SEC Chair Gary Gensler is preparing to discuss the Securities and Exchange Commission’s (SEC) updated approach to overseeing technological advancements, including cryptocurrencies and artificial intelligence (AI), in front of the U.S. House Financial Services Committee. Gensler’s opening remarks for the hearing on September 27 have been made available, shedding light on the SEC’s expanded regulatory scope.
One notable aspect of the SEC’s approach is its stance on the cryptocurrency sector. The SEC has faced criticism for its “regulate-by-enforcement” strategy, which some argue hampers innovation and adoption in the United States.
Gensler will specifically address two emerging technologies: predictive data analytics and cryptocurrencies. He emphasizes that participants in the “crypto asset securities markets” should be afforded protections under existing securities laws. Gensler points out that the 1933 Securities Act includes a comprehensive list of items defining a security, including the term “investment contract.” He suggests that most crypto tokens likely meet the criteria of an investment contract.
Furthermore, Gensler asserts that intermediaries like cryptocurrency exchanges, brokers, and dealers must also comply with securities laws due to the SEC’s view that most cryptocurrencies fall under these laws. He notes that the wider industry has exhibited “wide-ranging noncompliance with the securities laws,” leading to enforcement actions. The SEC has sought to address this through rulemaking, including releasing guidelines in April 2023 clarifying the applicability of existing SEC rules to cryptocurrency platforms, including decentralized finance (DeFi) protocols.
Gensler highlights the importance of enhancing protections for crypto assets through an updated investment adviser custody rule. This rule, if updated as proposed, would cover all crypto assets and improve the safeguards provided by qualified custodians.
In addition to cryptocurrencies, Gensler discusses the transformative impact of predictive data analytics and AI on the economy. While these technologies can enhance financial inclusion and user experiences, they also carry the risk of conflicts of interest. Gensler mentions an SEC proposal from July 2023 that would require firms to analyze and address conflicts of interest resulting from their use of predictive data analytics in interactions with investors.
It remains to be seen whether Gensler will comment on the ongoing legal disputes involving Coinbase and Binance.US, both U.S.-based cryptocurrency exchanges that the SEC has charged with multiple alleged violations of securities laws.
