Bloomberg Interview with SEC Chairman Gary Gensler: Crypto Investors Should Accept SEC Regulation

Author: Lydia Beyoud, Bloomberg

Compiled by: Qianwen, ChainCatcher

Gary Gensler positions himself as one of the most influential policymakers in American finance. But his early career was not like that. He is a Baltimore native, who describes himself as a "market person," having worked at Goldman Sachs for 18 years, becoming a partner at 30, and leading departments such as fixed income and Asian currency trading. Gensler later left to take a senior position at the U.S. Treasury under Bill Clinton, where he helped pass a bill that exempted over-the-counter derivatives from regulation.

In 2001, following the fraud scandals involving companies like WorldCom and Enron, Gensler worked for a Maryland senator, drafting the Sarbanes-Oxley Act. The purpose of the act was to enhance the accounting processes and related disclosures of publicly traded companies. After the 2008 financial crisis, he was appointed by President Obama as chairman of the Commodity Futures Trading Commission, tasked with reforming the $400 trillion swap market—one he had helped deregulate. Industry executives who negotiated with him at the time described him as a formidable opponent and a skilled negotiator.

In less than two years as chairman of the U.S. Securities and Exchange Commission, Gensler has already begun to implement a series of plans that will impact brokers, retail traders, digital assets, private funds, corporate boards, and financial and stock markets.

In late October, 65-year-old Gensler accepted an invitation from Bloomberg Markets in a room at the SEC's Washington headquarters, where he discussed his plans to reach the "summit of regulation."

LYDIA BEYOUD: Competition seems to be at the center of your agenda; do you accept that description?

GARY GENSLER: I have always thought of finance as the middle of an hourglass. The two sides of the hourglass widen, allowing a lot of sand to come in—the sand being money and risk—and the finance in the center needs to price and allocate that money and risk. We have three areas of focus: one side is investors, the other side is issuers, and in the middle is the market. A lot of what I focus on daily is how we can drive greater efficiency and competition in that middle layer to lower costs for investors and provide better returns. I believe this will also lower costs for issuers, those raising capital to give their great ideas a chance to succeed.

LB: What regulatory gaps are you looking to address?

GG: The pace of technological advancement is rapid. We have comprehensive digitization of financial assets—I’m not talking about cryptocurrencies. I’m referring to government bonds, ordinary equity securities—they are all digitized, and trading is very fast. Over the past few decades, communication costs have plummeted, and we have achieved global connectivity.

We are undergoing a significant transformation around predictive data analytics, using data, artificial intelligence, and machine learning. But we have not updated many of the core rules surrounding market structure, whether it’s the U.S. Treasury market, which is valued at $24 trillion to $25 trillion, or other markets, such as the rapidly growing private funds, including hedge funds and private equity, which together were valued at about $21 trillion at the end of last year. This is about to exceed the size of our entire commercial banking sector, which is only $23 trillion. Therefore, we recognize the rapid changes in technology, and within the powers granted to us by Congress, we are updating the basic rules to improve the lives of the American public.

LB: Are you saying that technological changes have created regulatory gaps that you need to address, or do you want to strengthen securities regulation for the future in some way?

GG: Historically, the nature of finance tends to be centralized due to economies of scale and network effects. The same is true for the data economy. The Medici family in the 15th century was like that, Morgan Chase is like that, and so is cryptocurrency. So first, it’s about how to do what Congress has told us to do in the regulations. They made us a competition-focused agency in 1975, and in 1996 they amended our laws to say we must focus on competition and efficiency. Therefore, we are looking at how to use tools like transparency, access, and fair trading to achieve that and lower costs in the middle.

Second, I do believe technology has led to gaps. For example, the robo-advisory industry uses algorithms to make decisions and recommendations, relying on various data sources, such as telematics in cars, our driving behavior, our social media footprints, etc., to guide clients to do this or that. There are inherent gaps and potential conflicts of interest here. Investment advisors have a fiduciary duty to put their clients' interests ahead of their own, but their algorithms and data may lead them to prioritize the income of the robo-advisors over the needs of the clients. The third point I want to make is that business models are changing; nothing is fixed.

