An SEC Watchdog’s Take on Crypto Rules: Everyone Would Be Better Off

I love the chance to affect the capital markets, which are a very powerful engine in our country that helps to fuel prosperity, and also can help to change people’s fortunes. Someone who has an idea to build a company can come to the capital markets and get funded and then build generational wealth, pass that on to the next generation, and also pass it along to other entrepreneurs. Being part of trying to get the rules around those capital markets right is such a privilege.

In December, the SEC made several proposals that are drawing pushback from Wall Street. The proposals would require that almost all retail stock orders be sent to auctions, and that brokers show that they’re executing clients’ trades in an optimal manner. The SEC also proposed lowering trading increments and access fees on exchanges. Do you feel that retail investors are being taken advantage of?

Those are proposals, and we’re getting public comment, so I’m looking forward to hearing what members of the public have to say. I actually did not support a couple of those proposals. I think the markets work better than they ever have for retail investors. Are they perfect? No. Are there incremental changes that we can make? Yes. But by and large, when a retail investor wants to buy or sell a stock, the retail investor is able to do so quickly and at no or a very low commission … at a price that’s what you see on the market or maybe even better.

The change that was proposed was quite dramatic, to tell brokers that every retail order has to follow this particular path. That’s something the government hasn’t done before, and I think absent a very strong justification, we shouldn’t be running experiments with the market. I hope we get a robust dialogue going, at least in writing, so we can really think about this before we put it in place.

In the wake of FTX’s collapse and the $2 trillion crash for the cryptocurrency market, do you think the industry has reached a point where its survival depends on a robust regulatory framework? Many investors have lost money through crypto fraud and bankruptcy.

I don’t think the survival of crypto depends on a regulatory framework, but it would be better for everyone if we spelled out clearly what the regulatory parameters are within which crypto could operate, because then people would spend a lot less time thinking about, ‘What are the rules?’ They’d know, and could think about building the things that they’re trying to build. We’re all wasting a lot of time thinking about questions that we and Congress could resolve.

We want to protect customers, whether they’re investors or consumers, and we want to protect the stability of the market. What are the best ways to do that? The SEC may have a role to play in that. We’ve already been able to bring some cases around fraud in the crypto space. That’s an important thing for us to be doing.

Building a regulatory framework that takes into account the challenges and opportunities associated with the technology would be a really good development. Europe just put in a regulatory framework for crypto. Whether they got it all right or not, it’s too early to tell, and we might do it differently in the U.S., but we should think about what kind of framework makes sense.

SEC Chair Gary Gensler recently said that among cryptocurrencies, “everything other than Bitcoin ” is a security and should be regulated because there’s an entity backing them. Do you agree?

The definition of “security” is broad, and you have to look at the facts and circumstances of everything when you’re considering whether to apply the securities clause. We’ve not been very disciplined in how we think about the securities clause application in crypto. We need to set out some framework within which people can operate, so whether the token is a security or not, people would be able to operate. If you’re going to say they’re all securities, how does the law apply in a way that allows these crypto projects to continue to function?

Do you think the SEC’s “regulation by enforcement” approach is working, given the massive levels of fraud and bankruptcies we’ve seen in crypto? Should exchanges like Coinbase be required to register with the SEC? 

I don’t think enforcement is the right approach to bring regulation to a space. If it’s fraud, we often do have a role to play, and we’ve brought a lot of cases in that space. But if we’re trying to bring regulation through enforcement, we’ve calculated it out, and at the rate we’ve been going, it would take us something like 400 years, so that seems like not the best approach. What we need to do as a society, and this is where Congress has a role to play, is think about, “Do we think that crypto exchanges should have a federal regulator? If so, who should that federal regulator be? Should it be the SEC? Should it be someone else?”

Do we think that when someone makes a token offering, there should be a disclosure framework around that? If there should be, who should do it? Do we think stable coins should have a regulator? Should it be a bank regulator, or should it be the SEC or some other regulator?

Do you have a list of top priorities in the next 12 months?

Gary Gensler, as chair, gets to set the agenda of the agency in terms of rulemaking, and he’s set a very active agenda, so one of my priorities is to think about all of the items on the agenda and figure out whether I can try to push those in a better direction or not. I would like to get us to a better place on crypto regulation, and to do that, we should be putting on some public roundtables where we’re bringing people in, preferably in conjunction with the [Commodity Futures Trading Commission], to have these conversations. I would love to see that happen in the next year.

And then I would turn some of our attention toward helping entrepreneurs find the capital they need to build their businesses. That’s been a part of our mission that we’ve neglected recently, and I would like us to spend more time thinking about, “What is it that we could do to make it easier for these founders of companies to raise money?”

Silvergate Capital, a major lender to crypto firms, is winding down its business in the wake of FTX’s collapse. Do you think there needs to be rules requiring customer assets or crypto brokerages to be segregated or more bright-line custodial rules?

It is good to think about custody rules upfront because people need to understand if something happens to the entity that’s holding their crypto, what happens to their crypto? Is it segregated for them, or is it part of the bankruptcy estate, and they’ll just have to get in line with the other creditors?

We definitely could do a better job in thinking about how entities that we regulate should be custodying crypto. We recently put out a proposal around custody for investment advisors. That’s a big rule, and it covers a lot of different things, but one piece relates to crypto custody, so it will be interesting to see what people have to say on that in general and on that piece of the rule.

There have been reports that Binance may have acted improperly to make it appear that Binance.US was a legally separate entity from Binance. Does this suggest that the industry needs tighter regulation?

Without speaking about any particular entity or entities, when you have centralized entities, there’s a fair question to be asked: ‘What kind of regulatory structure do we want around them?’ Part of the theory behind crypto is that centralized entities bring risks themselves … and blockchain technology allows you to build a trustless network where you don’t actually have to trust any other person. You trust the technology, and it’s all open, so you can see it all.

In instances where the technology is actually playing the role that regulation otherwise would play, that might be a space where you don’t have to put the same kind of regulatory framework in place.

Have you given any thought about your long-term future and what’s next in your career?

There’s so much to think about in this job, I can’t think about what’s next, other than hoping one day to have some beehives. That will be my hobby.

Source: Barron’s