(Kitco News) US Securities and Exchange Commission Chairman Gary Gensler said Monday that the cryptocurrency space is highly speculative, and investors need to pay close attention to disclosures, token ownership and much more when taking risks.
Gensler addressed the cryptocurrency market during the annual FINRA 2022 conference on Monday, following the crypto crash last week, which saw the collapse of the TerraUSD (UST) stablecoin and Bitcoin dropping below $30,000.
“I will take this opportunity to speak not only to the audience in the room but to the investing public. This space, the crypto markets, is a highly speculative asset class,” Gensler said.
One of the big problems with cryptocurrency is that investors do not get proper disclosure about the risks involved. “You, the investing public, can make up your mind about your risks, but there’s supposed to be full and fair disclosures, and people aren’t supposed to lie to you,” Gensler said.
The tokens Gensler focuses on are considered securities. The main difference between a commodity and a security when it comes to digital tokens is the raising of funds by a third party.
“Many of these entrepreneurs come up with an idea and want to raise money from you. And that puts it within the securities laws,” Gensler explained. And we can get legal about it. But it comes down to this, if someone is raising money from the public and the public is expecting a profit based on these entrepreneurs, that’s under the securities laws.”
This was a rare coding 101 lesson from Gensler, who said that space is not as decentralized as it is for many people.
“This crypto-asset space is not decentralized. There is a lot of focus. There are a few major trading venues and a few major lending venues that you, the investment audience, think you are trading or investing in,” he said.
To protect the public, the SEC looks at the basic rules of market integrity, including not managing your customer up front, anti-fraud, and anti-fraud.
The head of the Securities and Exchange Commission warned that token ownership is also often quite misleading in the crypto space. “You don’t think that you own your tokens when you go into a digital wallet and transfer ownership to a platform. And if the platform goes down, you just have a counterparty relationship with the platform, so be in line for bankruptcy,” he said.
In addition, crypto platforms are not prohibited from using the tokens stored there. “They can trade it. In the stock markets, we’ve had 50-year-old laws on bankruptcy protection and so on. No [in crypto]. The New York Stock Exchange is not trading against you. [In crypto]These platforms are often trading against you. “They’re making markets against you,” Gensler explained.
This isn’t the first time Gensler has brought up the idea that cryptocurrency platforms are trading against investors. In an interview with Bloomberg last week, Gensler noted that digital asset exchanges are “trading against their clients” and often “trading against their clients…because they are putting market tags against their clients.”
Another risk that Gensler discussed on Monday is investors getting too involved in cryptocurrency and getting bogged down in something similar to what happened in the 1920s in the stock market.
“The retail audience penetrated deeply into the markets in the 1920s, and we saw how that unfolded, and it was part of the Great Depression. [Franklin D. Roosevelt] they met. Section VI of 34 Protection Act is relevant in [crypto]. Don’t let someone say, “We don’t need to protect against fraud and manipulation.” This is where you lose faith in the markets.”
Gensler’s closing message to the audience was: “I will remain technology-neutral, but I am not policy-neutral.”
The head of the SEC noted that until there is better regulation of the crypto space, the public will remain vulnerable. “We will continue to be a policeman on the front line. We will continue to use our limited resources to the best of our ability to help protect the investing public.”
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