US SEC Chairman Gary Gensler's full speech: Why are we suing Binance and Coinbase?

Author | Gary Gensler

Compile | Joy, PANews

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US SEC Chairman Gary Gensler delivered a speech at the Piper Sandler Global Exchange and Financial Technology Conference on June 8. He once again emphasized the importance of regulation, from the signing of the securities law to the Howey test, and listed the SEC's series of measures for the encryption market. Enforcement actions, emphasizing that the crypto securities market should not be allowed to undermine the public's good faith in capital markets. The cryptocurrency market should not be allowed to harm investors. He also noted that regulation is now clear and issuers, broker-dealers and exchanges should know exactly how to comply. It's not a question of insufficient guidelines, exchanges just don't want to do what they're told to do by regulators.

well regulated market

I want to focus on one area that I think sits right at the intersection of the two things highlighted in the title of this conference - exchanges and fintech - and that is cryptocurrencies.

America's capital markets have thrived because, over the 90 years since the Securities Act was signed in 1933, we have created the rules of the road that help ensure investor protection, transparency, and competition. A year after signing the law, President Roosevelt worked with Congress to pass the Securities Exchange Act of 1934 to regulate securities intermediaries such as exchanges and broker-dealers. The law also created the Securities and Exchange Commission, which turned 89 last Tuesday.

Crypto Securities

There is nothing in the crypto securities market to suggest that investors and issuers should not be protected by our securities laws.

Congress could have said in 1933 or 1934 that the securities laws only applied to stocks and bonds.

"The purpose of Congress to create securities laws is to regulate investments, whatever form or name they may be called." It's not just a talking point. As Justice Thurgood Marshall wrote in the Supreme Court's famous Reves decision, this is the law of the land.

Congress included a long list of more than 30 items in its definition of securities, including the term "investment contract."

As clarified in another famous Supreme Court decision, SEC v. WJ Howey Co., an investment contract exists when funds are invested in a common business and profits are reasonably expected to come from the efforts of others. This test has been reiterated several times by the Supreme Court - the court most recently cited the Howey test in 2019.

In Howey, the court said that the definition of an investment contract "embodies a flexible rather than static principle capable of accommodating the myriad variable schemes devised by those seeking to use the investor's funds. Others have committed profit."

As I have said many times, the vast majority of crypto tokens meet the test of an investment contract. Not liking the message and not receiving it are two different things.

These tokens are promoted by the team through their website and Twitter account. Investors may even meet with the founders. These tokens did not come out of thin air. They don't grow out of the ground like corn or wheat. While they are digital, that does not distinguish them from the bulk of the capital markets, where securities and currencies are also already digital.

Satoshi Nakamoto's innovations have driven the development of encrypted assets and the underlying blockchain ledger technology. However, no matter what ledger is used, be it spreadsheets, databases or blockchain technology, it is the economic reality of investing that matters when investors are putting money at risk.

Accordingly, issuers of crypto securities will need to register their offers and sales of investment contracts with the SEC or satisfy an exemption requirement. We've had rules for decades about how issuers must do this. We have flexible rules for disclosures required in registration statements—Regulation SK and Regulation SX—as well as registration exemptions, including Regulation A or Regulation D.

We have also provided market participants with years of guidance on what constitutes and does not constitute a security in a cryptoasset, including the 2017 DAO report and the staff's 2019 "Analytical Framework for Digital Asset 'Investment Contracts'." More than 100 commission orders, settlements, and court decisions have also clarified when token offerings and sales are securities, including our actions against Telegram, LBRY, and Kik.

In fact, just this week, we claimed that Binance’s CFO and CCO were aware of the relevance of the Kik case to their own businesses. According to our lawsuit against Binance, due to the SEC action against Kik, Binance insiders have long realized that they need to “start preparing everything” to respond to subpoenas and Wells notices related to their exchange token BNB, including (to for this "battle") "war chest."

