U.S. SEC Chairman on Crypto Regulation: Historically, financial innovation does not thrive outside of a public policy framework

On August 3, U.S. SEC Chairman Gary Gensler attended the Aspen Security Forum and delivered a speech, discussing his latest views on the regulation of the crypto market, including security tokens, DeFi, crypto asset custody, stablecoins, and crypto investment products.
Gary Gensler stated that any stock token or crypto token providing exposure to underlying securities is subject to securities laws, and any DeFi project offering services related to securities-type tokens falls under SEC regulation. "Historically, financial innovation does not thrive outside of a public policy framework."
Chain Catcher has compiled the full text of Gary Gensler's speech as follows:
As a matter of practice, I want to point out that my views are my own and I am not speaking on behalf of the SEC.
Some may wonder: What does the SEC have to do with crypto? Why would an organization like the Aspen Security Forum want me to talk about the intersection of crypto technology and national security?
Let me start from the beginning.
It was Halloween night in 2008, during the financial crisis, when Satoshi Nakamoto published an eight-page paper on the Cryptography Mailing List, stating, "I have been working on a new electronic cash system that is completely peer-to-peer, with no trusted third party."
Satoshi solved two mysteries that had troubled these cryptographers and other tech experts for decades: how to transfer value over the internet without a central intermediary, and how to prevent the "double spending" of digital tokens.
Subsequently, his innovation drove the development of crypto assets and the underlying blockchain technology. Based on Satoshi's innovation, about a decade and a half later, the category of crypto assets rapidly expanded. As of Monday, the crypto asset category was reportedly valued at around $1.6 trillion, with 77 tokens each worth at least $1 billion and 1,600 tokens with a market cap of at least $1 million.
Before joining the SEC, I had the privilege of conducting research, writing, and teaching at MIT in the intersection of finance and technology. This included courses on crypto finance, blockchain technology, and currency.
In this work, I began to believe that despite much hype masquerading as reality in the crypto space, Satoshi's innovation is real. Furthermore, it has been and will continue to be a catalyst for transformation in finance and currency.
At its core, Satoshi was trying to create a form of private currency without a central intermediary, such as a central bank or commercial bank.
We are now living in an era of digital public currencies—dollars, euros, pounds, yen, and renminbi. If this was not clear before the pandemic, it has become very clear in the past year as we increasingly transact online.
This public fiat currency fulfills three functions of money: store of value, unit of account, and medium of exchange. However, no crypto asset widely meets all the functions of money.
First, crypto assets provide a digitized, scarce tool for speculative investment. Thus, in this sense, they can be said to be highly speculative stores of value.
These assets are not being used as units of account.
We also have not seen crypto used as a medium of exchange. In this regard, it is often used to circumvent our laws on anti-money laundering, sanctions, and taxation, and it can also be used for extortion through ransomware.
For decades, with the advent of the internet age and the shift from physical currency to digital currency, countries around the world have placed various public policy goals on top of our digital public currency system.
As a policy matter, I am technologist-neutral.
Personally, if I were not interested in how technology expands financing channels and promotes economic growth, I would not have gone to MIT.
But I am certainly not public policy-neutral. As new technologies emerge, we need to ensure that we are achieving our core public policy goals.
In finance, this is about protecting investors and consumers, preventing illegal activities, and ensuring financial stability.
So how does the U.S. Securities and Exchange Commission fit into all of this?
The SEC's mission consists of three parts—protecting investors, facilitating capital formation, and maintaining fair, orderly, and efficient markets between the two. We also focus on financial stability. But our core is protecting investors.
Currently, we do not have sufficient investor protection mechanisms in the cryptocurrency space. Frankly, it feels more like the Wild West at this point.
This asset class is rife with fraud, scams, and abuse in certain applications. There is a lot of hype and spin about how crypto assets work. In many cases, investors do not have access to rigorous, comparable, and complete information. If we do not address these issues, I worry that many people will be harmed.
First, many of these tokens are offered and sold as securities.
There is actually a lot of clarity on this. In the 1930s, Congress established a definition of securities, which includes about 20 items, such as stocks, bonds, and notes. One of these is the investment contract.
In the following decade, the Supreme Court adopted the definition of investment contracts. The case states that when "a person invests his money in a common enterprise and expects to make a profit solely from the efforts of the promoter or a third party," an investment contract exists. The Supreme Court has repeatedly reaffirmed this Howey test.
Moreover, this is just one of many ways we determine whether a token must comply with federal securities laws.
I think former SEC Chairman Jay Clayton said it well when he testified in 2018: "With respect to [initial coin offerings or ICOs] and whether digital assets are securities—I believe that every ICO I have seen is a security—we have jurisdiction, and our federal securities laws apply."
