Gensler Vows to Intensify Crypto Crackdown

Calling crypto a casino, Gary Gensler, the chair of the U.S. Securities and Exchange Commission, warned Thursday that the crypto crackdown is just getting started.

“The runway is getting shorter,” Gensler said in an interview with Bloomberg News. “The casinos in this Wild West are non-compliant intermediaries.”

Guilty

Gensler made the comments as Sam Bankman-Fried, the co-founder and former CEO of FTX, faces federal charges of securities fraud and conspiracy and two of his onetime colleagues have pleaded guilty to defrauding customers of what was the No. 2 crypto exchange until several weeks ago.

The SEC is also suing Bankman-Fried and the two former executives, Caroline Ellison and Gary Wang, for securities fraud. The agency poignantly appears to treat FTX’s native token, FTT, as a security. In the interview, Gensler reasserted his view that most cryptographic tokens are unregistered securities subject to existing law and must be registered with the agency like stocks.

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“[Insiders] sell the public on an idea while they’re potentially fraudulently pumping up the stock,” Gensler said. “This leads to distorted incentives and puts the public further at risk.”

The SEC chair’s comments punctuate an extraordinary period for the young crypto industry as it confronts numerous enforcement actions from multiple federal agencies.

Prosecutions

The Commodity Futures Trading Commission is also pursuing firms that fail to register crypto products that qualify as derivatives. The U.S. Department of the Treasury sanctioned Tornado Cash, the crypto mixer, after finding it facilitated the laundering of billions of dollars worth of cryptocurrencies resulting from illegal activity. And with the FTX prosecutions, the Justice Department is stepping up criminal enforcement in the sector.

FTX filed for bankruptcy on Nov. 11 after facing a run on its reserves . Federal authorities say more than $8B in customer money is missing after Bankman-Fried, Ellison, and Wang plundered deposits to cover losses at Alameda Research, a crypto hedge fund they also controlled.
On Wednesday, Ellison, the former CEO of Alameda Research, and Wang, an FTX co-founder and former CTO, pleaded guilty to charges concerning their involvement in FTX’s failure.

Non-compliant Companies

Bankman-Fried, the co-founder and former CEO of the exchange, was extradited from The Bahamas to the United States on the same day, and is currently residing at his parents’ home in California after posting a $250M bail on Dec. 22.

Gensler said he hopes the charges against FTX’s former brass will send a message to other exchanges that are operating in violation of securities laws, warning that non-compliant companies could soon face enforcement actions too. The SEC Chairman said many centralized exchanges are not properly segregating client funds.

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FTX’s collapse has thrown the practices of centralized exchanges into the spotlight, with many in the industry calling for CEXes to publish regular reports demonstrating their “proof of reserves to support their crypto assets.

But Gensler believes proof of reserves reports do not demonstrate that a platform is solvent. “Proof of reserves is neither a full accounting of the assets and liability of a company, nor does it satisfy segregation of customer funds under the securities laws,” he said.

Segregation of Funds

Gensler added that firms wishing to demonstrate they have customer funds on-hand should simply comply with the SEC’s custody, segregation of customer funds rules, and accounting rules.

Many analysts believe lawmakers will try to introduce heavy-handed regulations for the web3 sector following the high-profile failures of centralized entities including Celsius, Three Arrows Capital, and FTX.

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Coinbase, the top U.S. centralized exchange, said 2022’s crypto turmoil has given lawmakers a “sense of urgency” to establish basic risk controls for crypto-asset activities in its 2023 Crypto Market Outlook report.

The exchange urged policymakers to understand that the drama in the markets was driven by human beings, rather than any quality that is unique to blockchain technology.

“The regulatory framework should balance the need for reasonable standards for centralized entities with the need to protect the freedom to innovate at the base layer,” Coinbase said.

Cause for Concern

Tim Lehes, the co-founder of Swarm Markets, told The Defiant agrees that the sector will become more as a clear consequence of the dramas in 2022, but does not believe regulator oversight is cause for concern.

“This should not be feared by the sector but welcomed as a crucial foundation on which renewed trust and adoption from institutional and private users will be established,” Lehes said. “From a mass adoption standpoint, users will need regulatory clarity as well as clear licensing to prove the viability of projects. This is the only way for users to avoid some of the questionable projects that are still operating in the crypto space, with people’s funds at risk.”