• Crypto industry “can’t stay astride the public policy” if it wants to last into late 2020s, Gensler said.
  • SEC chairman seems to hint that a bitcoin ETF with CME-traded bitcoin futures could be more likely to be approved.

SEC Chairman Gary Gensler said Tuesday that though he believes blockchain technology could continue to be a catalyst for change in the fields of finance and money, he warned against industry players working outside of regulatory frameworks.

The crypto asset class has ballooned to be worth about $1.6 trillion. This includes 77 tokens worth at least $1 billion each and 1,600 with at least a $1 million market capitalization, according to CoinMarketCap.

Speaking at the virtual Aspen Security Forum on Tuesday, Gensler laid out some of the “significant gaps” in investor protection that the SEC will be looking to crack down on when it comes to various crypto platforms. 

“In this digital, scarce speculative asset of bitcoin and others, we just don’t have enough investor protection, and frankly, at this time, it’s more like the Wild West,” he said.

President Biden nominated Gensler in February. Though Gensler previously taught courses on crypto finance, blockchain technology and money at the Massachusetts Institute of Technology, he said during the forum that he is now focused on guarding against illicit activity, and ensuring financial stability.

Keep reading for some of the main takeaways from Gensler’s latest comments. 

Crypto won’t last outside of policy frameworks

While public fiat monies fulfill the three functions of money — a store of value, unit of account, and medium of exchange — crypto assets generally do not, Gensler said. 

He labeled crypto assets as “highly speculative stores of value,” noting that when acting as a medium of exchange, it is used to evade anti-money laundering laws and tax collection. It can also enable extortion through ransomware, he added, like with the attack on Colonial Pipeline

“Right now, large parts of the field of crypto are … not operating within regulatory frameworks that protect investors and consumers, guard against illicit activity, ensure for financial stability, and yes, protect national security,” he said. “…If this innovation has any chance of surviving into the late 2020s and 2030s, it can’t stay astride the public policy.”

Gensler focused on regulating securities, platforms

The SEC chairman said that many crypto assets are being offered and sold as securities. He cited the definition of a security established by Congress in the 1930s, as well as the Howey Test, which refers to the US Supreme Court case for determining whether a transaction qualifies as an investment contract.

“Generally, folks buying these tokens are anticipating profits, and there’s a small group of entrepreneurs and technologists standing up and nurturing the projects,” Gensler explained. “I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight. This leaves prices open to manipulation.”

The SEC chair argued that the legislative priority should center on crypto trading, lending and DeFi platforms. Though each token’s legal status depends on its own facts and circumstances, he said, it is unlikely that a platform with 100 tokens has zero securities.

“There’s dozens of platforms that say, ‘come here, lend us your crypto,’” Gensler said. “You can go online right now and find some that are touting 4% returns, 7% returns, 9% returns. …Who is looking after the investors as to those — are they good-faith actors that are really there, are they Ponzi schemes or are they somewhere in the middle?”

Gensler also said that stablecoins, cryptocurrencies backed by another asset in an attempt to offer price stability, also may be securities, in which case the SEC would apply federal laws to them.

In addition, he advocated for bolstering the SEC’s staff around crypto, noting that tripling the number of people may not even fully cover the field. However, he also said cooperation from the crypto companies themselves is perhaps more important.

“What I’m saying to those platforms is work with us and work with Congress if there’s things that might be appropriately shifted in our laws — additional authorities or adjustments,” he said. “It shouldn’t just be static.”

When will a bitcoin ETF be approved?

Though Gensler said he believes there is currently regulatory clarity around much of the crypto space, he noted that progress is being made when it comes to mutual funds and ETFs.

ProFunds launched a mutual fund last week that became the first publicly available US mutual fund or ETF designed to provide investment results that generally correspond to the performance of bitcoin. The offering primarily invests in bitcoin futures contracts, and does not invest directly in bitcoin.

There are already a number of funds that invest in bitcoin futures on the Chicago Mercantile Exchange, or CME, Gensler explained, adding that he anticipates there will be more filings for exchange-traded funds.

“I look forward to the staff’s review of such filings, particularly if those are limited to these CME-traded bitcoin futures,” he said.

His comments gave analysts hope that approvals are moving along.

“We can only speculate about what Gensler meant,” said Sumit Roy, a crypto editor and analyst for ETF.com. “But reading between the lines, I would assume he meant that a bitcoin ETF that holds CME-traded bitcoin futures would be more likely to be approved by the SEC.”

There are currently more than a dozen ETFs that would directly invest in crypto awaiting regulatory approval. The SEC has postponed the decision to greenlight or deny proposed products from VanEck, Valkyrie Digital Assets and others.

These ETFs planning to invest directly in bitcoin and other cryptocurrencies will continue to wait in registration, said Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database.

“[Gensler’s] comments have made it very clear that rolling regulated product up is going to be fine — that’s what a CME futures-based ETF would be,” Nadig told Blockworks. “I’ll be shocked if we don’t have a few new futures-based crypto ETF filed within the next few weeks.  

SEC Commissioner Hester Peirce said during a virtual event called The B-Word last month that she never would have imagined the SEC would not have approved a bitcoin ETF yet, especially as other countries are moving ahead with them.

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  • Ben Strack is a Denver-based reporter covering macro economics, financial services and digital asset management. Prior to joining Blockworks, he covered the asset management industry for Fund Intelligence, and was a reporter and editor for various local newspapers on Long Island. He graduated from the University of Maryland with a degree in journalism.