Don’t believe crypto asset market participants when they say on Twitter or on TV that they have not been “reasonably informed” that their actions may be illegal. They may have made a deliberate economic decision to consider the risk of law enforcement as a cost of doing business.

Like the rest of the securities market, registration and compliance need to come into play — and bond and equity issuers at this conference know that. It is appropriate, though, because it is this work that ensures investors receive the full, fair and truthful disclosure they deserve.

Some promoters of crypto-asset securities have argued that their tokens have functions beyond just investment vehicles. However, some additional utility would not remove cryptoasset securities from the definition of an investment contract, as courts have argued in the Telegram case and elsewhere. The investing public typically purchases these cryptoassets, at least in part, in anticipation of profits based on the efforts of the issuers of these tokens.

In fact, in the famous Howey decision, the Supreme Court wrote that if the investment contract test is satisfied, "it does not matter whether the business is speculative or non-speculative, or whether it sells property with or without intrinsic value." However, for Those tokens that are used exclusively in its blockchain ecosystem, the staff expressed willingness to provide a no-action letter.

Cryptocurrency Intermediary

Given that most crypto tokens are subject to securities laws, most crypto intermediaries must also comply with securities laws.

Again, these laws have been in place for decades. Sections 5, 15(a) and 17A(b) of the Exchange Act require intermediaries who act as securities exchanges, brokers and dealers, and clearing agencies to comply with the securities laws and must be registered or meet an exemption requirement.

Again, these cryptographic entities know the rules. As Binance’s chief compliance officer put it bluntly to a colleague in 2018, “We are an unlicensed securities exchange in the US.”

Registration is not just a matter of process. Failure to register isn't just a foot error in tennis. It is at the heart of fundamental protections for the investing public and our markets.

This year, we accused Beaxy, Bittrex, Binance, and Coinbase in separate lawsuits of commingling and illegally providing securities intermediary functionality without registering with the SEC. The Commission took settlement measures against EtherDelta and Poloniex in 2018 and 2021.

These alleged failures deprive investors of key investor protections, including a rulebook to prevent fraud and manipulation, proper disclosures, segregation of client assets, safeguards against conflicts of interest, oversight by self-regulatory organizations, and routine inspections by the SEC. When intermediaries don't register, it's investors who get hurt, and U.S. financial markets can suffer.

In other parts of our securities market, the exchange, broker-dealer and clearing functions are separate. The separation of these core functions helps mitigate the conflicts that may arise from mixing such services.

I disagree with the notion that "crypto intermediaries are impossible to be compliant" and recent history bears that out. I do recognize, and, I think it takes work. It's not just a matter of "paying lip service to applicable laws" or seeking a series of meetings with the SEC during which you're unwilling to do what is necessary to comply with securities laws Change.

Cryptocurrency intermediaries may need to separate lines of business, develop a rulebook to prevent fraud and manipulation, properly segregate client funds, mitigate conflicts, or change their methods of clearing and custody. These are things that protect investors. The fact that they didn't build their platform with these things in mind shouldn't be a free pass to put investors at risk.

Every stock exchange registered at this meeting has done the hard work of registering and developing a proper rulebook and oversight, and each is subject to all of our rules. We shouldn't be breaking 90-year-old securities laws.

As Gurbir Grewal, director of enforcement at the SEC, puts it, “You can’t ignore the rules because you don’t like them, or because you prefer different rules: the consequences for the investing public are too great.”

Additionally, just last month, a firm that limited its business to crypto-asset securities was approved by the Financial Industry Regulatory Authority as a special purpose broker-dealer. It can be done.

We also address issues in the encryption security industry through rulemaking. This comes despite complaints from many in the industry who have called for rulemaking.

We published a reopening version reaffirming the applicability of existing rules to platforms trading cryptoasset securities, including so-called “DeFi” systems. This edition also provides supplementary information for the systems that will be included in the new proposed exchange definition.

While our current investment advisor custody rules already apply to crypto funds and securities, our recent proposal to update it would cover all crypto assets and strengthen the protections offered by qualified custodians.

