Former Commodity Futures Trading Commission Chairman Gary Gensler testifies at a U.S. Senate Banking Committee hearing on systemic risk and market oversight on Capitol Hill in Washington May 22, 2012.
Jonathan Ernst | Reuters
WASHINGTON — Securities and Exchange Commission Chairman Gary Gensler on Tuesday assured lawmakers that Wall Street’s top regulator is working overtime to create a set of rules to oversee the volatile cryptocurrency markets while balancing the interests of American innovators.
Gensler told the Senate Banking Committee that he and his team are trying to protect investors through better regulation of the thousands of new digital assets and coins, as well as oversight of the more-familiar bitcoin and ether markets.
The SEC chief noted the enormity of the task, telling Sen. Catherine Cortez Masto, D-Nev., that the regulator could use “a lot more people” to evaluate the 6,000 novel digital “projects” and determine whether they all qualify as securities under U.S. law.
“Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending,” Gensler said in prepared remarks. “Frankly, at this time, it’s more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.”
Still, some lawmakers pressured Gensler to pick up the pace, arguing the opaque definitions and an uncertain marketplace not only lead to unchecked speculation but could also stifle innovation.
Sen. Pat Toomey, a Pennsylvania Republican and the committee’s ranking member, pressed Gensler early in the hearing over whether stablecoins meet the definition of a security since investors don’t necessarily expect those assets to return a profit.
Stablecoins are a type of cryptocurrency linked one-for-one to dollars or other traditional currencies and, as such, tend to be less volatile than their peers in the asset class.
“My whole point is, I think we need clarity on this,” Toomey said. “I think you should publicly disclose this. … And we certainly shouldn’t be taking enforcement action against somebody without having first provided that clarity.”
But where Toomey and his Republican colleagues voiced concern about the SEC’s potential to stifle innovation without a public set of guidelines, Democrats tended to highlight speculative risk they see as rampant in the cryptocurrency market.
Sen. Mark Warner, D-Va., jokingly criticized Gensler for putting only one “wild” in his description of the cryptocurrency industry as the “Wild West” of financial regulation.
“As someone who shares some of your concerns about crypto, I will acknowledge that you only put one ‘Wild’ in front of ‘West,’ as opposed to two,” he quipped. “As somebody who managed to do pretty well financially because of innovation, I’m all in. But we do need some guidance. We do need some direction.”
“I would go to the two ‘Wilds’ in terms of the description of this area, as good as some of the innovation is,” he added.
Controversial practice under scrutiny
Lawmakers also peppered Gensler with questions about the SEC’s ongoing analysis of payment for order flow, a controversial practice that online brokerages such as Robinhood Markets use to make money.
Firms such as Robinhood sell their customers’ trades to market makers such as Citadel Securities that execute the buy and sell orders. Market makers generate profits by pocketing the difference between the price at which they buy shares on the open market and the price they receive from selling them to Robinhood clients.
That means there is an incentive for market makers to inflate the price they quote to Robinhood’s customers. And given Citadel’s commanding market share, some regulators are concerned that investors may not be getting the best deal, since online brokerages themselves have an incentive to keep rosy relations with the companies that buy their trading volume.
“The United Kingdom, Canada and Australia have bans,” Gensler told reporters following the hearing. “We’re taking a look at the whole market structure.”
The retail public is paying in that “they don’t necessarily have order-by-order competition,” Gensler said, meaning that trading orders are bought up by just a few market makers known as “wholesalers” and aren’t fought over with promises of the lowest price.
Robinhood’s chief legal officer said on Monday that he believes the SEC will ultimately “arrive at the conclusion that payment for order flow is undoubtedly an amazingly good thing for retail investors and they’re not going to ban it.”
Diversity and climate
Democrats and Republicans respectively praised and faulted Gensler for the SEC’s move to approve Nasdaq’s rule to require diversity on the boards of companies that list with the exchange operator and increased efforts to require corporate climate disclosures.
The Nasdaq’s new rule, which is expected to face legal challenges, compels company boards to meet gender and racial diversity requirements or explain in writing why they have failed to do so.
Senator John Kennedy, a Republican from Louisiana.
Andrew Harrer | Bloomberg | Getty Images
Nasdaq’s goal for most U.S. companies is to have at least one woman director in addition to another board member who self-identifies as a member of a racial minority or the LGBTQ community.
Sen. John Kennedy, R-La., perhaps offered the most direct critique of the SEC’s decision to approve of Nasdaq’s rule.
“As to the people and the companies that you regulate, do you consider yourself to be their daddy?” Kennedy asked of Gensler. “Why do you impose your personal preferences about cultural issues and social issues on companies, and therefore their customers and their workers? Like climate change and the Second Amendment.”
“I’m sure you have personal feelings about abortion,” Kennedy continued. “Do you have plans to impose those values on companies?”
“I think that I am not doing that,” Gensler replied. “I think what I’ve been trying to do is say, if investors want information about climate risk … we at the SEC have a role to put something out to notice and comment, do the economic analysis and really see what investors are saying.”