews Mary Liu

When I teach a course on blockchain and currency at MIT, I ask my students a question every semester: "Who do you think Satoshi Nakamoto is?"

To this day, no one knows. The anonymity of Satoshi is part of a new form of finance that lacks a trusted third party—a way to transfer value over the internet aimed at operating without oversight from central intermediaries like governments or banks.

However, the financial world has historically been built on trust and the rule of law. Moreover, from banks to stock exchanges, finance has tended toward centralization, concentration, and interconnection.

The crypto market is no exception, with many "trusted" (though not compliant) intermediaries. Today, the crypto industry is dominated by a few exchanges, lending, staking, and other financial intermediaries, with the investing public believing these entities will be responsible for their assets. According to data compiled by CryptoCompare, the three largest crypto exchanges reportedly account for nearly three-quarters of all trading volume.

Crypto entrepreneurs may claim in their marketing PPTs that they are transparent and regulated. But make no mistake: very few (if any) participants are truly registered with the SEC (SEC) and fully compliant with federal securities laws.

The lack of compliance puts investors' hard-earned assets at risk. Investors lack basic disclosures about the crypto assets themselves and the companies executing trades and holding assets: What do companies do with customer assets? How do they fund the promised returns? Are they reaching into investors' pockets? When you buy or sell tokens, is your counterparty a trading intermediary? What are the rules to prevent manipulation and fraud?

Without disclosures and other investor protections, we simply do not know.

Overall, these companies always say, "Trust us." More importantly, when companies go bankrupt (and many have recently), they turn to bankruptcy courts to sort out their mess. Given Satoshi's original vision—essentially, code is law—this is somewhat ironic.

As the Chairman of the SEC, I have one goal regarding the crypto market: to ensure that investors and markets receive all the protections they would get in any other securities market.

How to Achieve This?

First, intermediaries and tokens should comply appropriately on their own. The business structures of crypto intermediaries should align with the laws that regulate securities exchanges, broker-dealers, and clearinghouses; they can create rulebooks to prevent fraud and manipulation. Crypto securities issuers should file registration statements and make necessary disclosures.

These are the rules that other participants in the securities market have followed for decades.

I find the argument that securities laws lack clarity unconvincing; some crypto companies may claim the law is not clear rather than acknowledge that their platforms lack sufficient investor protections.

It is already clear that most crypto tokens endorsed by entrepreneurs, along with other characteristics, are likely to be classified as securities. We have made it clear how lending and staking platforms are subject to securities laws. We have explicitly stated that platforms listing crypto securities must register with the SEC. Furthermore, securities laws clearly state that these platforms cannot combine functions under a single umbrella, which would create conflicts and risks for investors.

A common feature of crypto companies offering trading, lending, or staking as a service is that they often require users to relinquish control of their crypto assets to the platform (not your keys, not your tokens). Therefore, SEC staff has made it clear how companies should account for crypto assets held on behalf of users, and staff has provided guidance on disclosure obligations arising from the recent bankruptcies and financial difficulties of crypto market participants.

We are also clear that, based on the general operation of crypto platforms, investment advisers cannot rely on them as qualified custodians today. We have also proposed rules requiring all assets invested through investment advisers, including non-fund or non-security crypto assets, to be held by qualified custodians.

However, frankly, crypto intermediaries have not fully registered with the SEC and complied with the laws enacted by Congress; perhaps their business models are inherently non-compliant. In some cases, some participants seek approval for non-compliant activities rather than changing a fundamentally non-compliant business model fraught with conflicts.

Of course, another tool we have is to root out violations through investigations and enforcement actions.

The SEC has successfully brought or resolved over 100 cases against crypto intermediaries and token issuers, including cases involving Ponzi schemes or pyramid schemes, engaging in illegal touting, or committing other forms of fraud. We recently brought fraud charges against the CEO of FTX and other executives, as well as Terraform and its founders.

Enforcement actions take time and resources. This is especially true in the cryptocurrency space, as companies often do not cooperate, despite offering products to U.S. investors while claiming overseas jurisdiction, and have ample funds to engage in protracted litigation, including possibly using funds raised from investors on and off their platforms. However, we will steadfastly fulfill our mission to root out misconduct in the market.

Some criticize the SEC for suing (or even just investigating) crypto issuers and intermediaries. Some say we should let innovation thrive, or else we will push innovation overseas. But abandoning investor protections puts people's life savings at risk. Enforcement is a tool, not an end goal; the objective is to ensure market participants comply with the law and rules and to protect our "clients": U.S. investors.

The fact is this: even if Satoshi's identity remains unknown, the legal framework for regulating crypto is clear—crypto companies must either operate within the law or not at all.