In his prepared testimony for a U.S. House Committee on Financial Services hearing on 27 September 2023, Gary Gensler, the Chair of the Securities and Exchange Commission (SEC), provided a comprehensive outline of his views on the regulation of cryptocurrencies.

Crypto Assets and U.S. Securities Laws

Gensler was clear in stating that cryptocurrencies should not be exempt from U.S. securities laws. He emphasized that when Congress enacted these laws in the 1930s, it could have limited them to traditional assets like stocks and bonds. However, Congress chose a broader approach, including a wide range of financial instruments under the term “investment contract.” Gensler asserted that most crypto tokens likely fall under this category, making them subject to U.S. securities laws.

Compliance and Regulatory Requirements

Gensler pointed out that if most crypto tokens are subject to securities laws, then crypto intermediaries must also comply with these regulations. He cited Sections 5, 15(a), and 17A(b) of the Securities Exchange Act of 1934, which require intermediaries such as securities exchanges, brokers, and dealers to register or meet exemption requirements.

Industry Noncompliance and Enforcement Actions

Gensler expressed concern about the widespread noncompliance within the crypto industry, likening it to the financial landscape before federal securities laws were enacted in the 1930s. He revealed that the SEC has initiated several enforcement actions to hold violators accountable and to protect investors.

Rulemaking and Regulatory Proposals

Gensler also discussed the SEC’s proactive role in rulemaking for the crypto industry. He mentioned a reopening release that clarified the applicability of existing rules to crypto trading platforms, including decentralized finance (DeFi) systems. This release also provided additional information for systems that would be included in a new proposed exchange definition. Furthermore, Gensler stated that the SEC’s proposal to update investment adviser custody rules would cover all crypto assets and enhance protections provided by qualified custodians.

Limitations on Comments

Gensler concluded by noting that while he was open to discussing the SEC’s work in this area, he could not comment on any active, ongoing litigation.