SEC Chair: Investors need to know ‘someone is not lying to them’

Gary Gensler, chair of the Securities & Exchanges Commission (SEC), joins Yahoo Finance crypto reporter Jennifer Schonberger in an exclusive interview in which he talks crypto regulation, asset-backed securities, and potential SEC action going forward.

Video transcript

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JENNIFER SCHONBERGER: Welcome back to Yahoo Finance. I'm Jennifer Schonberger. Ever since stablecoin Terra and sister token Luna failed, crypto markets have plunged, touching off a series of defaults and failures of crypto lenders and funds, costing investors billions of dollars in losses. That's raising urgency for a regulatory response, just as Europe passed sweeping rules to regulate crypto.

So what rules should be put in place to regulate crypto? Joining me now in a Yahoo Finance exclusive is chief of the Securities and Exchange Commission, Gary Gensler. Chair Gensler, welcome back to Yahoo Finance. Thank you so much for being here.

GARY GENSLER: Great to be with you, Jennifer.

JENNIFER SCHONBERGER: So, it seems like another day, another crypto lender fails. We just saw Celsius filed for bankruptcy yesterday. More customers are being frozen out of their accounts and from their assets. How do we stop the situation from happening? Should similar rules that apply to traditional brokerages that protect customers' assets and access to accounts also apply to crypto? Or are these merely masquerading as unregulated banks?

GARY GENSLER: Well, in a word, yes. Just think of it this way. You've got a bunch of platforms, crypto lending platforms that had been offering anywhere from 4% yields to 20% yields in an interest rate environment that was generally for short-term deposits less than 1%. You've got to sort of think, if you're an investor, if it's too good to be true, maybe it is. And how is it that that would be possible? And so a lot of risk may well be embedded in that.

And we have securities laws. As you said, we have banking laws, but under the securities laws, if you're pulling a bunch of people's assets, we usually call that an investment company. And some of these lending platforms had a half a million or 2 million or even more members of the public, investors, pooling their assets together and these platforms offering, as I say, 4%, 7%, 8%, 10%, or even 20% returns, sort of too good to be true type of returns.

JENNIFER SCHONBERGER: Chair Gensler, given that you've said that nearly all tokens, with the exception of Bitcoin and perhaps Ethereum, would be classified as securities based on their use cases, how do you feel about applying the disclosure regime under current securities laws for equities to crypto?

GARY GENSLER: So it's really an age old concept. If you're raising money from the public and the public's anticipating profits based on the efforts of that common enterprise, that's a security. It's kind of a logical thing. And we at the SEC have a disclosure regime, as you said. I've said to the industry, to the lending platforms, to the trading platforms, come in, talk to us.

We do have robust authorities from Congress also to use their exemptive authority so that we can tailor investor protection, and in your specific question about the tokens themselves, even tailoring what the disclosures might be, because maybe not all of the disclosures for somebody issuing equity are the same as a crypto token. But I would note, we don't have the same disclosures for an asset-backed security that we do for a stock offering. So it's a thoughtful way to sort of tailor things.

JENNIFER SCHONBERGER: So, then, just to be clear, chairman, you would be open to applying the rules that apply to the equity disclosure regime to crypto, rather than coming up with a whole new rulebook?

GARY GENSLER: No, I'm actually saying something a little different, Jennifer. I think that just as there's a difference between maybe asset-backed securities and an equity offering, there may be differences here as well. And so, the public benefits by knowing full and fair disclosure and that somebody's not lying to them, you know, basic protections.

And whether you're buying a crypto token, or you're buying a security such as equities or a securities such as an asset-backed security, those basic disclosures-- because we in America let investors take risk. You get to decide what risk you want to take. But the person raising the money and selling you those financial assets ought to not defraud you, ought to give you the information so you can make your decisions.

JENNIFER SCHONBERGER: And Chair Gensler, people are losing a lot of money here. The same protections that apply to traditional asset classes don't really apply to crypto. Curious as to why--

GARY GENSLER: Well, actually, let me say that's because they're non-compliant platforms and token potentially. I can't prejudge any one of them, but we do have robust laws and rules at the Securities and Exchange Commission. My fellow market regulator, the Commodity Futures Trading Commission, does as well. We fortunately have the ability to write rules and use exemptive authority. But the public is not protected, largely because of the non-compliance in this space.

