This is the second in a three-part series based on Gary Gensler’s extensive previous public statements on crypto. Here is Part 1. A link to Part 3 will appear here when it is posted.
Gary Gensler is likely to become Chairman of the US Securities and Exchange Commission (SEC) in the coming days. As a professor at the Massachusetts Institute of Technology (MIT), Gensler is familiar with crypto and blockchain. This can be seen in leading a class on the subject at MIT’s Sloan School of Management.
During the course in the fall semester 2018, Gensler gave a comprehensive insight into crypto regulation. In 2018, US regulators struggled to get the industry under control. However, between the bitcoin bull market that ended in 2017 and the subsequent surge in initial coin offerings, it was a top priority among financial regulators. Gensler’s thinking reflected many broad trends that have emerged since then.
Crypto exchange as a regulatory choke point
One element of crypto regulation that Gensler pays particular attention to is exchange. An article that Gensler co-authored with several of his colleagues at MIT outlined their central importance for regulators:
“With most jurisdictions around the world still lacking specific regulatory systems for cryptocurrencies, ICOs, or related tokens, exchanges are an important gateway in protecting against illegal money transfers.”
Which remains largely true. Crypto exchanges, which are also referred to in the legal language as “Fiat On- and Off-Ramps”, act as centralized intermediaries in a largely decentralized economic system. The US government is therefore initially putting pressure on the exchange in the crypto industry. Gensler’s team argued that the situation was untenable:
“In the United States, protective measures have so far only been taken through government-administered money transfer regulations. That approach – regulating custodian duties in the same way Western Union and MoneyGram did – was unsatisfactory. “
The paper addressed the need to treat exchanges like exchanges that are registered nationally: “However, in order to better protect the investing public, crypto exchanges must be regulated more similarly than traditional exchanges.”
Unchecked exchange data
Gensler also noted some interesting points about crypto exchanges and opaque information about trading volumes. He used an October 2018 report by CryptoCompare on the Most Popular Digital Asset Trading Platforms to discuss a lack of clarity regarding exchange numbers:
“We don’t know if these numbers are correct. They are what CryptoCompare collects from 140 exchanges. But that doesn’t mean they are correct. One way they can be inaccurate is that an exchange can just lie. And when there is no rule or law against it. They can. “
Gensler also mentioned market manipulation efforts such as laundry trading as various methods of dishonestly generating data and prices for stock market production. Other areas of missing data were the number of users on a particular exchange, as well as the activity levels of those users.
Detergent trading remains a major problem on many global exchanges, with crypto being particularly vulnerable. The situation has improved noticeably since 2018, but the data quality of many exchanges remains a controversial issue. US-based crypto exchanges are subject to far more aggressive scrutiny than those outside the country. For a long time, regulators didn’t really know who was accessing which exchanges, which led to the subsequent urge for more user verification.
Few crypto exchanges had KYC protocols
Crypto exchanges are usually the first place to go to get to know your customer or KYC, and Anti Money Laundering or Money Laundering (AML) laws on the US platforms must collect a certain amount of information about their customers in order to be able to access the US operating although the exact degree is always a topic of debate.
As of 2018, 25% followed “partial” KYC and 28% observed “absolutely none”. Gensler added, “I hope none of those 28% are in the US. But they could be.”
The US has cracked down on crypto companies in the years since 2018. A large number of crypto exchanges are now blocking American residents, with Binance’s exit in 2019 being a particularly notable example. US regulators targeted the major derivatives exchange BitMEX in October 2020, citing in part the lack of KYC compliance that allowed US individuals to access investments that are not allowed in the country.
Prediction of the regulatory action
According to Gensler, the crypto industry had to struggle with a lack of protection parameters at least from 2018. He also predicted stricter in-depth US oversight, which has actually come true.
“They are going to cut a bigger footprint in 2019 or 2020 – lower the hammer if you want,” he stated. “I don’t think it will be 2018.”
In fact, various regulators have invaded the crypto space since 2018, with the US playing a particularly Hawkish role worldwide. This can be seen in examples such as the numerous cases of the SEC against ICOs, the action of the CFTC against BitMEX or the seizure of illegal stocks by the DoJ. Contrary to popular belief, regulating crypto is often good news for the industry if it offers a clear path forward.
If Gensler takes over the SEC chairmanship, the crypto industry would attract someone who thoroughly understands the crypto and blockchain space. Establishing rules and regulations based on an educated industry attitude would likely help add to the space.