The Securities and Exchange Commission (SEC) is planning a number of changes that could aggressively increase its regulation of the cryptocurrency industry, particularly in the oversight and functioning of both centralized and decentralized exchanges.
Speaking at the University of Pennsylvania Law School on Monday (April 4), SEC Chairman Gary Gensler cited the need to offer greater investor protection on “crypto asset platforms that serve millions, and sometimes tens of millions, of retail customers.” buy and sell the platform directly without going through a broker.”
The commission, he announced, plans to regulate both centralized and decentralized exchanges involved in trading or lending cryptocurrencies by allowing them to register with the agency.
See also: Gensler: SEC is coming for crypto exchanges
The SEC chairman also hinted that he heard the key message of President Biden’s executive order regulating cryptocurrency: the various competing government agencies must work together to create a common regulatory framework for digital assets.
Gensler announced that he has ordered his agency to make peace with the Commodity Futures Trading Commission (CFTC), with which the SEC has been arguing over whether cryptocurrencies are securities or commodities for the past six months.
Share and share on equal terms
The two regulators, who have a strong case for controlling the cryptocurrency business, have been fighting the issue for years. Gensler, like his predecessor Jay Clayton, argues that virtually all “crypto tokens are investment contracts” within the meaning of the law.
However, in his speech on Monday, Gensler said something that could spell a sea change in the SEC’s perspective on the matter.
“Crypto platforms currently list both crypto commodity tokens and crypto security tokens,” he said, “including crypto tokens that are investment contracts and/or debentures.”
As a result, Gensler said he asked SEC officials to figure out how “we could collectively target such platforms that could trade both crypto-based security tokens and some commodity tokens by using our respective agencies.”
By and large, Gensler’s SEC has had the upper hand in the fight for control of crypto: it can, and often does, take enforcement action against cryptocurrency issuers and exchanges for the illegal sale of unregistered securities. Recently, this has been expanded to include crypto lending programs, forcing BlockFi to pay a $100 million settlement for its lending offering.
Related: BlockFi’s $100M SEC Settlement Sparks Internal Controversy
The CFTC has no real reason to do this when a cryptocurrency is a commodity token — which is how the SEC sets precedents with what the crypto industry calls “regulation by enforcement” — although none have yet been tested in court.
Last month, CFTC Chairman Rostin Behnam made an aggressive plea for more crypto authority before a clearly supportive Senate Agriculture Committee, pointing to what he described as a “noticeable loophole” in the law about “what is a security and what is a commodity.” constitutes”. .”
Continue reading: At Senate hearing, CFTC Chairman Behnam ramps up battle with SEC over crypto oversight
Behnam also called for more resources to set up an enforcement and oversight department.
royal control
On the other hand, by striving for control of crypto exchanges, Gensler would make the CFTC a de facto junior partner at best.
In terms of registering and regulating exchanges, Gensler suggested that this might not be too difficult to pull off, noting that the top five crypto-only trading platforms account for 99% of the market. He added that the top five crypto-to-fiat on- and off-ramping exchanges account for 80% of the market, and the top five decentralized exchanges (DEXs) also account for 80% of this market’s activity.
Two changes could have a significant impact on how cryptocurrencies are bought and sold. First, the SEC is trying to force exchanges to segregate crypto assets — something virtually everyone is doing through “hosted” wallets.
But with more than $14 billion stolen last year, Gensler said the SEC is reviewing how “best to ensure the protection of client assets, specifically whether it would be appropriate to separate custody.”
Second, Gensler said the agency is considering directing both lending and trading exchanges to “separate market-making functions” — something that could have profound implications for decentralized finance (DeFi). DEXs work through automated market makers, commonly referred to as AMMs.
AMMs replace pools of investors locking cryptocurrencies into loan pools that provide the liquidity that traditional exchanges bring via market-making firms. It’s not clear if Gensler specifically included DeFi AMMs in this proposal, but it would be difficult to run DEXs without them.
See also: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?
These AMM liquidity pools are also a major source of DeFi investing in the form of liquidity mining.
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