These are just two of the rules we came up with when it comes to the cryptocurrency market.

In addition, recognizing the risks and uncertainties associated with cryptoassets, the staff expressed its views on cryptoasset-related public company accounting and disclosures regarding significant cryptoasset market developments.

Lending and Staking as a Service

Another common feature of crypto markets is intermediaries and promoters offering loans or staking-as-a-service schemes, promising returns in exchange for investors’ crypto tokens. Their products and promised rewards go by many names, which are often used to attract users to their platform.

In decades of cases, though, the Supreme Court has made clear that the economic reality of a product -- not its label -- determines whether it complies with securities laws.

It doesn’t matter what assets investors put into a lending or staking-as-a-service platform — cash, gold, bitcoin, or anything else. What the brokers say they will do with the assets determines what protection the law provides. Clients invest their assets through the platform, which then on-lends or pools and collateralizes them, in each case promising a return. These are classic securities, whether cryptocurrencies are involved or not.

Again, the SEC has been clear about this for years. From BitConnect in 2021, BlockFi in 2022, to a series of actions this year, the SEC has been claiming that these lending and staking-as-a-service products need to register and provide investment public and proper disclosure.

Just this week, we joined 10 states in accusing Coinbase of offering and selling its staking program without properly registering it.

** Behavior: Fraud, Manipulation and Bankruptcy **

Frankly, it's no surprise that we're seeing a lot of issues in these markets due to widespread breaches. We've seen this story before. It's reminiscent of the 1920s, before the federal securities laws. hawker. fraud. scam artists. Ponzi scheme. Members of the public queue to leave in front of bankruptcy court.

Earlier this week, we claimed that certain Binance entities misled investors about the platform's risk controls and its corrupted trading volumes, while actively concealing who was running the platform, manipulative trading by its affiliated market makers, and even Where and to whom investor funds and cryptocurrencies were detained.

We also allege that Sigma Chain, an affiliate controlled by Binance founder Changpeng Zhao, acted as the primary market maker for Binance.US, engaged in rigging and wash trading, and fraudulently inflated trading volumes on the platform, including around the time Binance.US launched, Its subsequent round of funding and, more recently, the timing of the listing of certain new crypto security tokens.

Additionally, through accounts owned and controlled by Zhao and Binance, billions of dollars in customer funds from both Binance platforms were allegedly commingled into accounts held by Merit Peak Limited, an entity controlled by Zhao.

The charges also describe Zhao and Binance's attempt to evade U.S. securities laws by announcing false controls they ignored behind the scenes so they could keep high-value U.S. customers on their platform. Our complaint quotes Binance’s Chief Compliance Officer, who said, “On the face of it we don’t have US users, but in reality, we should get them through other creative ways,” the CCO further said, “CZ would definitely agree This lol... upper management has taught me how to always find ways to support the business.”

We also saw FTX deceiving investors. With the collapse of Terra and LUNA, we saw deception. We allege that Do Kwon and Terraform repeated false and misleading statements to build trust before inflicting devastating losses on investors.

In the case against Justin Sun and three of his companies, we alleged a scheme to pay celebrities to tout tokens without disclosing their compensation.

I could go on and on, but in a market rife with fraud, abuse, and irregularities, there are too many to list.

We have also seen many companies, before and after FTX, blow themselves up, hurting countless investors. Investors are often lined up in court due to the bankruptcy of BlockFi, Celsius, FTX, Genesis and other crypto firms.

Let me be clear: These types of misconduct and bankruptcies are more likely to occur in markets where issuers and intermediaries fail to abide by fundamental laws. Even though we may not detect fraud or such blatant misconduct, investors need proper disclosure, segregation of their hard-earned assets, and confidence that they are not dealing with the company as a counterparty.

in conclusion

Markets are ultimately about trust. For 90 years, that trust has depended on compliance with securities laws.

The crypto-securities market should not be allowed to undermine the public's good faith in capital markets.

The cryptocurrency market should not be allowed to harm investors.

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