For a Sense of Gensler's SEC, See His CFTC

How Gary Gensler approached the $400 trillion swaps market at the CFTC points to how he might approach crypto at the SEC.

CoinDesk Insights
Mar 2, 2021 at 11:19 p.m. UTC
Updated Sep 14, 2021 at 12:20 p.m. UTC

In his highly anticipated U.S. Senate hearing this morning, Gary Gensler, nominated to chair the Securities and Exchange Commisson (SEC) presented tech savvy and powerful understanding of the regulatory challenges facing the crypto industry. 

Gensler’s opening statement stressed “strengthening transparency and accountability in our markets, so people can invest with confidence, and be protected from fraud and manipulation.” 

Chen Arad is the COO of Solidus Labs, a New York-based provider of crypto-native market surveillance and risk monitoring solutions.

On that note, Gensler referenced his tenure as chairman of the Commodity Futures Trading Commission (CFTC), and in particular his “decisive action to increase transparency and reduce risk in the $400 trillion swaps market.”

While history is not an indicator of future performance, it’s wise to use the past to help inform our future expectations. So the crypto industry should educate itself on Gensler’s actions and priorities while leading the CFTC to better understand how he might approach crypto (should he be confirmed as the next SEC chairman).

There are clear parallels between current crypto markets and the historical derivatives markets Gensler addressed during his time as  CFTC chair. In a recent NPR interview, Salman Banaei, a lawyer and economist who previously worked under Gensler at the CFTC on market surveillance, noted that “before Gensler came in, there wasn't much active surveillance of what traders were doing during the trading day.” 

The CFTC, he says, would often wait until a complaint was filed and react to that. But with Gensler, Banaei says, that changed.

Creating a holistic trade surveillance program, as opposed to launching investigations based on anecdotal reports or incidents, led to a number of investigations and settlements, according to Banaei. In other words, proactively surveilling market data immediately advanced market integrity.

Gensler has frequently emphasized the need for modern surveillance of markets, notably following the May 6, 2010 flash crash. In a congressional testimony then, Gensler highlighted how cross-market trading strategies – which focus on trading price-correlated assets in separate markets to affect pricing and make arbitrage gains – contributed to the crash that hurt millions of Americans. 

Until then, the CFTC collected all transaction and open position data. Due to the flash crash, it asked exchanges for full order book data for the days leading up to the event. “This was a tremendous effort to collect and analyze an enormous data file that included more than 14 million messages just for one day,” Gensler testified. It took months, but this ultimately enabled the CFTC to understand what happened.

But it wasn’t sustainable. Gensler told Congress that regulators must be able to truly understand and respond to suspicious market behavior in real time or near it. In the long term, capital market supervision needs to incorporate more comprehensive data reporting regimes, shared data repositories, and harness technology to surveil the data in an automated and sophisticated manner.

Markets work best when there's a cop on the beat.

What does this mean for crypto with Gensler as SEC Chair?

If you read any of the SEC’s rejections to bitcoin exchange-traded fund (ETF) applications – and I read most of them – you know that market manipulation is a major concern for the SEC. Those concerns are already addressed in other markets through shared-surveillance and data repositories, like the ones Gensler helped promote and enable in swaps and future markets. 

But in crypto markets, where assets like bitcoin aren’t native to any exchange, the agency is not confident such frameworks are in place (though they are technically possible). 

Gensler seems to be in agreement with these concerns. “The volumes, millions of customers, repeated hacks and ample potential for manipulative behavior, suggest that oversight is worthy by securities, commodities and derivatives regulators around the globe,” he told Congress in 2018.

Given the importance of learning from history, we know the SEC sees market manipulation as a fundamental hurdle to allowing the further adoption of crypto by American retail and institutional investors – as its ETF decisions indicate.

Second, we know Gensler isn’t blindly pro-crypto and he does specifically understand how crypto markets work, as Jeff Bandman who worked with him aptly pointed out in a CoinDesk op-ed. 

Third, he sees market manipulation as a major challenge crypto needs to address, and believes federal regulation and shared surveillance frameworks are ways to stymie manipulation and trade abuse in crypto markets.

Finally, we know Democratic administrations are more likely to provide regulators with increased oversight authority and supervision mandates.

As Gensler told NPR, “Markets work best when there's a cop on the beat."

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