SEC chair likens crypto to dot-com bubble because Superbowl ads

US Securities and Exchange Commission (SEC) chair Gary Gensler said that most crypto exchanges are subject to securities laws during his recent speech at the University of Pennsylvania.

During his speech on the Ivy League campus, Gensler reiterated that crypto exchanges and custodians that list securities and non-securities for trading are subject to clear regulations that have existed for nearly a century.

According to Law360, he affirmed that old rules apply even to non-standard securities based on innovative technologies like blockchain.

Congress approved a suite of rules to protect investors after the Great Depression. During the 1930s, Congress passed the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939.

Gensler acknowledged that crypto exchanges’ support for security tokens and commodity tokens can cause confusion regarding registration requirements.

However, he clarified that listing a mix of blockchain-powered commodities and securities does not exempt an exchange from SEC registration.

Gensler added the SEC is working with the Commodity Futures Trading Commission to create a framework that will work for both security and commodity tokens.

Gensler made his remarks as part of the University of Pennsylvania’s Conference on the Future of Digital Assets earlier this week.

SEC chair wants better consumer protection at most crypto exchanges

Gensler called for exchanges to separate user crypto from company assets to provide protection against theft.

The SEC has pursued several enforcement actions against token issuers and exchanges that it believes are subject to securities regulations.

Several of its open cases are still in investigative phases or working through the judicial system.

• In February, crypto lending startup BlockFi agreed to pay $100 million in fines and register BlockFi Yield products with the SEC as part of its settlement over alleged securities violations.
• The SEC in the same month opened an investigation into allegations that two companies with close ties to Binance, Merit Peak and Sigma Chain, improperly acted as market makers on Binance.US.
• Not to mention, the regulator is still pursuing a legal case against Ripple involving allegations that Ripple Labs raised $1.3 billion worth of unregistered security sales via its XRP token.

Gensler did acknowledge the challenges involved in regulating crypto exchanges, especially ones with offshore headquarters like Binance and FTX’s flagship platforms.

Major exchanges, including these two, now block US IP addresses on their main exchanges and have created separate platforms and entities to serve US investors.

Others, like ShapeShift, became decentralized exchanges to avoid adhering to standard regulations like know-your-customer and anti-money laundering procedures.

Transitioning to a decentralized exchange made it difficult to pin down a single individual who can take responsibility for transactions.

These perceived issues, among others, led Gensler to compare using crypto exchanges to the lawless Wild West.

Gensler sees similarities between crypto and dot-com companies

Gensler mentioned stablecoins as a stand-in for fiat currency like the US dollar when moving money between exchanges.

He noted 80-85% of crypto trading involves stablecoins, which (by design) avoids sending money to and from the traditional banking system. This generally makes it possible to fund and defund exchange accounts easily.

It’s this feature of stablecoins that facilitates trade on exchanges, like Bitfinex, which have historically found it difficult to maintain a bank account.

Gensler told his audience that the crypto industry still has some similarities to the dot-com bubble. Several promising online businesses went under and took investors’ funds with them as that bubble popped at the turn of the millennium.

He mentioned that many dot-com businesses bought expensive Super Bowl ads shortly before their collapse, comparing them with crypto businesses that recently aired commercials during 2022’s Super Bowl LVI.

Gensler didn’t really elaborate on whether he thought the failed businesses violated securities regulations or misrepresented their viability to investors.

Still, he did express warnings that the American entrepreneurial industry includes many failed projects in addition to a few successes.

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