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the author is Emeritus Professor of Harvard Law School and Director of the Capital Market Regulatory Committee
The collapse of the FTX exchange sparked a crackdown on regulation in the crypto world. The U.S. Securities and Exchange Commission has filed civil charges against Binance and Coinbase, the world’s largest cryptocurrency exchanges, for allegedly failing to register with regulators as securities exchanges.
But U.S. cryptocurrency investors remain at risk due to the lack of a proper cryptocurrency regulatory framework, especially Binance, which has been accused by the SEC of commingling billions of dollars in customer funds. The reality is that SEC Chairman Gary Gensler had the opportunity to create an agency and he didn’t act.
In May 2021, Gensler admitted in congressional testimony, the problem is that there is “no regulatory framework” for cryptocurrency exchanges to register with the SEC.But in December 2022, following the failure of FTX, Gensler immediately reversed course and replaced it with claim Cryptocurrency exchanges should “come in and register with the SEC.”
But can a cryptocurrency exchange really be registered as a stock exchange? The answer is no.The SEC’s own rules make it impossible, according to one SEC Report Developed by the not-for-profit Committee on Capital Markets Regulation (CCMR).
Bottom line, if a cryptocurrency exchange is registered as a stock exchange, then it has nothing to trade. This is because registered securities exchanges can only list and trade crypto assets that have been registered as securities with the SEC.
Only 5 of the 23,000 existing digital assets are actually registered with the SEC. These five digital assets represent just 0% of the $230 billion in daily cryptocurrency trading volume. They will not be able to trade digital assets such as bitcoin and ether, which are not registered securities and make up the majority of digital asset transactions. The SEC can easily address this issue by using its waiver to allow simultaneous trading of securities and non-securities on registered exchanges.
Additionally, the SEC has failed to adjust its disclosure requirements for cryptocurrencies. Issuers of registered equity and debt securities are wisely required to provide ongoing operational disclosures, but that doesn’t make sense for digital assets like Bitcoin and Ethereum that have no operations and whose value is based solely on supply and demand. Other jurisdictions, including the European Union and Japan, have adopted disclosure regimes to register crypto assets to address these concerns.
By law, trading on registered stock exchanges is also limited to registered broker-dealers, but none of these broker-dealers are registered to trade crypto assets. The U.S. Securities and Exchange Commission has once again barred broker-dealers from registering to trade crypto assets, as its rules prohibit such parties from trading other assets such as stocks or bonds. It is impossible for an established broker-dealer to operate a business that exclusively trades crypto assets. In contrast, all other major jurisdictions allow registered broker-dealers to trade crypto assets alongside other financial assets.
One remaining option for exchanges is to exclusively trade digital assets that are not securities so that they do not have to be registered as securities exchanges. In fact, a new cryptocurrency exchange, EDX Markets, backed by Citadel Securities and Fidelity, Appear That’s it. However, the solution does not allow cryptocurrency exchanges to simultaneously trade registered securities and non-securities. And it will not lead to providing cryptocurrency exchanges with the regulatory investor protection standards of stock exchanges.
The SEC’s needless failure to establish a registration regime for cryptocurrency exchanges has not entirely gone unnoticed.House Financial Services Committee and House Agriculture Committee suggested Legislation to create a viable registration regime for cryptocurrency exchanges is still in its early stages.
The SEC’s strategy could be to ban cryptocurrencies entirely by forcing exchanges to do the impossible, and then sue them for not doing so. But it’s not the SEC’s job to determine whether a crypto asset, or any other financial asset, is worth investing in.
Instead, the SEC has a duty to establish investor protections that allow investors to safely make their own decisions, as regulators in all other major jurisdictions have done with cryptocurrencies. And, in this core mission, the SEC and Gensler have clearly failed, and the result is likely to be mounting losses for future investors.
CCMR Director of Research John Gulliver contributed to this article