SEC Chair Gensler Counters Bill to Create Regulatory Clarity in Crypto Industry

SEC Chair Gary Gensler disapproves of the FIT21 bill set to undergo voting in the U.S. House of Representatives today.

The legislation, dubbed Financial Innovation and Technology for the 21st Century Act (FIT21) seeks to clarify the regulatory boundaries for cryptocurrency assets between the SEC and the CFTC. This comes amid a clash between both agencies as regulatory uncertainty engulfs the U.S. crypto market. 

Gensler’s stance opposes the bipartisan support the bill has received, as the House of Representatives readies for the vote today. In his statement, the SEC chair argued that the proposed legislation may entail financial risks for investors.

SEC Chair Voices Concerns Against FIT21

His primary concern is that the bill could undermine existing securities laws. He emphasized that the federal securities laws, instituted in response to the Great Depression, have been vital in protecting investors for nearly a century.

These regulations demand thorough disclosure from issuers and stringent oversight of intermediaries to thwart fraud and uphold market integrity. Gensler contends that the proposed FIT21 bill would result in regulatory loopholes by exempting blockchain investment contracts from the definition of securities.

Such a move could diminish safeguards for investors by permitting issuers to self-certify their offerings as decentralized, effectively circumventing SEC supervision. Gensler sees the bill’s provision of only 60 days for the SEC to contest these certifications as inadequate, particularly given the extensive array of crypto assets currently in circulation.

Moreover, he condemned the bill for forsaking the Howey test, a well-established Supreme Court ruling used to assess whether an asset meets the criteria of a security based on its economic substance. He cautioned that the bill’s approach could erode investor protections and heighten risks within the broader capital markets.

Gensler further emphasized the potential for conflicts of interest and diminished custody protections that could result from the bill’s provisions. He claims the bill would enable crypto platforms to legally undertake actions that could jeopardize investor interests if it excludes these platforms from the definition of an exchange.

Additionally, he asserts that the expansive exemption for entities categorized under “Decentralized Finance” could pave the way for substantial regulatory gaps.

The Need for Regulatory Clarity

The crypto industry has consistently clashed with the SEC’s regulatory strategy, which has primarily centered on enforcement actions. Notable lawsuits against prominent crypto entities such as Ripple, Coinbase and Binance have stirred considerable controversy.

Industry leaders contend that the SEC’s actions impede innovation and breed uncertainty. They advocate for well-defined regulatory frameworks capable of accommodating the distinct characteristics of digital assets.

Advocates of FIT21 believe the bill could lead to regulatory clarity. They argue that the current securities laws are inadequate for addressing the crypto market. The objective is to encourage innovation while ensuring sufficient investor protections by differentiating securities from commodities.

However, Gensler maintains that FIT21 would do more harm than good. He cautioned that the bill’s self-certification mechanism might result in widespread noncompliance and investor detriment, extending beyond the crypto sector to impact the broader capital markets.