Core Summary

  • After the House passed a digital assets bill, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler criticized the cryptocurrency market for "fraud and scams," stating the bill would create a flawed legal framework.
  • "It comes down to the risks of not complying with U.S. law," Gensler said Thursday, noting that "some of the leading figures in this field are now either in prison, awaiting prison, or awaiting extradition."
  • Speaking at an event hosted by the Investment Company Institute, Gensler said that the 15,000 to 20,000 cryptocurrency tokens worldwide are more like tools for ransomware than currency, and that "there are many very significant players in the market." He added that so-called exchanges "operate in conflicting ways," saying, "We would never allow a traditional exchange to bet against its customers and act as an active market maker."

In-Depth Analysis

According to data from Deloitte, a growing number of companies in the U.S. and other countries have adopted digital assets as an alternative to traditional currency. In a June 2023 report, Deloitte stated: "A growing number of companies globally are using Bitcoin and other cryptocurrencies and digital assets for investment, operational, and trading purposes," noting that by the end of 2022, approximately 2,352 U.S. companies accepted Bitcoin.

Deloitte also noted that companies may find that cryptocurrency opens up new demographic markets, including "customers with disposable income, an interest in cutting-edge technology, and an interest in luxury goods and services." Citing a survey, Deloitte said that 85% of merchants view cryptocurrency payments as a way to reach new customers. Additionally, corporate use of cryptocurrency may enhance employee awareness of technology and prepare for the potential broader deployment of central bank digital currencies in the future.

Meanwhile, the World Economic Forum stated that weak or absent regulation of digital assets could lead to global financial instability. In a May 2023 report, the World Economic Forum said: "Currently, crypto assets account for a very small share of the global financial system, but even so, the lack of regulation in some jurisdictions and the absence of a unified regulatory framework have raised concerns about whether this market could pose a threat to global financial stability." The forum also warned: "The impact of the macroeconomic environment could include spillover effects, market contagion, liquidity crises, sudden unemployment, and investor capital losses."

In the U.S. House of Representatives, sponsors of the Financial Innovation and Technology for the 21st Century Act said the legislation would clarify the regulatory environment for digital assets while allowing innovation and market growth. In a statement after the bill passed on Wednesday, one of its sponsors, Republican Representative French Hill of Arkansas, said the law would establish a "digital asset regulatory framework that protects consumers and investors while ensuring U.S. leadership in blockchain innovation."

Gensler opposed this. In a statement before the House vote, he said the legislation "would create new regulatory loopholes and undermine decades of precedent regarding the regulation of investment contracts, exposing investors and capital markets to incalculable risk." He noted that one of the bill's multiple flaws is removing blockchain investment contracts from the statutory definition of securities, thereby depriving investors of "time-tested protections under federal securities laws."

Gensler also said the legislation would allow issuers of crypto investment contracts to "self-certify" their products as "decentralized" systems, thereby classifying them as a special category of digital commodities and removing them from SEC oversight. He warned: "The self-certification process envisioned in the bill not only endangers investor protection in the crypto space, but could also undermine the broader $100 trillion capital market by providing a pathway for those seeking to evade rigorous disclosure requirements, prohibitions against customer fund losses and theft, SEC enforcement, and the private right of action for investors in federal courts."

The House passed the digital assets legislation by a vote of 279 to 136. It remains unclear whether the Senate will consider the bill.