Crypto products offering returns cannot avoid regulation, says SEC boss

Cryptocurrency trading and lending platforms that promise returns to investors are wrong to think that they can avoid regulation by the US Securities and Exchange Commission, the agency’s chair has said.

Gary Gensler told the Financial Times’s Future of Asset Management North America conference on Wednesday that investors in such crypto products deserved the same kind of safeguards against fraud and manipulation as bank depositors or purchasers of insurance policies or mutual funds.

“This crypto space is now certainly of a size that without those investor protections of banking, insurance[and] securities laws [and] market oversight, I do think somebody is going to get hurt,” he said. “A lot of people are likely to get hurt.”

Gensler’s intervention comes days after Coinbase, the listed cryptocurrency exchange, shelved plans to offer a digital asset lending product, initially promising a 4 per cent yield, after running into resistance from the SEC.

Coinbase had argued that the product, called Lend, should not be considered a security under federal law. The SEC disagreed and threatened to sue the company it if launched Lend, Coinbase said.

The SEC’s position is based on a Supreme Court ruling, called the “Howey Test”. It holds that an investment contract subject to federal securities law exists if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party”.

In recent months, Gensler has urged cryptocurrency platforms to contact the SEC and discuss whether they should register with the agency. On Wednesday, he noted that some companies have “said things publicly about some of those conversations”.

“There are going to be times that people come in and we say: ‘Register,’” Gensler said. “It’s not going to be everybody comes in and says: ‘Can you please tell us we are not a security’.”

He said that crypto platforms that accepted funds from investors and offered returns “should consider the securities laws carefully and talk to the agency about getting registered”.

He added: “Many of them should [register] now — or should have even in the past.”

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Gensler spoke at the FT conference after presiding over his first public SEC meeting as chair. During the meeting, the commission voted in favour of a proposal to expand requirements on proxy vote disclosure for investment managers including mutual or exchange traded funds.

The SEC said that the suggested amendments, including standardising proxy vote disclosure and reporting data in a machine-readable format, would help facilitate investor analysis. If ultimately approved, these measures would update a disclosure regime launched nearly two decades ago.

The SEC also voted in favour of a proposal to have institutional investment managers disclose votes on executive pay known as “say on pay”, a move that is part of the agency’s implementation of the Dodd-Frank Act.

The SEC’s recommendations will be open to public comment for 60 days after their publication in the Federal Register.