Original Title: "Washington Post Full Interview: Gary Gensler on Cryptocurrency and Evergrande Crisis"

Interviewee: Gary Gensler, Chairman of the U.S. Securities and Exchange Commission
Interviewer: David Ignatius
Translation: Moni

The U.S. Securities and Exchange Commission (SEC) is one of the most powerful financial regulatory agencies in the world and a key participant in the government's push for cryptocurrency industry regulation. Recently, Washington Post columnist David Ignatius interviewed SEC Chairman Gary Gensler about the prospects of cryptocurrency, the growth of digital trading platforms, and the need for stricter financial disclosure requirements.

Here is the transcript of the interview:

MR. IGNATIUS: Welcome to Washington Post Live, I’m David Ignatius, columnist for the Washington Post.

Today, we are joined by Gary Gensler, Chairman of the U.S. Securities and Exchange Commission, who spoke last week at a Senate Banking Committee hearing about the necessity of regulating cryptocurrency, a topic that has captured the financial markets' attention, and we hope to continue the dialogue with Chairman Gary Gensler.

Once again, welcome Gary Gensler to Washington Post Live.

MR. GENSLER: Thank you for having me, David. It’s great to be with you and the audience.

MR. IGNATIUS: Let’s start with some significant recent events in the cryptocurrency industry. Recently, the value of Bitcoin and other tokens has plummeted sharply, dropping more than 8%. I want to first ask you about the fundamental question of the stability of cryptocurrency as an asset and whether there is a need for stricter regulation?

MR. GENSLER: Well, crypto tokens, which you referred to in this program as cryptocurrencies, although some of my colleagues in the official sector often shy away from that term—I’m happy to use it—I think cryptocurrencies are a highly speculative asset class. I had the privilege of working with computer science colleagues at MIT, where I also specifically studied and taught cryptocurrency. I think the Bitcoin white paper published by Satoshi Nakamoto over a decade ago was highly innovative, although we still don’t know who Satoshi is, whether she, he, or they are, Bitcoin brought some essential innovations.

However, we now have a highly speculative asset class stored on digital ledgers, and as you mentioned, the recent decline in cryptocurrency market prices can sometimes be sharp, and they can also rise sharply, and generally speaking, apart from the fact that someone else will pay you, there’s nothing that actually supports cryptocurrencies.

MR. IGNATIUS: Before we dive into what regulation might involve, I want to ask you about some potential economic news that seems to have driven the movements of Bitcoin and these other currencies overnight, namely the high leverage in China’s real estate sector and the issue of excesses in financial markets. I want to ask you, as the Chairman of the SEC, are you concerned that what is happening in China might spill over into the U.S. and the global financial markets, and what measures have you recently taken to try to protect our markets and our financial stability?

MR. GENSLER: We are a highly interconnected global economy. The U.S., while only 4% of the world’s population—we account for 23% (maybe 24%) of the global economy and 38% of the global capital markets. So, we are highly interconnected with the global economy.

Now, regarding China, we have been doing a lot. We have about 270 companies related to China raising funds in the U.S. For new companies looking to list in the U.S., we have paused until we can require them to enhance their disclosures. Investors can decide for themselves whether to invest, but issuers must provide complete and fair disclosures to investors. The SEC prevents fraud and market manipulation, which is also one of my concerns regarding crypto and the crypto asset class. But back to China, given some regulatory changes there, we have asked issuers to emphasize disclosures more because U.S. investors are typically buying a Cayman Islands company that operates in China. And you don’t actually own these Chinese companies directly.

The second thing that happened is about 19 years ago, we established an organization in the U.S. responsible for auditing public companies. This is about trust in our capital markets; you have a body—it’s called the Public Company Accounting Oversight Board—that is responsible for inspecting auditors to ensure the accuracy of the relevant business numbers. What has been the impact since then? Now, 19 years later, about 50 jurisdictions have started doing this, but China has not. So, the U.S. Congress has been unanimous in the Senate, and the House has passed and participated in requiring the SEC to fundamentally address this issue within the next three years, meaning China needs to comply with the relevant constraints, and their officials and auditors also need to comply, or we will suspend trading in these 270 companies.

MR. IGNATIUS: Let me ask one more question. Given the excessive debt pressures of China’s large real estate developer Evergrande, some analysts are concerned that risks may spill over into the financial markets, similar to the 2008 financial crisis and the collapse of Lehman Brothers and related derivatives and swaps, ultimately having a huge impact. So, I just want to ask you directly, do you believe that our financial markets today can still be protected in the event of such issues, not necessarily with Evergrande but with any large company with such high levels of debt?

