Securities laws helped prevent stock market scams when they were passed in the 1930s, and they can benefit the cryptocurrency market today.
In a speech at the Piper Sandler Global Exchange and Fintech Conference on June 8, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler compared the current cryptocurrency market to the U.S. stock market in the 1920s, saying it was full of "Peddlers," "Fraudsters," and "Ponzi Schemes." He believes that just as Congress cleaned up the stock market by enacting securities laws, the current SEC can also clean up the cryptocurrency market by applying these laws.
During the talk, Gensler praised the Securities Act of 1933 and the Securities Exchange Act of 1934, claiming that these laws allowed the U.S. securities market to “flourish” over the next 88 years. He argued that today’s “crypto-securities markets” should also benefit from these laws because they do not “deserve the protections provided by the laws.”
Gensler pointed to the court’s decision in Telegram Open Network, which held that crypto-asset securities are not exempt from securities laws even if they have utility.
During the talk, Gensler praised the Securities Act of 1933 and the Securities Exchange Act of 1934, claiming that these laws allowed the U.S. securities market to “flourish” over the next 88 years. He argued that today’s “crypto-securities markets” should also benefit from these laws because they do not “deserve the protections provided by the laws.”
Gensler pointed to the court’s decision in Telegram Open Network, which held that crypto-asset securities are not exempt from securities laws even if they have utility.
“Some promoters of crypto-asset securities argue that their tokens have additional functionality beyond being an investment vehicle,” Gensler said. “But, as the court in Telegram and others have said, some additional utility does not eliminate a crypto-asset security from the definition of an investment contract.”
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Gensler said this means crypto securities exchanges must comply with securities laws, including requirements to separate “exchange, broker-dealer, and clearing functions.” In his view, such a separation “helps mitigate conflicts that could arise from commingling such services.”
Gensler denies that such a separation is impossible, saying separating the three functions simply requires work.
The head of the SEC argued that the current cryptocurrency market is rife with scams due to the industry’s failure to comply with securities laws, stating:
"Frankly, it's not surprising that we're seeing a lot of problems in these markets given the widespread irregularities. We've seen this story before. This is reminiscent of the 1920s before federal securities laws were enacted. Hucksters. Con artists. Ponzi schemes."
The solution, in Gensler’s view, is to ensure that crypto-security issuers comply with the law. That’s because these scams are “more likely to occur in markets where issuers and intermediaries do not comply with basic laws.”
As SEC chairman, Gensler has been heavily criticized in the crypto industry, especially after the SEC filed lawsuits against crypto exchanges Binance and Coinbase. Critics say his regulatory powers at the SEC are too broad and are driving innovation out of the U.S.