SEC’s Gensler: The ‘runway is getting shorter’ for non-compliant crypto firms
SEC Chair Gary Gensler joins Yahoo Finance’s Jennifer Schonberger live from Washington, D.C., to discuss the FTX fallout, crypto regulation, proper fund segregation, classifying customer assets, and the outlook for the crypto space.
JENNIFER SCHONBERGER: Welcome back to Yahoo Finance Live. I'm Jennifer Schonberger. I'm joined now by the Chair of the Securities and Exchange Commission, Gary Gensler, here at SEC HQ to talk about regulating cryptocurrencies in the aftermath of FTX's failure. Chair Gensler, it is wonderful to be with you here at HQ.
GARY GENSLER: Great to be with you, Jennifer, and your listeners.
JENNIFER SCHONBERGER: Thanks so much for sitting down with me. So many lawmakers are pointing fingers at the SEC over FTX's collapse. You have said numerous times rules, security laws are in place. And they apply to crypto. This is an issue of noncompliance. Why didn't the SEC enforce rules on the books? Could that have prevented FTX's collapse?
GARY GENSLER: We are enforcing. The Securities and Exchange Commission, I couldn't be prouder. And it started under my predecessor, Jay Clayton, has brought over 100 enforcement cases in this space. And what we've said to what is largely a non-compliant field-- there's about 10,000 of these crypto tokens. And then there is not just dozens, but maybe hundreds of service providers, broker-dealers. They might call themselves exchanges. Some might call themselves other things. You might think of them as the casinos, where in the investing public is looking for a better future. And because most of these tokens are securities, that means that the storefronts, if you wish, or the casinos, need to come into compliance with our time-tested laws.
And what that means is basically, not using customer funds, as many of them do. Their business model right now is offering the public, they say, they're purporting to offer them an interest return in crypto, 4%, 8%, 12%, sometimes 15% or even 20% returns, and then possibly trading against their customers, trading ahead of their customers, lending that out. Anywhere else in finance, these conflicts are not allowed. And they're separated out. So we have publicly been saying to these crypto intermediaries-- they might call themselves crypto lending. They may call them crypto exchanges. These crypto intermediaries, in essence, the casinos, if I might say it again, to come into compliance with the law.
We've brought a number of actions. Crypto exchange, Poloniex, last year in September of 2021, when a large exchange Coinbase wanted to get into the crypto lending space, we said that would not be compliant with the laws the way they were set up. We brought actions against crypto lending platforms, including BlockFi. And we will continue to be a vigorous securities regulator. But I really do suggest to these intermediaries, these storefronts, these casinos, if you wish, to come into compliance, work with the SEC to get into compliance, disaggregate these businesses.
JENNIFER SCHONBERGER: So given that you've laid out that firms cannot use customer assets to trade with--
GARY GENSLER: Our laws say this. Congress has said this. You can't use somebody's stock assets either.
JENNIFER SCHONBERGER: But that's exactly what FTX was doing. So it sounds like they were in flagrant violation of SEC law.
GARY GENSLER: I can't speak to any one case or any one situation. But our securities laws say that you need to properly segregate customer funds. You also shouldn't be running a broker-dealer or a hedge fund and exchange. The New York Stock Exchange doesn't also have a hedge fund on the side and trade against their customers.
JENNIFER SCHONBERGER: Right. So to your point, FTX was reportedly using more than half of customer assets to fund risky bets at Alameda Research. As you said, broker-dealers are explicitly banned from trading with customer assets. You suggested to me back in July that perhaps, that traditional broker rules would apply to crypto firms.
GARY GENSLER: They do apply.
JENNIFER SCHONBERGER: But they should be tailored to crypto as well. So can we expect rules that are specifically tailored to crypto on this in other areas next year?
GARY GENSLER: Look, this is a field that has caught the worldwide public attention around the globe. I would remind the public, if I could, this is a highly speculative asset class. These 10,000 projects, many will fail because entrepreneurs in all sorts of walks of business fail. Many will they are also because history tells us that we don't need and don't use micro currencies.
We have the dollar. We have the yen. We have the euro. We have the Sterling, the pound. There's a reason for that economically. But if the investing public wants to invest in these tokens, they need the appropriate disclosure just like they get the disclosure from the companies you might invest in in the public markets. And the broker-dealers, and the exchanges, and the hedge funds, same thing.