MR. GENSLER: Well, David, that’s a good question, and it’s multi-layered. Some of this I hope you understand; I don’t want to comment on one company, particularly since the company you mentioned is not directly registered and traded in the U.S. capital markets. Evergrande is registered in Hong Kong and operates in mainland China.

But it can be accurately said that we are a highly interconnected global economic system, just as the financial crisis that erupted in the U.S. in 2008 spread from our real estate bubble, and other countries around the world responded to those shocks, that is possible. In fact, we in the U.S. would also respond to shocks from other economies and countries, especially when China’s economy has become so large relative to Europe or the U.S. economy itself.

Regarding your second question, I do believe that the reforms after the 2008 financial crisis have made the U.S. financial system stronger. This does not mean we do not take the regulatory issues of the SEC and other important regulatory agencies (like the Federal Reserve, banking regulators, and CFTC) seriously. I am fortunate to serve as the SEC Chairman, and I do believe that compared to before the 2008 financial crisis, we are in a better position in 2021 to absorb some financial risk shocks, but that does not mean we are isolated; economies are interconnected globally.

MR. IGNATIUS: Let’s return to some cryptocurrency issues. You have used some very "strong" language in your recent speeches and testimonies regarding crypto------

MR. GENSLER: David, David, if I may, I want to clarify first, if I can, I do think this new technology of crypto is very interesting—whoever Satoshi is, Bitcoin has sparked change and is prompting central banks around the world to reconsider how to provide payment systems. Bitcoin is driving financial change, the so-called "fintech," which is the intersection of new technology and finance. I have taught cryptocurrency at MIT and studied it for several years; if I didn’t think it was interesting and innovative, I wouldn’t spend my time on it. But at the same time, I think if technology exists outside of the social and public policy framework, it won’t last long.

In this case, we must ensure investor and consumer protection, which is what agencies like the SEC are meant to do, but at the same time, we must ensure that other public policy goals can be met, such as people complying with taxes and adhering to so-called anti-money laundering regulations, etc. The SEC will not undermine the stability of the system, so I think it is best to bring cryptocurrencies into the public policy framework and ensure we achieve these important public policy goals. I apologize for interrupting you to explain because you mentioned the word "strong."

MR. IGNATIUS: No, I— in my view, "strong" is not a bad word. So, let’s delve into this detail. In your testimony, you said, "If we don’t address these issues surrounding the existence of cryptocurrencies, I worry that many people will be harmed." You mentioned last week that the SEC already has the authority it needs to regulate cryptocurrencies. However, when I read your testimony, you also talked about the SEC wanting more authority to do "cryptocurrency regulation" more appropriately. So please tell us, what can the SEC do now with the authority it already has? And what else would you like to do in areas where you currently cannot regulate?

MR. GENSLER: In fact, the SEC has been around since the 1930s and has a very broad range of powers. Congress decided to write a broad definition of "securities," which includes 30 or 35 subparts. Then, of course, this has sometimes been challenged in court, including the Supreme Court. But as Justice Thurgood Marshall wrote in 1990 regarding the definition of "securities," Congress used broad strokes to protect investors from fraud.

In finance, you know, people’s nature is that they try to sell something and exaggerate it, like—you know, the typical street vendor in the world. So this broad definition gives agencies like the SEC significant authority. If someone—if these tokens—and there are five or six thousand different projects—if these tokens have the attributes of investment contracts or notes, or have stock or bond attributes. Essentially, one of the core questions is—whether there is a platform: a trading platform that allows you to buy and sell these tokens, a lending platform, or whether you can earn returns through these tokens. The cryptocurrency industry not only has dozens of tokens but sometimes hundreds or thousands of tokens. They likely play roles that fit the definition of securities, investment contracts, or notes on these platforms, so these platforms should be regulated, and they should figure out how to register and take on the responsibilities of investor protection.

Now, not many people are doing this, so I’m really concerned that we will continue to bring these enforcement cases, but if we don’t, there will be problems. Lending platforms or trading platforms will run into issues. Frankly, when that happens, I think many people will be harmed.

