SEC’s Gensler criticizes digital asset industry for “ignoring the law” as crypto crash continues

by Arthur · April 15, 2023

By Chris Matthews

Crypto platforms “act as if they have a choice to comply with our laws,” Gensler said.

US financial regulators look set to further tighten the screws on the digital asset industry, with Securities and Exchange Commission Chairman Gary Gensler taking the lead in an ongoing crackdown on illegal crypto activities.

The SEC voted Friday to issue supplemental guidance on how a proposed update to securities exchange regulations would affect crypto markets broadly and decentralized finance (DeFi) applications in particular.

Gensler said the supplemental release seeks to answer questions crypto market participants have about the proposed rule, but he also emphasized that many crypto companies are already violating securities laws, regardless of whether the rule under consideration is enacted.

“These platforms act as if they have a choice to comply with our laws,” Gensler said. “They don’t.”

“Calling yourself a crypto platform is not an excuse to ignore securities law,” he added. “Calling yourself a DeFi platform is not an excuse to defy securities laws.”

The comments come amid a surge in enforcement action against crypto companies, with the SEC increasing cases against the digital asset industry by 50% last year, according to Cornerstone Research, a legal advisory firm.

Coinbase Global Inc. (COIN), a publicly traded cryptocurrency exchange, announced last month that it had received a Wells Notice from the SEC, a formal notification that the agency is considering enforcement action against it for violating securities laws.

In February, the SEC settled with crypto exchange Kraken for failing to register its offering and sale of certain investment contracts related to crypto assets. Kraken paid $30 million in fines, without admitting or denying wrongdoing.

The new exchange rule, proposed last January, aims to update the definition of an “exchange” under SEC rules to provide greater control over electronic communications platforms, common in fixed income markets, which the SEC says act as securities exchanges.

The crypto community immediately raised alarms about how the rule could affect DeFi platforms, or protocols used to trade cryptocurrencies such as bitcoin and ether, which advocates say removes the need for regulated intermediaries.

“The proposal is mainly aimed at something like a Bloomberg terminal where buyers and sellers can find each other using chat functionality,” Jerry Brito, CEO of crypto think tank Coin Center, wrote at the time. “But the language in the new proposed rule is written so broadly that it’s hard to see how it wouldn’t cover a decentralized exchange.”

SEC officials told reporters at a Thursday briefing that the agency received a number of comment letters requesting information on how the proposed rule would apply to digital assets, and so the commission voted Friday on whether to add supplemental material to the rule release to address those comments.

Ignacio Sandoval, a former SEC regulator and partner at the law firm Morgan Lewis, told MarketWatch that while the industry has a right to be concerned about how potential new rules could affect it, the agency already has plenty of power to pursue aggressive enforcement.

“The SEC is clearly trying to determine that [most cryptocurrencies] are securities and subject to existing rules,” he said, adding that the agency is laying the groundwork through enforcement actions so it can tell companies with digital assets, “guess what, we’ve made our views pretty clear.”

– Chris Matthews

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04-15-23 1319ET