LB: You mentioned you want to make the market fair for the public. But an entire generation of Americans is losing trust in the financial markets. Millions of Americans cannot afford food or medicine, let alone have meaningful retirement savings or participate in the financial markets. What specific actions can the SEC take to restore trust and support public participation in the markets?

GG: The SEC does have influence, but our jurisdiction is limited to overseeing a $100 trillion capital market, which is about protecting those investors and facilitating issuers in raising capital in the market. We cannot compel people to do good.

But I do believe trust is foundational to the financial system; historically, financial systems that have benefited society tend to be almost faith-based. Those that have collapsed often lack trust. Transparency is crucial. If you want to raise funds from the public, you must disclose all important information and financial conditions comprehensively, fairly, and truthfully. Our agenda is working towards that—providing a fair competitive environment between so-called dark pools and lit markets in our stock market. Every day, one-third to half of stock trades in the U.S. occur in dark pools. Therefore, disclosure and transparency are really important, but it’s also about market integrity—preventing fraud, manipulation, and ensuring fair trading.

I think it’s also about access—not just the opportunity to enter the market but also the opportunity to access information. Whether you are buying 10 shares of stock or 100,000 shares, whether you are an ordinary person just starting to save for your vacation or the CEO of a large company, you should be using the same rules. The entire market should provide fair trading, a level playing field, and market integrity. These are the things we can focus on, and then fulfill our duties.

LB: Many of your proposals increase the information that market participants must provide. I think the proposal regarding climate disclosures from stock issuers is the most prominent. A report from the SEC's Office of Inspector General highlighted some concerns from senior executives that the pace of your agenda may exceed the resources you have to complete it. The report stated that this could lead to some litigation risks. How do you view the issues raised in that report, and how will you work to help these different rulemakings address the legal challenges ahead?

GG: During the last administration, the agency was reduced by about 5%, and during this period, our numbers should at least grow that much. We have about 4,500 people, half of whom are in review and enforcement. Our staff processes about 50,000 to 100,000 critical documents and the decisions surrounding those documents each year, such as companies going public, new mutual funds, or exchanges making rule filings. As a commission, we actually vote on about a thousand items each year. I share this with you to say that this outstanding staff and agency have a lot of work to do.

Regarding your second point, how we will move forward, we have released a public agenda item list that is quite similar in many ways to what my predecessor released, especially in length. We have listed about 50 or 55 items. My predecessor finalized 64 rules during his four-year term.

LB: That’s true, but the report notes that in the first eight months of 2022, you proposed about 26 rules, which is more than half of your proposed agenda. Will you aim to propose as many proposals as possible before January?

GG: Government service is not to be taken lightly. Working with staff to put ideas on paper, write them into rule forms, discuss them with the five commissioners, draft proposals, and publish them to the public is indeed an important task. I am one of five, I am a twin, and I am a partner at a Wall Street firm—we all rise and fall together. I believe in the role of this team. So if we successfully put out proposals earlier than my predecessors, it may be due to our team-oriented approach, as we try to address issues early and get proposals out.

LB: I want to ask you a question about cryptocurrency.

GG: Our bond, stock, and other securities markets are worth $100 trillion. The global cryptocurrency market is about $1 trillion. If you look at the U.S. stock market and see how many companies have a market capitalization greater than the leading cryptocurrency, Bitcoin, it’s about 30. I just want to say from a scale perspective, most of our focus is not on cryptocurrency. But what’s your question?

LB: Given the collapse of FTX and its impact on other digital asset platforms, what are your views on the next steps for the cryptocurrency industry? What impact will this have on other digital asset platforms? How can the government maximize help for those affected by these events or those investing in cryptocurrencies?

GG: While I cannot comment on any private entity, the best way for cryptocurrency investors to receive the protections they deserve is for intermediaries, such as cryptocurrency exchanges and lending platforms, to comply with the law and register with the SEC. Investors have benefited from nearly 90 years of carefully designed protections that provide the necessary disclosures and guard against misappropriation of customer assets, fraud, manipulation, pre-sales, and other conflicts of interest that harm investors and market integrity. There is nothing about the cryptocurrency market that is incompatible with securities laws.

