On Tuesday, October 5, SEC Chair Gary Gensler testified in front of the House Financial Services Committee as part of a broader oversight hearing. One of the major discussions of the hearing was cryptocurrency. This comes as no surprise, as oversight of cryptocurrency has become a major topic of discussion, and Chairman Gensler has been making the rounds to express his views on the proper rules of the road.
Before the hearing, the SEC stated that the agency would review the risks of complex financial products traded on exchanges and consider new safeguards, citing dangers facing not just average investors but also the broader market. Gensler has said that certain products can also be hazardous for sophisticated investors and can potentially create system-wide risks when markets experience volatility.
During the hearing, members from both parties repeatedly questioned Chairman Gensler about his approach of housing stablecoin oversight within the SEC, and broadly what the SEC intends to do to implement new regulations. Of note, Gensler urged lawmakers to consider strengthening regulator authority to supervise cryptocurrency trading platforms and stablecoins. It is clear that both Democrats and Republicans are considering new laws to direct how regulators should oversee the crypto market.
One message Gensler repeated was that Congress does not need to define a new regulated asset class or create a new agency to regulate crypto. He stuck to previous statement that the SEC and the CFTC have adequate authorities and would coordinate on efforts to regulate cryptos. Gensler said that crypto entrepreneurs and their lawyers “don’t even have to squint” to understand what might be considered an investment contract. Gensler did state that policymakers may want to focus on which cryptos need to follow the rules for traditional bonds and stocks for those products that qualify as a security.
Further, Gensler stated that policymakers will need to look at issues pertaining to custody, anti-money laundering, tax compliance, and investor protections. Gensler pushed back on criticism from the exchanges that argue that they’re already regulated by the states. Many crypto firms make this claim because they’ve secured money transmitter licenses at the state level.
Gensler hesitantly answered questions about oversight of stablecoins, which have their value pegged to other assets like the U.S. dollar, as this is a major focus area of the President’s Working Group on Financial Markets (PWG). Gensler noted that stablecoins may possess a stability risk to the financial system as markets grow. Of note, most of the members of the PWG are members of the Financial Stability Oversight Council (FSOC). Also, the Treasury Department and other financial regulators are expected to release a report this month urging Congress to subject stablecoins to bank-like regulation.
Additionally, Gensler did clash with lawmakers, including Ranking Member Patrick McHenry (R-NC), over the SEC’s agenda for crypto regulation and its increasingly aggressive enforcement efforts. McHenry said, “To be frank, I’ve got strong concerns about how you’ll regulate in the digital asset space, and whether the law is on your side.” During the hearing, McHenry highlighted newly introduced legislation, which would shield crypto startups with a regulatory “safe harbor” and exempt them from having to register with the SEC. The bill is based on an earlier proposal from Republican SEC Commissioner Hester Peirce. Gensler’s response to providing a safe harbor was counter to what McHenry’s bill would provide companies. Gensler said, “I think that the challenge for the American public is that if we don’t oversee this and bring in investor protection, people are going to get hurt,” he said.