The U.S. Securities and Exchange Commission (SEC) needs to take action to protect consumers against bad actors in the crypto space, Senator Elizabeth Warren told Yahoo Finance on July 17.
“Congress needs to act, but the SEC has a responsibility to use its authorities to put guardrails in place and crack down on crypto actors that break the rules.”
Warren, who has been “ringing the alarm on crypto” for a while, said there is a need for “stronger rules to protect customers and financial stability.” She added that “too many crypto firms” have scammed customers of late with “insiders” making off with the money.
Apart from the members of Congress, many analysts are also wondering why the SEC has not been more aggressive, the Yahoo Finance report said.
SEC chairman Gary Gensler has reiterated several times since 2021 that nearly all cryptocurrencies are securities. Gensler has also likened stablecoins to “casino chips,” and the crypto market to the “wild west,” referring to the states west of Mississippi that had rampant lawlessness until the 20th century.
Gensler has also repeatedly called for exchanges to register with the SEC. However, an unnamed crypto industry lobbyist cited by Yahoo Finance said that most crypto industry players are afraid to approach and engage with the SEC because of fears of enforcement actions. The lobbyist added that more enforcement actions are expected from the SEC.
In an interview with Yahoo Finance on July 14, when asked why the SEC has not acted more aggressively to formulate rules to protect consumers, Gensler said that rules are already in place. Gensler said:
“We have rules in place for what it means to be an investment company, like a mutual fund, when you put your money in.”
However, Gensler added that tailoring the disclosure requirements for stocks to crypto makes sense so that customers know “somebody is not lying to them.” He also said that consumers remain unprotected mostly due to non-compliance in the industry.
Gensler also pointed to the enforcement actions against crypto firms by the SEC over the past few months, including against BlockFi. The SEC uses enforcement actions to encourage compliance with securities laws.
Urgency for rules amid bankruptcy spree
Warren’s call for action comes when the crypto industry is reeling from bankruptcy from two large lenders and a prominent crypto hedge fund. In the aftermath, crypto investors have had a rude awakening that they have no government safety net for protection when crypto platforms fail.
Three Arrows Capital (3AC) was ordered to liquidate by a British Virgin Islands court in June. Voyager Digital, which had exposure of over $650 million to 3AC, declared bankruptcy within a week.
Then Celsius, which had over 1.7 million customers and managed nearly $12 billion in assets in May, declared bankruptcy on July 14. Celsius’ bankruptcy filings showed that it had a deficit of $1.19 billion.
These bankruptcies have created more urgency for investor protection rules. Senator Bob Menendez told Yahoo Finance:
“The recent turmoil in crypto is a clear example of why Congress and financial regulators need to come together to create a robust regulatory framework for digital assets that protects consumers and provides clarity for investors.”
According to the Yahoo Finance report, lawyers say that the SEC is waiting for the results of the Ripple case to set a precedent for rulemaking. The SEC has charged Ripple with offering unregistered securities, which Ripple continues to contest in an ongoing legal battle. The outcome of the case will establish whether the SEC’s claims of XRP and similar tokens being securities is correct.
SEC’s powers may be limited
While some analysts claim that the SEC’s attempts to reign in crypto have been inadequate, others believe that the agency has done a fair amount. Citing the SEC’s enforcement actions, Todd Phillips, director for financial regulation and corporate governance at the Center for American Progress, told Yahoo Finance that the agency has been using its resources “very effectively.”
“Under Chair Gensler they’re doing about as much as they can. The SEC only has so many resources and enforcement attorneys so they can only do so much.”
But when it comes to insolvent lending platforms like Celsius and Voyager, the SEC’s authority might be limited, Todd said. Therefore, it is unfair to “criticize” the SEC when the agency “doesn’t have authority to reign them in,” he added.
Gensler has been working with the Commodities Futures Trading Commission to create one rulebook for regulating crypto to avoid gaps in oversight.