MR. IGNATIUS: So, the question is whether you want Congress to give you more power to regulate this new area of crypto. You mentioned that some of these tokens may have the attributes of securities, which would fall under your regulatory scope------

MR. GENSLER: Well, actually—if I may say, I think my predecessor Jay Clayton said it well around February 2018, and I think he was right, that many tokens are securities. You know, that’s a fundamental idea. David, if you ask some of the listeners of this program to give you their money, you say you will provide something of value. They rely on you, David, and perhaps five to ten other entrepreneurs and computer scientists to build a platform, or tokens, etc., and they give you funds expecting to make a profit. If that’s the case, the U.S. Supreme Court made it clear long ago that this is an investment contract.

Think about it. This is a straightforward idea. You, David, raised some money. People rely on you, expecting to make a profit. As Thurgood Marshall wrote, we provided a broad definition of securities through Congress to ensure the safety of those investors. So, I believe that in fact, many tokens are securities, and that’s what we are working to do.

Now, regarding Congress, I believe the U.S. already has two market regulatory agencies. I am fortunate to serve as the chairman of the SEC, which is the sister agency to the Commodity Futures Trading Commission (CFTC), which is responsible for regulating derivatives and has strong regulatory powers over derivatives, with various enforcement powers over commodities. While some crypto tokens have more commodity attributes, most are securities, and some tokens have both commodity and security attributes.

I think how we coordinate is very important. Although we are both powerful regulatory agencies, the CFTC has some authorities that we do not have—so we need to coordinate with each other. Additionally, how we coordinate with banking regulators on a new function is also important—I don’t know if it will involve working with banking institutions, especially regarding stablecoin regulation—we also coordinate with marketing agencies because these stablecoins may have investment contract attributes, and some attributes of banking products, but banks currently do not have the full range they need, so we need to explore how to work with Congress to address these issues.

MR. IGNATIUS: So, I just want to make sure I’m clear on this. You say that securities law and banking law have broad definitions of securities, but this definition is like a broad brushstroke. Do you have a clear definition?

MR. GENSLER: Well, at least in terms of securities law, at least in terms of securities law.

MR. IGNATIUS: So, my question is simple: do you think you need additional congressional authorization to do what? In your judgment, does the SEC not have a way to better regulate, scrutinize, and ensure transparency in cryptocurrencies? Or do you already have enough power, especially considering the current way laws are being made?

MR. GENSLER: I believe the SEC already has strong powers, and we will continue to use those powers. I also believe that better definitions need to be provided for some platforms, such as platforms trading securities, platforms offering lending products, and platforms with so-called "collateral products." I’m happy to describe these to the audience, but in fact, if you’re going to put tokens on a platform and then receive returns, then those platforms will be regulated, and we will also become the "police" and take some enforcement actions.

Working with Congress will definitely help because there is a lot of coordination among our financial regulatory agencies. I’ll let the banking regulators speak for themselves, but we are currently working under the guidance of Treasury Secretary Yellen to draft a report on stablecoins. In the world of stablecoins, I do believe we will get some help from Congress, and Congress can help us coordinate on commodities and securities. But as far as the SEC is concerned, I do believe we already have strong authority, but there are still gaps compared to other regulatory agencies, as I have identified.

MR. IGNATIUS: The appeal of these new tools, cryptocurrencies, lies precisely in their lack of regulation by banks and existing financial institutions, and they are not bound by traditional regulations, which is actually part of the reason for their emergence. The question is, if the kind of system you’re talking about is established, will it accelerate the development of these tools in other jurisdictions or other unregulated areas? You know, it’s almost like a reverse arms race. People will always find new ways to evade your scrutiny. Are you worried about that?

MR. GENSLER: David, new technologies emerge, the internet emerged, and we all saw the internet become popular in the 1990s. This is a question—how will regulation adapt to our public policy goals and framework? Are we taxing businesses on the internet? What about speech on the internet? We need to sort these things out.

Frankly, new technology is often a good thing, but it challenges the system; however, I don’t think new technology really exists outside of a public policy framework for the long term. Congress can come together and change new technologies; they can say, "Listen, no matter how new the technology is, we, Congress, don’t care if people are defrauded, we don’t care if markets are manipulated." However, I don’t think Congress would say that. Cryptocurrency is an emerging field, and I have publicly stated that it is rife with issues like fraud and abuse. As you said, cryptocurrency is a global market, operating 24/7, and there are also innovations challenging traditional finance, which is actually very exciting and is why I have studied cryptocurrency so closely at MIT. But I also want to say that cryptocurrency needs to develop within a public policy framework.

Think about it, those crypto projects, 5,000, 6,000-plus crypto projects are raising funds from the public. If they are not raising funds based on public expectations of profit, and the public wants to retire better next year or enjoy better vacations, then what is investment?

