SEC Chair Gensler’s comments about cryptocurrency on August 3 were unsurprising in the context of his regulatory philosophy. He said as much when he concluded with the line “If this [crypto] field is going to continue, or reach any of its potential to be a catalyst for change, we better bring it into public policy frameworks.” Going back to Gensler’s overhaul of the swaps market during his CFTC tenure, it’s clear he sees the power of regulation to stabilize markets in beneficial ways. So while crypto regulation wasn’t among the SEC regulatory priorities released in June, it’s clearly coming. The open question is the precise form it will take. Will we see something closer to the safe harbor approach championed by Commissioner Peirce, or will it be something less industry-friendly?
The August 3rd speech gave the impression that any forthcoming SEC cryptocurrency regulation may be formulated and dictated without involving representatives of the crypto industry (e.g., Gensler’s crypto comments included that he looks “forward to working with [his] colleagues on the President’s Working Group on Financial Matters” and “stand[s] ready to work closely with Congress, the Administration, our fellow regulators, and our partners around the world” to close regulatory gaps). While Chair Gensler’s technical chops position him well as a cryptocurrency regulator, it seems that regulating these markets could only benefit from involving representatives from the industry. The SEC could look to FinCEN’s example as a model; the financial crime regulator relied on numerous interactions with the industry during its early approach to cryptocurrency. As a result, the agency didn’t act without full information, and avoided an enforcement response that punished entities for failing to implement compliance measures that continue to be technologically challenging to the point of near impossibility. Gensler’s words also gave the impression that crypto may be another area that magnifies his concerted move away from the prior administration’s priorities, toward a heavier consumer protection focus, with relatively little emphasis on easing regulatory burdens for capital formation.
In terms of regulating cryptocurrency exchanges, regulatory jurisdiction is the grey area that needs clarity. Neither the SEC nor CFTC is explicitly authorized to regulate markets that trade cryptocurrencies which fall outside the definition of being a security (usually due to those instruments being sufficiently decentralized that they are seen as creatures of the markets, rather than being identified with any commercial entity that is viewed as their “issuer”). Gensler is a skilled Washington hand who used the August 3 speech to underscore the need for congressional action, and he may successfully convince Congress to extend the bounds of SEC and/or CFTC authority to cover this space. What remains to be seen is whether he will extend a welcome to those in the crypto industry, and ensure that both the full implications and technical feasibility of proposed regulatory measures are appreciated.