Sen. Warren demands clarity on SEC’s existing authority on crypto exchanges by July 28

Warren, a Democrat who chairs the Senate Banking Committee’s subcommittee on Economic Policy warned of the growing risks posed to consumers and financial markets by “highly opaque and volatile” cryptocurrency market at a recent Senate Finance committee.

“While demand for cryptocurrencies and the use of cryptocurrency exchanges have sky-rocketed, the lack of common-sense regulations has left ordinary investors at the mercy of manipulators and fraudsters. These regulatory gaps endanger consumers and investors and undermine the safety of our financial markets. The SEC must use its full authority to address these risks, and Congress must also step up to close these regulatory gaps.”

-Elizabeth Warren, U.S. Senator

She has warned that cryptocurrency investors are at the “mercy of manipulators and fraudsters” because the crypto market isn’t properly regulated. According to a letter to the SEC chairmen, Warren requested a framework for legislation to regulate the fast-evolving crypto market and asked for a response to some of her questions by July 28.

We were able to access the questions which provides an interesting glimpse into the minds of Democrats:

1. Do you believe that cryptocurrency exchanges are currently operating in a “fair, orderly, and efficient” manner? If not, what problems has the SEC identified that are associated with the use of these exchanges?
2. How do the characteristics of assets traded on cryptocurrency exchanges differ from those of assets traded on traditional securities exchanges? Do these characteristics warrant additional investor and consumer protections for cryptocurrency exchanges relative to those provided for traditional exchanges?
3. Describe the extent of the SEC’s existing authority to regulate existing cryptocurrency exchanges. To what extent does that authority differ from the agency’s authority over traditional securities exchanges?
4. Foreign regulators have moved to restrict cryptocurrency exchanges in their jurisdictions in recent years while calling for international coordination to address regulatory gaps. One specific regulatory challenge may arise from the unique organizational structure of some global exchanges. For example, Binance, one of the largest cryptocurrency exchanges in the world by trading volume, “is everywhere and yet based nowhere. The cryptocurrency exchange has processed trillions of dollars in trades this year as it transfers digital and conventional money around the world through a constellation of affiliates. And yet it has no headquarters.” In your view, to what extent is international coordination needed to address gaps in the regulation of cryptocurrency exchanges and ensure the protection of investors and consumers in the United States?
5. In a recent address, Commodity Futures Trading Commission (CFTC) Commissioner Dan M. Berkovitz stated: “In a pure ‘peer-to-peer’ DeFi system… There is no intermediary to monitor markets for fraud and manipulation, prevent money laundering, safeguard deposited funds, ensure counterparty performance, or make customers whole when processes fail. A system without intermediaries is a Hobbesian marketplace with each person looking out for themselves. Caveat emptor — ‘let the buyer beware.’” Berkovitz further argues that DeFi derivative instruments are likely illegal under the Commodity Exchange Act.

a) Do you agree with Commissioner Berkovitz’s assessment of DeFi platforms?

b) Do decentralized platforms raise similar investor and consumer protection concerns within the SEC’s jurisdiction? If so, what challenges does the SEC face in addressing these concerns?

c) Do the characteristics of decentralized cryptocurrency exchanges warrant additional investor and consumer protections relative to those needed for centralized cryptocurrency exchanges?

Read the official letter to SEC Chair Gary Gensler

Looks like Senator Warren did her homework and that’s a good thing! It will be interesting to hear SEC Chair Gary Gensler’s responses to these questions in the coming weeks. Thankfully he is well equipped to address these questions in a thoughtful manner as he has taught blockchain and digital currencies at MIT Sloan School of Management, participated in discussions around the world and testified on digital currencies policy and regulation before Congress. Also, unlike previous SEC Chairs, who had enforcement or M&A background , Gensler’s background is in markets and financial technology as well as policy. What do you think? Is crypto regulation a good thing? Will the SEC Chair’s response be met with more volatility? How will this all play out over the coming weeks and months? Only time will tell…

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