I find myself agreeing with Chairman Clayton. You see, generally speaking, those who purchase these tokens are expecting profits, with a small group of entrepreneurs and technologists stepping up to nurture these projects. I believe we now have a crypto market where many tokens may be unregistered securities, without disclosure or market oversight.
This makes prices susceptible to manipulation. It leaves investors vulnerable.
Over the years, the SEC has taken dozens of actions in this space, prioritizing token-related cases involving fraud or other significant harm to investors. We have not lost a case.
Furthermore, many platforms actively offer crypto tokens or other products that are priced in relation to the value of securities and operate like derivatives.
There is no doubt: whether stock tokens, securities-backed stable value tokens, or any other virtual products providing comprehensive exposure to underlying securities, these products are subject to securities laws and must operate within our securities framework.
I have urged staff to continue protecting investors in the absence of registered securities sales.
The crypto finance world now has platforms where people can trade tokens and platforms where tokens can be lent. I believe these platforms implicate not only securities laws but also commodity laws and banking laws.
A typical DeFi trading platform has more than 50 tokens. In fact, the number of tokens far exceeds 100. While the legal status of each token depends on its own facts and circumstances, the likelihood of any specific platform having zero securities is very low, whether it is 50 or 100 tokens.
Additionally, unlike other trading markets where investors trade through intermediaries like the New York Stock Exchange, people can trade on cryptocurrency trading platforms without brokers—24 hours a day, 7 days a week, from around the world.
Moreover, while many overseas platforms claim they do not allow U.S. investors, there are allegations that some unregulated forex trading facilitates trading by U.S. traders using virtual private networks or VPNs.
The American public is buying and lending cryptocurrencies on these trading, lending, and DeFi platforms, but there are significant gaps in investor protection.
There is no doubt: if there are securities on these trading platforms, under our laws, they must register with the Commission unless they qualify for an exemption.
There is no doubt: if lending platforms offer securities, they also fall under the jurisdiction of the U.S. Securities and Exchange Commission.
Next, I want to turn to stable value tokens, which are crypto tokens pegged or linked to the value of fiat currencies.
Many of you have heard about Facebook's efforts to establish a stablecoin called Diem (formerly known as Libra).
Due to the global influence of the Facebook platform, this has drawn significant attention from central bankers and regulators. This is not only due to general policy and concerns about crypto but also because of Diem's potential impact on monetary policy, banking policy, and financial stability.
However, perhaps what these audiences may not realize is that we already have a stablecoin market worth $113 billion, including four large stablecoins—some of which have been around for seven years.
These stablecoins are embedded in crypto trading and lending platforms. In July, nearly three-quarters of all transactions across crypto trading platforms occurred between stablecoins and a few other tokens.
Thus, the use of stablecoins on these platforms may facilitate those seeking to evade a range of public policy goals associated with our traditional banking and financial systems: anti-money laundering, tax compliance, sanctions, etc. This also impacts our national security.
Additionally, these stablecoins may also be securities and investment companies. To some extent, we will apply the Investment Company Act and other federal securities laws for comprehensive investor protection on these products. I look forward to working with colleagues from the President's Working Group on Financial Markets on these issues.
Next, I want to turn to investment tools that provide exposure to crypto assets. These investment tools already exist, with the largest one having been around for eight years and valued at over $20 billion. Additionally, there are many mutual funds investing in Bitcoin futures on the Chicago Mercantile Exchange (CME).
I expect to submit filings regarding exchange-traded funds (ETFs) under the Investment Company Act ('40 Act). When combined with other federal securities laws, the '40 Act provides important investor protections.
Given these important protections, I look forward to staff reviewing such filings, especially if they are limited to these CME-traded Bitcoin futures.
The final policy area relates to the custody of crypto assets. The SEC is seeking comments on crypto custody arrangements for broker-dealers and those related to investment advisors. Custodial protection is key to preventing the theft of investor assets, and we will seek to maximize regulatory protections in this area.
However, there are some gaps in this area: we need more Congressional authorization to prevent trading, products, and platforms from falling into regulatory gaps. We also need more resources to protect investors in this growing and turbulent industry.
We stand ready to work closely with Congress, the government, our regulatory counterparts, and our partners around the world to close some of these gaps.
In my view, the focus of legislation should be on crypto trading, lending, and DeFi platforms. Regulators would benefit from additional plenary authority to set rules for crypto trading and lending and to attach guardrails to them.
Currently, much of the crypto space operates outside of the regulatory framework for protecting investors and consumers, preventing illegal activities, ensuring financial stability, and protecting national security, rather than within it.
For those who want to encourage cryptocurrency innovation, I want to point out that historically, financial innovation does not thrive outside of our public policy framework.
At the core of finance is trust. At the heart of market trust is investor protection. If this space is to continue or to realize its potential as a catalyst for change, we best bring it within the public policy framework.