SEC’s Gensler Likens Crypto to ‘Fraudsters, Scam Artists, Ponzi Schemes’ of 1920s

Securities and Exchange Commission (SEC) Chair Gary Gensler listens during a meeting at the U.S. Treasury Department in Washington on Oct. 3, 2022. Anna Moneymaker/Getty Images

Securities and Exchange Commission (SEC) head Gary Gensler does not want the U.S. financial system to return to the 1920s, a time before the government adopted federal securities laws.

Gensler delivered a virtual keynote address to the Piper Sandler Global Exchange & FinTech Conference in New York on June 8, providing a combative defense of his agency’s latest actions against the cryptocurrency industry, accusing crypto exchanges Binance and Coinbase in lawsuits of operating illegally and trading in unregistered securities.

Binance allegedly failed to restrict U.S. clients from its platform, established separate U.S. entities to evade federal securities laws and misled investors about market surveillance controls.

The SEC claimed that Coinbase functioned as an unregistered broker since 2019 by managing crypto transactions that ignored regulatory requirements to ensure investor safety.

A flipped version of the Coinbase logo is reflected on a mobile phone screen in London on Nov. 9, 2021, in a photo illustration. Leon Neal/Illustration/Getty Images

Gensler told the conference attendees that they would never be permitted to emulate some of the behaviors that are common in the crypto realm.

“When crypto asset market participants go on Twitter or TV and say they lacked ‘fair notice’ that their conduct could be illegal, don’t believe it,” Gensler said in his prepared remarks.

“They may have made a calculated economic decision to take the risk of enforcement as the cost of doing business.”

The SEC chief dismissed the arguments that it is challenging for crypto outlets like Coinbase to register with the stock market regulator.

According to Gensler, organizations making this claim might need to transform their corporate infrastructure to function more like conventional financial services firms.

“I disagree with the notion—and recent history disproves it—that crypto intermediary compliance isn’t possible. I do recognize—and, again, think it’s appropriate—that it takes work,” he said.

“Registration is not just a process issue. Failure to register isn’t just a foot fault in a tennis game. It’s core to providing the investing public and our markets with basic protections.”

Protecting Investors

Crypto intermediaries might need to determine better proper lines of business to handle various regulatory issues, such as protecting against fraud, correctly segregating customer funds, and mitigating conflicts.

“These are the things that protect investors. The fact that they didn’t build their platforms with these things in mind shouldn’t be a free pass to put investors at risk,” Gensler added.

In April, Coinbase filed a lawsuit against the SEC and requested a judge to force the commission to provide an answer to the company’s July 2022 petition that asked the regulator to “propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods.”

“From the SEC’s public statements and enforcement activity in the crypto industry, it seems like the SEC has already made up its mind to deny our petition. But they haven’t told the public yet.

“So the action Coinbase filed today simply asks the court to ask the SEC to share its decision,” wrote Paul Grewal, the Coinbase chief legal officer, in a blog post at the time.

Meanwhile, Gensler likened the wide range of crypto scandals over the past couple of years to how traditional financial markets behaved prior to the federal securities laws enacted in the 1930s.

“With wide-ranging noncompliance, frankly, it’s not surprising that we’ve seen many problems in these markets,” Gensler stated.

“We’ve seen this story before. It’s reminiscent of what we had in the 1920s before the federal securities laws were put in place: Hucksters, fraudsters, scam artists, Ponzi schemes. The public left in line at the bankruptcy court.”

Despite tanking on June 6, Coinbase shares rose more than 1 percent on June 8. Binance Coin (BNB), the native token for the crypto exchange, climbed about 0.4 percent.

Binance Takes Aim at Gensler

Gensler offered to serve as an adviser to Binance’s parent company in 2019, according to documents submitted by attorneys for the crypto exchange and founder Changpeng Zhao.

Company lawyers allege that Gensler attempted to foster a relationship with Binance before President Joe Biden nominated him to the head of the SEC in 2021.

“We again raise our concerns—which the staff has never addressed or even acknowledged—regarding Chairman Gensler’s personal history with BHL [Binance] and Mr. Zhao,” wrote lawyers from Latham & Watkins and Gibson, Dunn & Crutcher.

“As we conveyed nearly four months ago, Mr. Gensler should have been recused from any consideration in this matter based on this history and the prospect that Mr. Gensler may be a material fact witness.”

Zhao Changpeng, founder and chief executive officer of Binance, attends the Viva Technology conference dedicated to innovation and startups at Porte de Versailles exhibition center in Paris on June 16, 2022. Benoit Tessier/Reuters

The Wall Street Journal had previously reported on the relationship between Gensler and Binance, citing internal Binance messages and an individual close to the SEC chief. Both sources say Binance approached Gensler.

Speaking in an interview with CNBC’s “Squawk on the Street” on June 6, Gensler argued that the United States does not need any more digital currencies as they are unnecessary in today’s economy.

“Look, we don’t need more digital currency,” he said. “We already have digital currency. It’s called the U.S. dollar. It’s called the euro, or it’s called the yen; they’re all digital right now. We already have digital investments.”

Sen. Bill Hagerty (R-Tenn.) believes the SEC “is weaponizing their role to kill an industry.”

“Allowing a company to list publicly and then stonewalling their attempts to register is indefensible,” he tweeted.

“Gary Gensler is finally saying the quiet part out loud: the Biden admin wants to kill market innovation to pave the way for a CBDC [central bank digital currency], which would give the federal gov. unprecedented insight into your life,” Hagerty, a former U.S. ambassador to Japan, later wrote.