On the back of a meltdown in crypto markets last week, Securities and Exchange Commission Chairman Gary Gensler sent a stern warning to the investing public on crypto, calling it a “highly speculative asset class” and reiterating its lack of investor protections.
During an appearance at a FINRA conference in Washington, D.C., on Monday, Gensler opined that the investing public isn’t getting full and fair disclosures and that cryptocurrencies should be regulated as securities.
“The investment public is not getting disclosures…When you make other asset purchases, we have this basic bargain, you the investing public can make your choices about what risks you take,” Gensler said. “There's supposed to be full and fair disclosure, and people aren't supposed to lie to you. Right now, many of these entrepreneurs come up with an idea … and they want to raise money from you. That puts it inside of the securities laws.”
Gensler warned that investors should not think they own their crypto tokens, noting that using a digital wallet on a platform constitutes a transfer of ownership to the platform.
“If the platform goes down, guess what? You just have a counter-party relationship with the platform," Gensler said. "Get in line at bankruptcy court."
The SEC chair argued that the digital asset class is not that decentralized, pointing to a handful of major trading and lending venues that handle the majority of crypto asset volume. Gensler called for basic investor protections including, market integrity, barring front running customers, and anti-manipulation and fraud.
He also said crypto platforms are often trading and making markets against investors.
“When [the platforms] take your custody, when they take those tokens, they can use them, they can trade them. It's not like when you trade in the equity markets," Gensler said. "They're actually making markets against you."
Gensler’s strong comments about crypto’s pitfalls come after stablecoin TerraUSD and sister token Luna crashed to zero last week after a run, spilling over into other cryptocurrencies to cause an asset class wide selloff.
The SEC chair has made the case for regulating stablecoins in particular, flagging that stablecoins, which are used to trade in and out of different cryptocurrencies, are actually often owned by the trading platforms and that individual investors have no direct right of redemption for the two largest stablecoins by market capitalization, which were created by crypto trading or lending platforms.
Gensler has been a strong advocate of regulating cryptocurrencies and repeatedly tried to assert authority over regulating the asset class through applying the definition of securities to the asset class. But he and the agency have stopped short of issuing specific regulations to oversee crypto, instead encouraging crypto trading platforms to voluntarily sign up with the SEC or opting to take enforcement action against crypto players that fall short of securities laws.
Jennifer Schonberger covers cryptocurrencies and policy for Yahoo Finance. Follow her at @Jenniferisms.