Gensler Takes Aim at DeFi Platforms in Testimony Before House Financial Services Committee

In an upcoming testimony, U.S. Securities And Exchange Commission (“SEC”) Chair Gary Gensler is set to share his thoughts on crypto markets and regulation at a U.S. Congress hearing. It is important to note that these comments reflect his personal views, and he makes it clear that he is not speaking on behalf of the other Commissioners or the staff of the SEC.

On April 18, 2023, at 10:00 am ET, Gensler will testify before the House Financial Services Committee concerning the oversight of the SEC. This hearing is titled “Oversight of the Securities and Exchange Commission.” Gensler addresses the crypto market in his prepared remarks and emphasizes that most crypto tokens are considered securities. He stresses the importance of compliance with securities laws, stating that “it’s the law; it’s not a choice.”

Gensler points out that crypto intermediaries often combine various functions such as exchange, broker-dealer, custodial, clearing, and lending, leading to potential conflicts of interest and risks for investors. He argues that crypto investors should benefit from the same protection as other investors: “Calling yourself a DeFi platform […] is not an excuse to defy the securities laws.”

Gensler highlights the current noncompliance in the crypto market, which not only endangers investors but also jeopardizes public trust in capital markets. He notes that the SEC has taken action to address this issue through enforcement actions and rule proposals. The best execution rule, for instance, would cover all securities, including cryptoasset securities. The investment adviser custody rule, which already applies to crypto funds and securities, would be updated to cover all crypto assets and enhance the protections provided by qualified custodians.

In addition, Gensler mentions that the SEC staff has stated their views on public company accounting related to crypto assets and disclosure regarding significant crypto asset market developments and that the SEC announced on April 14 that it was reopening the comment period and providing supplemental information for proposed amendments to the definition of “exchange” under Exchange Act Rule 3b-16.

Gensler emphasizes that forsaking investor protection puts real people’s life savings at risk and that regulation aims to protect U.S. investors. He quotes Justice Thurgood Marshall, who said, “Congress’s purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.”

In his remarks, Gensler reiterates that Congress has given the SEC a mandate to protect investors, regardless of the labels or technology used. He further stresses that nothing about the crypto markets is incompatible with securities laws. The investing public generally purchases crypto tokens in anticipation of profits and a better future, counting on the efforts of others to generate returns on their investment.
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