SEC Chairman Publishes Article: SEC Treats Cryptocurrency Market the Same as Other Capital Markets

Original Title: 《The SEC Treats Crypto Like the Rest of the Capital Markets》

Original Author: Gary Gensler, SEC Chairman

Original Translation: Wu Says Blockchain

What is the relationship between automobile manufacturers and crypto lending platforms? Whether it’s a car or an investment tool, consumers and investors should be protected.

In September 1966, President Lyndon Johnson signed the National Traffic and Motor Vehicle Safety Act. Nearly six years later, seat belts and other basic safety features were still standard equipment. Despite many innovations in automotive technology, this remains true. Whether a car runs on gasoline or electricity, drivers and passengers should be protected.

Similarly, the federal securities laws signed by President Franklin Roosevelt during the Great Depression were designed to protect investors. There is no reason to treat the crypto market differently just because it employs different technologies.

Recent market events illustrate why it is crucial for crypto companies to comply with securities laws. Some crypto lending platforms have frozen investors' accounts or gone bankrupt outright. When a platform goes bankrupt, these investors must queue in court.

Consider this hypothetical: An app run by Bob can yield returns of 4%, 7%, or 19%. Alice and millions of everyday investors place their assets in this app. Investors benefit from understanding the reasons Bob claims he will provide certain returns. If an investment sounds too good to be true, it probably is. Alice can decide whether to invest based on these disclosures.

These disclosures help her understand what Bob is doing with her assets. Is he trading? Is he lending the assets to other investors? Is he running a hedge fund? How is he funding the promised returns, and what risks is he taking?

Notably, it does not matter what kind of assets Alice invests in Bob's app—cash, gold, bitcoin, or anything else. What Bob does with those assets determines what protections the law provides.

Moreover, depending on how Bob uses Alice's assets, he may also be operating an investment company, such as a mutual fund. In this case, Bob would have to provide additional safeguards, making it more difficult for fraudsters to deceive investors.

Bob cannot evade these time-tested investor protections by simply rebranding the products or promised benefits. He might call it interest, yield, income, or annualized return rewards. He might say his app is a lending platform, a cryptocurrency trading platform, or a decentralized finance platform. In decades of case law, the Supreme Court has made it clear that the economic reality of a product—rather than its label—determines whether it is a security under securities law.

The SEC confirmed this in its recent agreement with the crypto lending platform BlockFi. The company borrowed over $10 billion in crypto assets from 570,000 investors, offering them variable rates of return. This made the loan products it offered to investors—the BlockFi Interest Account—essentially a security. BlockFi pooled these assets, packaged them into loans for institutional borrowers, and invested in other securities. This made BlockFi an investment company.

Here, the issue is not that BlockFi borrowed cryptocurrency. In fact, you could substitute "cryptocurrency" with any other asset. The problem lies in what it did with the borrowed assets and what it, as a company, failed to do: provide the necessary disclosures to investors. Complying with our laws can protect the investing public. Unfortunately, some platforms offering crypto loans have not complied.

We reject the notion that crypto lending is unregulated. In fact, these rules have been in place for decades. Some crypto platforms have simply chosen not to follow the rules. Non-compliance is not an inevitable result of the crypto business model or the underlying crypto technology. Yet these platforms seem to suggest they have a choice—or worse, that they can "catch us if you can."

As I stated in a speech last year, "Don't get it wrong: If a lending platform offers securities, it is subject to SEC regulation." In many cases, the Commission and state regulators have addressed how relevant case law applies when it comes to crypto assets and crypto lending.

Just as automobile manufacturers had to add seat belts, compliance with securities laws comes at a cost. In any case, platforms offering crypto lending must comply, not only because it is the law but also because it helps protect investors and increases trust in our markets.

Fortunately, there is a path forward. I encourage platforms offering crypto lending to come in and engage with SEC staff. Bringing these platforms into compliance with securities laws will benefit both investors and the crypto market.

Meanwhile, the SEC will act as a police force to regulate the crypto market. Just like seat belts in cars, we need to make investor protection the standard in the crypto market.