JENNIFER SCHONBERGER: Right, so to your point, chair, why haven't you taken more aggressive action in terms of rule writing here? Is it an issue of authority? It seems to be that you feel that a lot of these are classified as securities. So what's really holding you back from acting now? And what can we expect--

GARY GENSLER: Well, Jennifer, I sort of-- if I might just not accept the premise, we have rules in place for what it means to be an investment company, like a mutual fund when you put your money in. And what we found earlier this year-- we settled with one lending platform called BlockFi-- that they were a non-compliant, unregistered investment company, that they had not yet gone forward and shared their public information with the public.

And they had 670,000 investors, $17 billion of crypto. These are all public figures in that filing in that settlement. And so there is a path forward for these lending companies. We're continuing to work on that settlement, as that was publicly announced. And there are paths forward here.

JENNIFER SCHONBERGER: To your point, what can we expect from the SEC in the coming months on the crypto regulatory front? I know that you've been working on a memorandum with the Commodities Futures Trading Commission to essentially come up with a single rulebook so that you could both work more closely together, whether a token would be classified as a security or a commodity. How is that going? What can we expect there? What can we expect on the crypto regulatory front from you?

GARY GENSLER: So, more broadly, the public right now would benefit from investor protection around these various service providers, if you wish-- the exchanges, the lending platforms, and the broker dealers. So we at the SEC are working in each of those three fields-- exchanges, lending, and the broker dealers-- and talking to industry participants about how to come into compliance or modify some of that compliance. We are also looking at the tokens, the stablecoin, so to speak, and the non-stablecoins.

Separately, we do have discussions with the bank regulators and with our friends and colleagues at the CFTC, because as you said, and I've said publicly, something like Bitcoin is a non-security token, and thus send information over there, collaborate, and coordinate as best we can.

JENNIFER SCHONBERGER: You mentioned stablecoins. Given the run on Terra, the fact that Tether broke the buck, you had both an algorithmic and a Fiat-backed stablecoin both fail. What authority could you use unilaterally at the SEC to protect against runs on stablecoins?

GARY GENSLER: Look, these tokens, so-called stablecoins, are being used as a settlement token inside the lending and trading platforms. What I've said publicly, they're like a poker chip being used inside of the platforms. Those are the current uses. 99 plus percent of the use is inside. And so, I think that we look at them, and we say, they're part of an overall ecosystem that needs protection for the investors, protection against fraud and manipulation.

We've also partnered up and working with our other colleagues at the US Department of Treasury and elsewhere and feel it may be appropriate also for Congress to weigh in to ensure for financial stability. Now a lot of these tokens also have attributes similar to money market funds. They have taken money from the public. And then the public, in the way they use them, they're getting yields or rewards, sometimes, it's called, on these stablecoins and the like.

But we're really focused on trying to insure for the public's protection in the use of these tokens. And again, the stablecoins-- there's two or three of the big ones-- were all founded and run by affiliates of crypto exchanges. And I don't think that's any surprise. I mean, it's-- and some of them are multi-use. So many multiple casinos, you can use the chip, the settlement token. But they're not fundamentally yet used to buy a cup of coffee at Starbucks.

JENNIFER SCHONBERGER: Right, and in the time we have left here, chair, I want to ask you a question actually unrelated to crypto. The Supreme Court just ruled in June limiting the powers of the EPA when it comes to regulating greenhouse gas emissions. Curious what impact, what challenges that might create for the SEC, given the proposed rules to require public companies to disclose climate risks and greenhouse gas emissions.

GARY GENSLER: Jennifer, we put out the proposal and received a lot of public comment, I think well over 4,000 unique public comments. So we're still sorting through those comments. Staff is doing the work. Anything that they might recommend to our commissioners will be with an eye to the law and, certainly, all the body of law whenever we move forward, including this recent ruling of the Supreme Court, that we do things based on the economics and based on the law.

JENNIFER SCHONBERGER: Chair Gensler, thank you so much for your insight this morning. So appreciate it. Hope to talk with you again soon.

GARY GENSLER: Thank you, Jennifer.