Gensler testimony — Crypto enforcement actions driven by “wide-ranging noncompliance”

The United States House Financial Services Committee will hear how the Securities and Exchange Commission is changing its oversight and rules to keep pace with technological advancements, including cryptocurrencies and artificial intelligence.

SEC Chair Gary Gensler is set to outline how the U.S. securities regulator is updating its rules to align with “technology and business models of the 2020s.” As is customary, Gensler’s opening remarks have been published ahead of the Sept. 27 hearing, outlining the SEC’s wider oversight of securities and exchanges in the United States.

There is particular interest in the SEC’s approach to the cryptocurrency sector, which has copped criticism for its “regulate-by-enforcement” approach that has been criticized for quashing innovation and adoption in America.

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Gensler will directly address two areas of emerging technology, namely predictive data analytics and cryptocurrencies. The SEC chair is set to stress that investors and issuers involved in “crypto asset securities markets” deserve protections afforded by securities laws.

Referring to the establishment of the 1933 Securities Act, Gensler said that the U.S. Congress made a decision to include a list of more than 30 items in the definition of a security, including the term “investment contract.”

“As I’ve previously said, without prejudging any one token, the vast majority of crypto tokens likely meet the investment contract test.”

Gensler is set to tell the House Financial Services Committee that the SEC’s view that most cryptocurrencies are subject to securities laws also necessitates that intermediaries such as exchanges, brokers and dealers must comply with these laws as well.

The SEC chair suggests that the wider industry has been guilty of “wide-ranging noncompliance with the securities laws,” which has led to a number of enforcement actions. Gensler added that the SEC has looked to address the cryptocurrency “security markets” sector through rulemaking.

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This included a reopening release published in April 2023 that reiterated the applicability of existing SEC rules to platforms that trade cryptocurrencies, including decentralized finance (DeFi) protocols. Included in the release were further guidelines for systems that would fall under a new, proposed exchange definition.

“While our current investment adviser custody rule already applies to crypto funds and securities, our proposal updating it would cover all crypto assets and enhance the protections that qualified custodians provide.”

According to the SEC chair, predictive data analytics and artificial intelligence have brought about a “transformational age,” driving efficiencies across the economy. The potential of the technology stands to increase financial inclusion and user experience, but it also poses risks of exploitation.

“This also raises the possibilities that conflicts may arise to the extent, for example, that advisers or broker-dealers are optimizing to place their interests ahead of their investors’ interests.”

Gensler’s address also notes an SEC proposal in July 2023 that would require firms to analyze conflicts of interest arising from the use of predictive data analytics to interact with investors. These potential conflicts would need to be eliminated or neutralized by the firms concerned.

It remains to be seen whether Gensler will be drawn to comment on ongoing legal battles with Coinbase and Binance.US, two U.S.-based cryptocurrency exchanges that the regulator has charged with a litany of alleged securities laws violations.

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