LB: There are researchers studying quantum computing who say it could potentially break blockchain technology in about the next decade. Is quantum computing a threat to the survival of digital assets, and what does that mean for regulators like you?**

GG: Satoshi Nakamoto’s white paper was published 14 years ago, discussing a ledger that stores this information on a blockchain. Satoshi raised the question—whether the underlying ledger could be cracked by quantum computing, and I think that is almost inevitable. Cryptography is, to some extent, a mathematical problem. Even with one-way mathematical formulas, you can use brute force to reverse and crack them. I don’t know if her conclusion will be proven, but interestingly, even at that time, this was considered, which is why Satoshi designed things like double hashing functions.

From a regulatory perspective, regardless of whether it’s quantum computing or whether blockchain technology will persist, our focus is on protecting investors. At the time of this interview, there are about 10,000 tokens that the public is investing in. That is the role of the SEC. It’s about comprehensive, fair, and truthful disclosures, ensuring that intermediaries do not deceive, manipulate, or mislead the public. It’s about holding these asset managers accountable to the fiduciary duties I mentioned earlier. It’s all the same public policy. It just happens to relate to blockchain.

LB: On October 19, the Fifth Circuit Court ruled that the funding structure of the Consumer Financial Protection Bureau is unconstitutional. There seems to be an increasing skepticism toward national administration in our court system. Many industry groups are actually watching closely, and once your rules are finalized, they will sue if they dislike any aspect. If someone challenges a rule and the court ultimately overturns some of the agency's powers, what will happen? How are you considering these issues?**

GG: I want to share a little story from my early days at the Commodity Futures Trading Commission. It was late spring 2010, and the House and Senate were discussing what would later become the Dodd-Frank Act. We were expecting the president to sign a bill and were just beginning to think about how to advance the more than 60 rules we proposed. In fact, the draft at that time mandated that Congress required us to complete all work within a year. We had 30 to 40 team leaders in the hearing room downstairs at the CFTC, and we spent two hours discussing how to move forward. I shared a story with them—I have a twin brother, Rob. He has never served in government. He was a research analyst at T. Rowe Price and later became a portfolio manager. In the 1990s, he studied the telecommunications sector. He said, "Don’t let what happened at the FCC in the 1990s happen to you. They put some rules in place, and they all got overturned."

I shared this with the people in the room. I said, "This [outcome] does not help the American public. We are facing a significant crisis, part of which comes from the swap market. Congress is about to give this agency a lot of additional authority to reduce risk and increase market transparency. Let’s do this within the bounds of the law, within the economic scope, and in a sustainable way."

At that time, we were talking about a different agency at a different point in time. But at that time, we did 67 Dodd-Frank actions, and we did another 15 or 16 unrelated actions, totaling over 80. We faced challenges in court; that’s part of democracy, part of our constitutional system. We only lost once. And the challenges we faced were far more than one.

Congress established this agency 90 years ago. They have amended and revised the laws multiple times. Uncertainty is always present. However, the agency’s job is to protect the public—whether in the stock market or the Treasury market. We must follow the powers granted to us by Congress and fulfill our obligations within those powers. I believe that any time the Supreme Court speaks, it is important, and we will pay attention to it and do our utmost to comply with their rulings.

LB: I read that you enjoy mountain climbing; why do you like it?**

GG: I enjoy this beautiful, serene, yet challenging physical activity. On the day of the summit, I woke up in the cold of Mount Rainier, with my daughter sleeping beside me, and I felt so fulfilled in life. I woke up at 12:30 AM, put on my boots, gathered all my gear, and stepped out of the tent. It was all exhilarating.

I learned about the spirit of sports from Olympic athlete Ted Nash. He was the coach of the rowing team at the University of Pennsylvania, and I showed up in the spring of 1975 hoping to be part of the sailing team. Through sailing, I learned about team sports because if anyone's oar is slightly off the surface of the water, or if their seat slides improperly, you lose the race. That’s when I started running and biking, and I’ve loved sports ever since. I’m slow and steady. Through sports, I learned that preparation is crucial. You need to know what your goal is: reaching the summit, a 100-mile bike ride, or the finish line of a marathon. But to reach the summit, you need to have a strategy and do a lot of preparation.