SEC's Gensler slams digital-asset industry for 'ignoring the law' as crypto crackdown continues

By Chris Matthews

Crypto platforms 'are acting as if they have a choice to comply with our laws,' Gensler said.

U.S. financial regulators appear set to tighten the screws further on the digital asset industry, with Securities and Exchange Commission Chairman Gary Gensler taking the lead in an ongoing crackdown on illegal crypto activities.

The SEC voted Friday to issue supplemental guidelines on how a proposed update of securities-exchange regulations would impact crypto markets broadly and decentralized finance (DeFi) applications in particular.

Gensler said that the supplemental release seeks to answer questions crypto market participants have about the rule proposal, but he also stressed that many crypto companies are already breaking securities laws, regardless of whether the rule under consideration gets adopted.

"These platforms are acting as if they have a choice to comply with our laws," Gensler stated. "They don't."

"Calling yourself a crypto platform is not an excuse to ignore the securities laws," he added. "Calling yourself a DeFi platform is not an excuse to defy the securities laws."

The comments come amid an increase in enforcement actions against crypto companies, with the SEC increasing cases against the digital asset industry by 50% last year, according to Cornerstone Research, a litigation consultancy.

Coinbase Global Inc. (COIN), a publicly traded cryptocurrency exchange, announced last month that it had received a Wells Notice from the SEC, a formal notice that the agency is considering an enforcement action against it for violating securities laws.

In February, the SEC settled with crypto exchange Kraken for failing to register their offer and sale of certain investment contracts related to crypto assets. Kraken paid $30 million in penalties, without admitting or denying fault.

The new exchange rule, proposed in January of last year, is aimed at updating the definition of an "exchange" under SEC rules to bring greater scrutiny of electronic communication platforms, common in fixed-income markets, that the SEC says function like securities exchanges.

The crypto community immediately raised alarms about how the rule might impact DeFi platforms, or protocols used to trade cryptocurrencies like bitcoin and ether , which advocates say remove the need for regulated intermediaries.

"The proposal is mainly aimed at something like a Bloomberg Terminal through which buyers and sellers can find each other using chat functionality," wrote Jerry Brito, executive director of the crypto think tank Coin Center, at the time. "However, the language of the new proposed rule is written so broadly that it's difficult to to see how it wouldn't cover a decentralized exchange."

SEC officials told reporters at a Thursday briefing that the agency received numerous comment letters requesting information about how the rule proposal would apply to digital assets, and so the commission voted Friday on whether to add supplemental material to the rule release to address those comments.

Ignacio Sandoval, a former SEC regulator and partner at the law firm Morgan Lewis, told MarketWatch that while the industry is right to be concerned about how potential new rules might impact it, the agency has plenty of power to pursue aggressive enforcement already.

"The SEC is clearly trying to establish that [most cryptocurrencies] are securities and subject to existing rules," he said, adding that the agency is laying the groundwork through enforcement actions so it can tell digital-asset companies, "guess what, we've made our views pretty clear."

-Chris Matthews

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04-15-23 1319ET

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