Gensler stood his ground by stating that existing securities laws protect investors and dismissed the need for a new regulatory framework. Meanwhile, Chris Dixon of a16z criticized the US government's vague crypto regulations, and warned that regulatory uncertainty is slowing industry progress. Dixon called for clear rules to avoid more collapses like FTX. The need for regulations in the industry became clear after the SEC, DOJ, and FBI uncovered a crypto market manipulation scheme, and charged multiple firms and individuals with fraud and wash trading.
Gary Gensler Faces Tough Questions
During a fireside chat at New York University Law Institute for Corporate Governance and Finance, US Securities and Exchange Commission (SEC) Chair Gary Gensler faced some very tough questions from law students and former SEC Democratic Commissioner Robert Jackson Jr. about his approach to crypto regulation. The conversation mostly centered around the SEC’s use of the Howey Test, which is a way to determine whether digital assets should be classified as securities.
Jackson questioned whether it was appropriate to apply a decades-old legal framework to modern technology. Gensler defended the approach by stating that the Howey Test is still "the law of the land" and crucial for protecting investors.
Gensler also stated that securities laws, regardless of the asset class, exist to provide transparency and necessary disclosures for investors, whether they are investing in green energy or artificial intelligence. He mentioned the SEC’s enforcement actions against major crypto firms like FTX, Binance, Kraken, and Coinbase as proof that there is a need for crypto exchanges to register with the agency.
In response to Jackson's suggestion of establishing a new regulatory framework for digital assets, Gensler argued that a framework like that already exists, and just because it is unpopular does not mean it is invalid. He held firm that the SEC’s position has been consistent over the years, even under former SEC Chair Jay Clayton, and that the courts have upheld the agency's interpretation of the law.
Gensler also addressed the concerns from a student about the SEC’s terminology, and explained that the term "crypto asset securities" refers to the full range of contracts, expectations, and understandings around the sale of these assets, rather than the assets themselves.
Another student asked about the potential impact on the utility of tokens if they were made compliant with SEC regulations. Gensler clarified that the SEC is “merit-neutral.” This means that it does not assess the value or utility of assets, and leaves that decision to investors. He also stated that cryptocurrencies are unlikely to become legitimate currencies, and believes that their value will ultimately need to be demonstrated through disclosures and practical use rather than being seen as a medium of exchange.
Chris Dixon Warns of Regulatory Gaps
While Gensler believes the SEC has done enough for the crypto sector, others might not fully agree. Chris Dixon, the founder of Andreessen Horowitz’s a16z Crypto subsidiary, recently shared his views on stablecoin regulation and the need for more clarity from the US government during his talk at the Permissionless III event in Salt Lake City, Utah.
Dixon speaking at Permissionless lll (Source: X)
At first, Dixon started on a positive note by acknowledging that the crypto market has overcome several technological barriers. However, he also identified two key challenges still facing the industry: infrastructure and policy clarity.
Dixon offered a unique perspective. While some analysts claim large-scale investors are not focused on application-layer startups, Dixon disagreed with this, and stated that at least half of a16z Crypto's investments in recent years have been in this space. The problem, however, is that these startups are hesitant to build out their ideas because of fear of prolonged legal battles caused by unclear regulations.
He believes there is potential for a lot of growth in the digital assets space, driven by new entrepreneurs and developers, but pointed out that a lack of regulatory clarity is slowing down progress. According to Dixon, the infrastructure is ready, but the industry is hampered by vague policies.
He also criticized the current regulatory approach, which he believes focuses on good actors while allowing scams and bad actors to flourish. Instead of targeting high-profile cases, Dixon urged for there to be a regulatory framework that prioritizes clarity and consumer protection, while also still providing a clear path for legitimate industry players. Additionally, he even warned that there could be a risk of another FTX-like collapse if these issues are not addressed.
What Happened to FTX
The downfall of crypto exchange FTX in November of 2022 had massive effects on the broader cryptocurrency industry, and completely shook public confidence in the industry. FTX was once a leading player in the crypto world, but was brought down by revelations that its owners misused customer funds.
CEO Sam Bankman-Fried was sentenced to 25 years in prison and ordered to repay $11 billion after it was revealed that FTX and its sister company, Alameda Research, were deeply intertwined in financial mismanagement.
The trigger for FTX’s collapse was a report from CoinDesk on Nov. 2, 2022, which exposed that most of Alameda Research’s assets were tied up in FTT tokens and other cryptocurrencies created and controlled by FTX insiders. This lack of diversification and reliance on internally generated assets led to a loss of confidence among investors and customers, who very quickly pulled their funds from the platform. As a result, FTX was unable to meet withdrawal demands, and became insolvent and filed for bankruptcy.
The collapse of FTX increased concerns about the fragility of the crypto ecosystem, and is exactly why Chris Dixon is advocating for clearer regulations in the industry.
SEC and FBI Uncover Crypto Market Manipulation Scheme
The need for these regulations became very clear after the SEC, in collaboration with the Justice Department and the Federal Bureau of Investigation (FBI), charged three crypto market-making firms and associated individuals with fraud and market manipulation. Civil suits were filed on Oct. 9 in the District Court of Massachusetts against Gotbit Consulting, ZM Quant Investment, CLS Global, and nine people. The charges involve market manipulation, specifically wash trading, and the promotion of unregistered securities.
Gotbit Consulting and its marketing director, Fedor Kedrov, were charged with wash trading for cryptocurrencies Saitama and Robo Inu. Vy Pham, who organized these projects, was charged separately with unregistered securities offerings and market manipulation. Four of Pham’s associates faced similar charges.
ZM Quant Investment and CLS Global face similar allegations related to the coin NexFundAI, which was created by the FBI as part of the investigation. Both firms and the people associated with Pham were also charged with market manipulation involving the SaitaRealty coin. The search for justice in this case spanned multiple countries, as some of the defendants live in Russia, England, Hong Kong, and India.
The SEC is asking for permanent injunctions, disgorgement of gains, civil penalties, and officer and director bars against the defendants. The FBI added that additional cryptocurrencies, including VZZN and Lillian Finance, are under investigation, with their founders also facing charges. In total, 18 people and one additional company, MyTrade MM, are implicated in the combined cases.