SEC Chair wants to police crypto, but calls for cooperation

Securities and Exchange Commission Chairman Gary Gensler in a speech on Thursday said the same things he's always said, that most crypto are securities (so they should register) and should follow existing securities law (so they should really register).

Driving the news: While the industry has long called for more guidance on how to comply with the existing regulatory structure, Gensler said more guidance isn't coming. Enough has already been provided, he said, pointing to previous reports and punitive actions.

Quick take: The SEC wants to subject crypto to financial regulations created a very long time ago — for a vastly different set of "securities" — without outlining how they would apply to crypto projects.

The existing actions Gensler pointed at to serve as guidance include:

• The DAO report: A 2017 investigation that concluded tokens sold by a decentralized autonomous organization, called The DAO, were securities and therefore subject to securities disclosure rules.
• Munchee Order: In 2017 the regulator stopped Munchee Inc. from raising $15 million in an initial coin offering that would fund a tokenized restaurant review app.
• Lots of enforcement actions: Starting with a Bitcoin ponzi scheme in July 2013 and ending with the one against Dragonchain's unregistered securities offering in August. They also run the gamut from DeFi to lending.

Meanwhile, Gensler called for cooperation.

• "For those who are starting up in this space now — either from traditional finance or as crypto-native companies — work with us on compliance from the beginning. It’s far less costly to do so from the outset," he said.
• And he appears to expect compliance with the making of a new office within the Division of Corporation Finance to handle specifically crypto disclosure statements and filings.

Of note: He nodded to a saying of predecessor Joseph Kennedy, the very first SEC chair who in the face of broad balking at newly instituted securities regulation in 1934, got major corporations to register and exchanges to comply:

• "No honest business need fear the SEC."

Reality check: Much of the crypto industry is already wary of voluntary cooperation, as the SEC has continued to regulate via enforcement.

• SEC Chair Kennedy took a Friendly Enforcement approach, focusing on putting away cons and frauds. By contrast, the SEC under Gensler doubled the size of its enforcement's crypto assets and cyber unit.

What's next: Gensler appeared to largely target his speech to crypto intermediaries.

• He characterized them as "an amalgam of services" that in the rest of the securities market are typically separated from each other: exchange functions, broker-dealer functions, custodial and clearing functions, and lending functions.
• Intermediaries have to register for each service they provide, which could lead to "disaggregating" them into separate legal entities in order to "mitigate conflicts of interest" and "enhance investor protection," Gensler said.
• Stablecoins, which Gensler said are often used as "settlement tokens" within platforms, should register with the SEC regardless of whether they offer yield directly or indirectly, or how such tokens are "offered" or "sold," he said.

Crystal's thought bubble: If Gensler were to truly follow Kennedy's model with regard to fashioning new regulation, he would take a light-touch enforcement approach to new registrants, and tweak disclosure requirements to make them less onerous to crypto companies.

• Then, like Kennedy, he could eventually take a different leadership role in Washington with significant accomplishments under his belt.