(Kitco News) If crypto exchanges and lending platforms are not brought inside the policy framework, “a lot of people will get hurt,” U.S. Securities and Exchange Commission Chair Gary Gensler testified before the House Financial Services Committee.
“If we don’t get these [crypto] exchanges, lending platforms inside the public policy framework, a lot of people will get hurt,” Gensler said on Tuesday. “It is a highly speculative idea that a token [trades] on the potential that in the future it might be worth something because others will pay for [it].”
Gensler was grilled on risks associated with crypto trading, the popularity of retail investing, and the looming debt ceiling crisis.
On whether the SEC could ever ban crypto trading like China, Gensler replied that any bans “would be up to Congress.”
“Our approach is really quite different. It’s a matter of how do we get this field within the investor consumer protection that we have and work with bank regulators and others on how to ensure that the Treasury department has it within any money-laundering and tax compliance? And of course, the financial stability issues that stable coins could raise as well,” Gensler said.
SEC’s mission is to facilitate capital formation and investor protection, Gensler noted, adding that the SEC also works to achieve fair and effective markets.
Gensler pointed out that the SEC is busy looking at rapid changes in technology, including predictive data analytics, AI and machine learning.
When it comes to crypto finance, Gensler warned that there’s not enough investor protection.
“Many of [these crypto projects] are basically saying to the investing public: ‘give us your money, and we have a small group of entrepreneurs and computer scientists that are going to build something. And based upon that, there is hope and anticipation of reward or profit in the future … Many of these fit these definition [of speculative assets].”
Gensler added that the SEC’s authorities in the crypto space are clear. “I asked projects to come in and talk to us. Congress painted with a broad brush to protect public against fraud … We need coordination with multiple Congress committees and CFTC,” he said. “There are gaps on stablecoins and banking regulatory regime. We have two great market regulators [SEC and CFTC] and we have different authorities. We don’t need another regulator.”
Throughout the testimony, Gensler compared some cryptocurrencies to investment vehicles and others to speculative assets such as gold and silver.
“The U.S. dollar happens to be the leading currency around the world. A lot of these [cryptos] are not really currencies. But most of them are investment vehicles. A handful might be competing with gold or silver as a digital speculative store value as gold has been a speculative store of value over the centuries … Bitcoin is a highly speculative asset. It is also a store of value like gold.”
Gensler reminded U.S. lawmakers of the risks and potential conflicts of interest involved when it comes to retail trading and payment for order flow.
“Zero-commission does not mean it’s free. Some brokers have payment for order flow,” he said. “Potential of conflict of interest when an order is routed to a wholesaler when we back away from payment by order competition. That may not be the best execution.”
According to Gensler, one of the biggest risks to investors is stabecoins, who compared them to poker chips at a casino.
“If this continues to grow, it can present systemic-wide risks,” he said. “[But] even poker chips in a regulated environment are a good thing.”
With the debt ceiling deadline of October 18 looming, Gensler also highlighted that uncertainty would be very significant if the U.S. were to default.
“We’d be in uncharted waters. We’ll be in a period of very significant uncertainty. We’d have significant volatility in the markets, and we’d see some breakages in the system. We’d be in for some of the greatest challenges we’ve seen in our financial sector. Much greater than we’ve seen in the past.”