US regulator puts crypto markets in the crosshairs

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April 06 2022
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The United States government is looking to put crypto markets under the microscope by introducing regulations that would significantly change how decentralised digital currencies are managed through exchange platforms.

Essentially throwing the gauntlet at largely unregulated crypto markets that have previously enjoyed a relatively laissez-faire approach from Western governments, the US Securities and Exchange Commission (SEC) is eager to move on the $2 trillion market.

Although the SEC already regulates legacy markets, including securities exchanges, brokers, dealers, investment advisers and mutual funds to promote “fair dealing” and “prevent fraud”, crypto markets have largely evaded government scrutiny. As such, a move that backflips on its current approach could set a new global benchmark for how markets are managed.

Speaking to the Penn Law Capital Markets Association Annual Conference on 4 April, SEC chair Gary Gensler suggested that a top-level review into crypto markets could be warranted. Essentially, in a call-to-arms to protect cryptocurrency investors from potential fraud or manipulation, what Mr Gensler proposed is a form of crypto market regulation to promote investor confidence.

“There’s no reason to treat the crypto market differently just because different technology is used. We should be technology-neutral,” Mr Gensler told the conference attendees.

With platforms, stable coins and crypto tokens in the SEC’s regulatory crosshairs, Mr Gensler said that new technologies come along all the time, but the question is “how we adjust to that new technology”.

“Crypto may offer new ways for entrepreneurs to raise capital and for investors to trade, but we still need investor and market protection,” Mr Gensler said.

What Mr Gensler would like to see is the platforms themselves registered and regulated much like regular retail exchanges.

“These crypto platforms play roles similar to those of traditional regulated exchanges. Thus, investors should be protected in the same way,” he said.

“In my view, regulation both protects investors and promotes investor confidence, in the same way that traffic laws protect drivers and promote driver confidence. It’s at the core of what makes markets work.”

Fraud and cyber criminality have been big problems for crypto investors using popular exchanges for their daily trading, where people’s accounts are highly vulnerable to theft and cyber attacks unless they move their coins into so-called “cold wallets”, which act as an offline safeguard for people’s valuable crypto tokens.

Not only is fraud a problem, but also the known volatility in many so-called “alt coins”, which may permanently collapse in value due to their start-up backend businesses failing, which leaves many underprepared investors at risk of losing significantly in their portfolios – and Mr Gensler hopes to mitigate that.

Also on Mr Gensler’s agenda are platforms that trade both crypto-based security tokens and commodity tokens, with the SEC chair announcing a partnership with Commodity Futures Trading Commission (CFTC) to address existing issues.

“We already have robust ways to protect investors trading on platforms. And we have robust ways to protect investors when entrepreneurs want to raise money from the public,” the chair said.

“Let’s not risk undermining 90 years of securities laws and create some regulatory arbitrage or loopholes,” he concluded.

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