Gary Gensler is coming after digital currency companies. In his recent opinion piece published on the Wall Street Journal, the chairman of the U.S. Securities and Exchange Commission fired a warning shot at the digital currency industry.
There’s no reason to treat the crypto market differently from the rest of the capital markets just because it uses a different technology…
Read my recent Op-Ed:
— Gary Gensler (@GaryGensler) August 22, 2022
Business compliance
Gensler’s main message for digital currency businesses was that just because their platforms and services revolve around distributed ledger technology does not mean that existing securities laws do not apply.
Gensler says that many digital currency businesses often try to hide behind the label they assign themselves, like “lending platform, crypto exchange, and decentralized finance platform,” but at the end of the day, “the Supreme Court has made clear that the economic realities of a product—not the labels—determine whether it is a security under the securities laws.”
Gensler illustrates this by bringing up a recent example, the digital currency lending platform BlockFi’s settlement with the SEC. BlockFi called itself a digital currency lending platform. It lets its users lend out their digital assets to generate interest on their initial deposit and lets individuals borrow USD against their digital assets at a low-interest rate.
“That BlockFi had borrowed crypto wasn’t the issue here. In fact, you could replace “crypto” with any other asset. The issue was what it did with the borrowed assets and what it didn’t do as a firm: provide the required disclosures to investors,” Gensler says.
“The company had borrowed more than $10 billion in crypto assets from 570,000 investors, offering them a variable interest rate in return. That made its lending product offered to investors, called BlockFi Interest Accounts, a security. BlockFi then pooled these assets, packaged them into loans to institutional borrowers, and invested funds in other securities. That made it an investment company,” he added.
When a company undertakes these activities and provides services that the Securities Exchange Commission (SEC) has created frameworks and policies for, then it must abide by the guidelines that the agency has laid out. In most cases, and where a majority of digital currencies are evading the law, this means that the digital currency company must provide the proper disclosures for their activities.
Gensler reminds the audience that the purpose of these laws is to protect investors, which is why companies that undertake these activities and provide these services must release disclosures that make the information about the company, such as how it uses investor funds, public information that individuals should review when deciding whether to invest in the company or not.
In summary…
Gensler’s article is a hawkish analysis of digital currency company operations that hints at the idea that the SEC has set its sights on the businesses in the digital currency space that fit the bill of the companies with activities and services described in the article. He encourages “cryptocurrency lending platforms” to come in and speak with the SEC to become compliant with security laws which will benefit investors and the digital asset market as a whole. Gensler closes out by saying that in the meantime, “the SEC will serve as the cop on the beat,” indicating that the SEC will continue to weed out the non-compliant businesses in the space and press charges against them.
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