Crypto entrepreneurs have engaged in regulatory ‘arbitrage’ to avoid oversight, says SEC’s Gensler

Gensler noted that stablecoins like Tether USDTUSD, -0.03% and USD Coin USDCUSD, , which are used to facilitate trading between volatile cryptocurrencies like bitcoin BTCUSD, -3.35% and ether ETHUSD, -3.66%, have some security-like qualities that could put them under the purview of the SEC, but also have similarities to bank products that would necessitate oversight by the Federal Deposit Insurance Corporation or the Federal Reserve.

“They came about in 2013, 2014 to facilitate trading on these trading platforms in part for efficiency but in part, frankly, because it was a way to do trading without using the fiat banking system,” which is subject to anti-money laundering and know-your-customer regulations that crypto traders wished to avoid, Gensler said.

Biden administration financial regulators have expressed their desire to find a comprehensive regulatory framework for stablecoins. In July, U.S.Treasury Secretary Janet Yellen said that the government must “act quickly to ensure there is an appropriate regulatory framework in place” for these digital assets.

Critics say stablecoins pose a threat to financial stability, because investors use them as cash substitutes, but they remain lightly regulated, unlike similar products like bank deposits or money market mutual funds. This summer, Federal Reserve Chairman Jay Powell said in a congressional hearing that regulators should treat stablecoins similarly to these instruments.

Gensler also warned investors that when they trade stablecoins and other cryptocurrencies on many exchanges, they don’t have direct control over those assets. “Most of the stablecoins aren’t actually owned by the public,” he said. “They’re primarily owned actually by the platforms themselves…and the broad public only has a credit relationship with the exchange.” Gensler added that this custodial relationship is another aspect of the crypto economy that regulators must “consider for financial stability and investor protection.”

The Treasury Department is expected to issue a report this fall that will recommend ways to protect investors and the financial system from risks posed by stablecoins.

The SEC Chairman also weighed in on the topic of digital engagement practices, or the methods that online brokerage platforms use to encourage use of their products and potentially discriminate between customers.

“Are these platforms solely optimizing for our returns as investors, or are they optimizing for other factors, including their revenues?” Gensler asked. “How can we ensure that new developments in analytics don’t instead reinforce social inequities that are embedded in data?”

The SEC recently submitted a request for public comment on digital engagement practices and may engage in new rulemaking on these practices in the coming months.