“I’m neither a maximalist nor a minimalist but I do believe [blockchain is] a catalyst for change,” said Gary Gensler, the potential next chairman of the U.S. Securities and Exchange Commission (SEC).
Gensler was speaking to the Senate Banking Committee, which held a hearing Tuesday to consider his nomination to the SEC, along with President Joe Biden’s nominee to run the Consumer Financial Protection Bureau, Rohit Chopra.
Gensler’s background suggests he is both pro-crypto and pro-regulation, and it remains unclear if the industry will perceive him as friendly or overzealous on regulation. The hearing didn’t provide too many clues because Gensler was careful to strike a balance between emphasizing regulating suspicious behavior and encouraging new innovations.
The largely substantive hearing had senators asking Gensler to detail how he would approach current issues, including the recent GameStop stock market volatility and Robinhood’s payment for order flow model, diversity mandates and financial regulation in the wake of the pandemic.
Gensler, who has lectured at MIT about the cryptocurrency industry, praised the technology at various points during the hearing, noting that it could provide cheaper cross-border or domestic transactions while the underlying blockchain technology can be applied to medical records, trade finance or other data collection uses.
“Bitcoin and other cryptocurrencies have brought new thinking to payments and financial inclusion, but they’ve also raised new issues of investor protection that we still need to attend to,” he said. “If confirmed at the SEC, I’d work with fellow commissioners to both promote the new innovation, but also at the core to ensure investor protection.”
This would include examining what might fall under U.S. securities laws, and checking whether there are any specific investor protection statutes that would apply to crypto exchanges, he said.
Gensler, a former Commodity Futures Trading Commission (CFTC) chairman, repeatedly brought up investor protection concerns, telling Sen. Bill Hagerty (R-Tenn.) that as cryptocurrencies and possible central bank digital currencies grow, “it’s important to stay true to our principles of investor protection and capital formation.”
If an entity is offering an investment contract, that falls under the SEC’s purview. If a cryptocurrency is more a commodity like bitcoin, it could fall under the CFTC or Congress could determine how it would be overseen, he said.
These protection concerns include crypto custody and ensuring that regulated entities have sole control over the private keys for digital assets, he said. Gensler’s concerns also include overseeing fraud and manipulation.
“That’s the greater challenge frankly, because there has been … for some markets, usually operating overseas but some markets have been really rife with fraud and scams so trying to protect the investors against that,” he said.
The SEC should also remain technology-neutral, Gensler said.
When Sen. Cynthia Lummis (R-Wyo.) asked how the SEC could regulate the industry, Gensler said it would be important for the agency to provide guidance, which could occur through no-action letters or rulemaking.
Both Gensler and Chopra mentioned the benefits of a faster real-time payment settlement system, with Chopra specifically calling for more work to be done in implementing such a system.
“We can not be falling behind other countries. We see that China is in many ways investing in faster payments, in a stablecoin,” Chopra said. “That will help consumers and businesses get funded faster, to their benefit, and I strongly support efforts to modernize that system so that everyone can have equal access.”
Chopra has advocated for a modernized real-time payment system before, writing a letter to the Federal Reserve in 2019 recommending the central bank move forward on the “FedNow” service in light of the at-the-time Libra stablecoin initiative. He revisited his concerns on Tuesday.
“Facebook’s libra proposal drew a lot of scrutiny from this committee, as well as regulators all over the world with respect to how it might impact privacy, fair competition and even compliance with our money laundering laws,” Chopra said.
Chopra also raised data privacy concerns, saying there are “real questions” about what data is collected by technology companies and how that data is used.
After Tuesday’s hearing, the Senate Banking Committee must vote on whether to advance the nominations. The full Senate will then vote on whether to confirm the nominees to their respective positions.