There's nothing incompatible about our securities laws and crypto. It's really just that there's sort of a worldwide market. Much of this is offshore. I can't speak to any one matter. But I can quote from the bankruptcy court that just 2% of the customer assets at FTX were US. So it just gives you a sense of how much of this is a worldwide market as well.
JENNIFER SCHONBERGER: Right. But can we expect tailored rules for crypto in 2023? What are your goals for regulating crypto next year?
GARY GENSLER: I've got one goal is that these platforms, the exchanges, the lending platforms come into compliance. They can do that appropriately working with the SEC. Or we can continue on the course with more enforcement actions. And I would have to say that the runway is getting shorter.
JENNIFER SCHONBERGER: The runway is getting shorter. You've repeatedly called on these exchanges to come in and register. And you said you're talking to--
GARY GENSLER: And not just register, come into compliance. Separate out their businesses appropriately. Protect the public.
JENNIFER SCHONBERGER: But to your point, we've heard from Coinbase, the largest US exchange, that they're in dialogue with you. But they say it's rhetoric now. They don't see a path forward. So given what you were saying, given what they're saying, what's the roadblock? What's the holdup here? Why is this taking so long?
GARY GENSLER: It really is on these entrepreneurs and business leaders in the crypto space. And it's an area that has grown up worldwide with a lot of intermingling of customer funds on their platforms providing interest returns to their customers and then trading against their customers and the like.
The basic protections in our securities laws for 80 or 90 years apply to this field as well. And so it's really on them. We've been clear. We can use some exemptive authority to tailor things, as you said earlier. But it's not to drop the basic protections of separating out these businesses into a separate exchange. And again, I remind the public, we don't let the New York Stock Exchange also run a hedge fund and trade against customers. Separate out a separate broker-dealer. Separate out separate custody function. And really use the time-tested rules of the road that are on the books.
So it's kind of up to them. Or we'll be, of course, following as we've-- we've given good advice to each of these agencies around crypto lending. Actually, the way it's organized is often similar to a mutual fund. You're collecting up the public's funds. You're offering a return to them. So come into compliance.
JENNIFER SCHONBERGER: According to your calendar, you met with now former CEO of FTX, Sam Bankman-Fried, on March 29 of this year. Aside from that, had you met with him any other times? And what was your impression of him when you met with him?
GARY GENSLER: Again, I'm not going to speak to any one matter. As my predecessors did as well, my calendar public. And we meet with market participants. And the basic message that I've had is the same public message as a private message. Come into compliance. Your field will not last long outside of public policy norms. I might be technology neutral. But I'm paid not to be public policy neutral. And it's about protecting the investing public.
The message has also been that we're not going to let the public-- all the safeguards down in this regard. So some of these platforms have come in and said, we want to continue running a commingled platform. We want to continue doing lending, trading, hedge fund functions, an exchange function, a custody function. We said, no, you have to separate it out. Some have come in and said, can we have a lighter touch regulation? We've said no. We said no, the time-tested protection.
And I want to say one other thing. It would not be fair to all the market participants that comply today, the stock exchanges, the broker-dealers, the asset managers, [INAUDIBLE], mutual funds, and even the folks that are managing hedge funds today that are complying, the market makers that are complying with our rules when they're trading and buying Apple stock or Ford Motor. Why should it be different here?
JENNIFER SCHONBERGER: Yeah. To your point, I'm wondering if we need proof of reserves, but not only just proof of reserves, but a way to vet internal controls on these crypto firms? Because we look at Sarbanes-Oxley. And then we look at what happened as an example of the FTX situation. According to the bankruptcy filings, there was a huge failure of internal corporate controls. We know that FTX was technically audited. But that was not caught. So do we need some sort of rules in place for that portion?
GARY GENSLER: They're in place. They're in place. See, here's the good news for the public. I look to you. The good news is over decades we have put in place, Congress put them in place by law, this agency, this great agency put it in place through regulation, basic rules around books and records, basic rules around internal controls, basic rules around--
JENNIFER SCHONBERGER: So should we expect more enforcement action then?