What I want to say in conclusion is that historically we have tried private forms of currency. In the U.S., we might remember something called the Wildcat Banking Era, which occurred from the 1830s to the 1860s, after President Jackson got rid of the Second Bank of the U.S.—sorry to my history teacher, I can’t remember the exact dates. But we had banks issuing paper money, and they were competing with each other. The paper money in Philadelphia was different from that in Baltimore, and even within Philadelphia, different paper currencies were competing. But all of this came with many costs and many problems, so Abraham Lincoln established an oversight body called the "Controller of the Currency," and 50 years later, the Federal Reserve emerged.

So, only public money can achieve a lasting position globally; private money typically does not last that long. Therefore, I believe those 5,000 or 6,000 private forms of cryptocurrencies do not have long-term viability because history has already told us the outcome. So, I think it is worthwhile to build an investor protection system around this.

MR. IGNATIUS: Let me ask you one more "interesting" question about the field of crypto regulation. The Wall Street Journal reported that large banks in the U.S. and Europe have told the Basel Committee on Banking Supervision that they need to set standards for regulation because they oppose strict capital requirements for Bitcoin. The Basel Committee on Banking Supervision is one of the main global regulatory bodies for preventing financial risks. I’m curious if you’ve seen this news, do you agree with the stance taken by the banks, or do you want to push back against them?

MR. GENSLER: David, I haven’t looked into it closely, so I don’t know. I mean, highly volatile assets—Bitcoin is such an asset. Bitcoin is digital, scarce, and I could even say Bitcoin is a speculative store of value. To hold appropriate capital if Bitcoin is on a bank's balance sheet seems to align with our past responsibilities, so there needs to be appropriate regulatory measures to address potential losses, but I haven’t seen specific measures yet.

MR. IGNATIUS: One last quick question about the cryptocurrency industry, and then I want to turn to another topic at the end of the interview. This question is—are these cryptocurrencies, tokens, regulated, and is investor protection beneficial for the U.S.? In the long run, is cryptocurrency just an aspect of financial development and financial engineering that is beneficial for the U.S. as an economy? Is it beneficial for investors? Or will it only bring regulatory concerns?

MR. GENSLER: In fact, I have discussed these issues in class and while working with colleagues. I believe cryptocurrencies are catalysts for change; Satoshi Nakamoto brought innovation, not just Bitcoin, but the entire distributed ledger technology has become a catalyst for change, with central banks and the private sector around the world exploring how to enhance our payment systems at lower costs, making them operate in real-time 24/7. So, there is some competition going on now.

I also think that the way exchanges operate and certain forms of decentralized lending have produced some interesting innovations. In the U.S., P2P lending has developed for 15-20 years, and we have experimented with it; decentralized lending is a new type of experiment. So, I think these innovations are challenging established business models and are very interesting.

On the other hand, I don’t think a lack of regulation is a good idea. If we wait until problems arise and then we, the official regulators, rush in, although we have congressional hearings, the cryptocurrency market has now reached $2 trillion, with 5,000 to 6,000 projects. It is best to implement regulation in advance regarding investor-consumer protection, tax compliance, anti-money laundering, and financial stability.

I believe history tells us that private forms of currency do not last long. Investment contracts outside the scope of investment protection can easily harm people. If our lending platforms are outside the boundaries of securities or banking, they often become over-leveraged, ultimately leading to financial stability issues. These stablecoins are now like poker chips in a casino, so I use the analogy of the "Wild West." I mean, there are many casinos in the Wild West, and the poker chips in those casinos are these stablecoins; you know, these chips are placed on the casino tables.

So, I think there have already been many warning signs and flashing lights, so I would prefer to strengthen regulation in advance.

MR. IGNATIUS: So, this is a clear and ambitious agenda. One last question: you recently mentioned that the SEC is about to release a report on the GameStop trading. How long can we expect this, and can you give us some details?

MR. GENSLER: Well, I am honored to be the chair of a five-person commission. As I said last week, the entire report is now before my commissioners and is expected to be released soon. You know, many details have already been disclosed. So, perhaps I lowered expectations a bit because, you know, the Washington Post and other media have extensively covered the "GameStop incident" in January.

MR. IGNATIUS: Finally, I want to thank Chairman Gary Gensler for the insightful discussion on one of the hottest topics in the global financial arena. I believe you have made it clear what is on the "SEC plate" and what you are considering doing. Thank you for joining us.

MR. GENSLER: Thank you very much, David, and thank you all for listening.

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