SEC to focus on consumer protection gap as crypto exchanges and DeFi pose risks

Gary Gensler, the chairman of the United States Securities & Exchange Commission, believes that the cryptocurrency industry poses various risks to investors and that regulation is the way to address them.

SEC aims to work with Congress

During a hearing before the Financial Services and General Government subcommittee of the House Representatives, Gensler was questioned by Congressman Mike Quigley on the addition of a new regulatory category for cryptocurrencies.

The agency’s chairman suggested that the breadth of the digital asset industry has made it challenging to provide sufficient consumer protections, given that the SEC has only brought 75 actions despite countless token projects in existence. 

Gensler added that the best point to put consumer protections in place is at the trading venues. He said:

I would think if we could work with Congress to try to bring investor protection where these — sometimes commodities, sometimes securities — are trading on the platforms.

The SEC chair is worried that market participants will front-run traders’ orders without the “rules of the road.” He hopes to bring similar protections placed on the New York Stock Exchange and Nasdaq to crypto platforms. 

Currently, the agency spends around 16% of its budget on new technology. Gensler said more funding might be needed to create and enforce the rules of the road. 

Last week, the SEC head stated that the agency is ready to take on cases involving cryptocurrencies. While highlighting the consumer protection gap, he urged federal financial regulators to bring cases against bad actors in the industry. 

While Gensler noted that the SEC does not have the jurisdiction to regulate Bitcoin, he is now seeking to work with Congress to make critical decisions surrounding digital asset regulation.

While the crypto market crashed last week, decentralized exchange volumes rose to all-time highs amid the heightened volatility. 

Decentralized finance (DeFi) platforms were also highlighted during Gensler’s testimony. He suggested:

Crypto lending platforms and so-called decentralized finance (‘DeFi’) platforms raise a number of challenges for investors and the SEC staff trying to protect them.

Gensler noted that the reported trading volume has been highly volatile in recent weeks, ranging from $130 billion to $330 billion per day. 

The chairman further suggested that the agency would be willing to bring enforcement actions against parties who do not comply with federal securities laws.