GARY GENSLER: Look, I can't speak of any one matter. This is a great agency. We have 1,300 people in our enforcement division. We have 1,100 people in our examination division. That's half of the agency. We oversee $100 trillion capital markets. We bring about 700 enforcement actions a year across insider trading, and microcap fraud, and books and records violations, as you talked about earlier. And yes, we have a robust enforcement history in the crypto space. I think over 100 actions, a couple of dozen while I've been here as chair, against crypto exchanges, against crypto lending platforms, against of course, tokens.
We had a very big win recently in a case around a crypto token called Library. Unfortunately for the investing public, the entrepreneurs in this field have chosen-- and it's a choice-- they have chosen to try to skirt the law, whether they're setting up overseas and they're servicing overseas actors. That's for other jurisdictions. That's for other regulators around the globe. But if they're tapping into US markets, they need to come into compliance.
JENNIFER SCHONBERGER: To your point, so much of this is happening overseas. We saw that with FTX. The international unit went down, brought the US unit down with it. Do you need better coordination with global authorities? How does that factor into your ability to police?
GARY GENSLER: We have good coordination around the globe. But there are different laws, particularly in small island jurisdictions and the Caribbean Island, Cayman Islands, the Virgin Islands, Bahama, Bermuda. But sometimes outside of the Caribbean's you see some of these crypto entities are set up in the Seychelles or in Malta, and the like. So we have our best coordination with larger economy countries. But that coordination is important.
But I would say if you're tapping into US investors, our securities laws are to be complied with.
JENNIFER SCHONBERGER: OK, so then bottom line here, securities laws in place. We don't need extra tailored rules for crypto. We won't be expecting that next year?
GARY GENSLER: The agency could use more resources from Congress. We could definitely do that. You raise the extra territoriality reach. We have a reach that's US jurisdiction. But the laws are there. The rules are there. And I would say something else. The law firms know how to advise their clients to comply. All too often these firms are saying we'll set up overseas. But there is even an announcement this week by a crypto lending firm that said, we will no longer be offering any of our products to US investors. That's a way to protect US investors as well.
JENNIFER SCHONBERGER: To your point, Senator Elizabeth Warren wrote an op-ed in "The Wall Street Journal" recently calling on the SEC to quote unquote "suit up". She wants you to really--
GARY GENSLER: We're already suited up. We're already suited up.
JENNIFER SCHONBERGER: She wants you to crack down on crypto using your existing authority. My question is, do you feel--
GARY GENSLER: Have you ever met Gurbir Grewal who runs our division of enforcement? We're suited up.
JENNIFER SCHONBERGER: Here's my question though, chair. Do you feel you have enough authority? Or do you feel that you need legislation for more authority from Congress?
GARY GENSLER: I feel that we have enough authority, I really do, in this space. Could we use greater resources, appropriations? Absolutely. Could we use maybe a little more extraterritorial reach overseas? Yes. But I also think it's important not to do any harm. We have $100 trillion capital markets. It's not a small number. Even our stock market's approximately 35 or 40 trillion of that. But the whole Treasury market, all the pieces of our market we can't undermine that.
As much attention as your viewers have on this crypto market, worldwide it's about $800-ish billion. We don't know the exact number in the US, but far smaller than that $800 billion. We can't undermine all that helps drive this economy, that helps protect investors to allow folks to raise money in the public, ultimately. We can't undermine any of that.
JENNIFER SCHONBERGER: To your point, Chair Gensler, a new commission meeting was announced for next Wednesday on making changes to equity market structure. What can we expect next Wednesday?
GARY GENSLER: Well, we're going to take up four recommendations from the staff around the equity market. This is a really important piece of our capital markets. And it's important to investors. And the retail public certainly has paid a lot of attention to this market. There's growth in the market. It's about driving greater competition, transparency, and efficiency in the marketplace.
And we have a marketplace today that depending upon the day, between a third and a half is not in what's called the lit markets, but is in the dark venues, dark pools or just being purchased by wholesalers. So it's trying to consider recommendations to better level the playing field between these venues, the dark markets and the lit markets. Get more competition, particularly in the retail orders, the retail market of orders.
We'll be considering how to ensure that your broker-dealers, the public's broker-dealers, truly gives you and gets best execution when you send in those orders, and more transparency in this space. We have last updated our equity market rules in 2005. There was a lot of good work under my predecessor around data and what's called the infrastructure rule. But in terms of looking at the whole market-- and so think about your iPhone from 17 years ago. You didn't have an iPhone 17 years ago, right? We didn't have-- a lot's changed in 17 years.