SEC Chairman Exposes Crypto Industry’s Flagrant Noncompliance

Key Points:

• SEC Chairman Gary Gensler addresses key tech trends: cryptocurrency and AI.
• Cryptos may fall under securities laws, ushering in compliance challenges.
• Predictive data analytics and AI offer potential, but bring exploitation risks.

The U.S. House of Representatives Financial Services Committee convened on September 27 to delve into the SEC Chairman strategy for adapting to the fast-paced technological landscape, which includes cryptocurrency and artificial intelligence (AI).

SEC Chairman Gary Gensler set the stage for the hearing with opening remarks, shedding light on the SEC’s overarching regulatory responsibilities in the realm of U.S. securities and exchanges. However, the spotlight of the discussion was squarely on two emerging tech frontiers: predictive data analytics and cryptocurrency.

SEC Chairman’s Address

Gensler underscored the importance of ensuring that both investors and issuers participating in the “crypto asset securities market” are afforded the protections granted by securities laws. He emphasized that the definition of securities comprises over 30 items, including “terms of investment contracts.” In Gensler’s view, the majority of cryptocurrency tokens meet the investment contract test, thereby making them subject to securities laws. Consequently, intermediaries such as exchanges, brokers, and dealers are also obligated to adhere to these regulations. Widespread non-compliance within the industry has led to a series of enforcement actions.

Cryptos under Scrutiny

Moreover, SEC Chairman Gensler highlighted the transformative potential of predictive data analytics and AI, characterizing them as catalysts for an “era of change” that can enhance efficiency throughout the economy. While these technologies hold promise in terms of improving financial access and user experiences, they also bring inherent risks of exploitation.

The SEC Chairman’s presentation delved into the SEC’s July 2023 proposal, which called for companies to scrutinize conflicts of interest stemming from the use of predictive data analytics in their interactions with investors. In cases where conflicts arise, companies are required to mitigate or eliminate them. Notably, Gensler did not comment on the ongoing legal disputes involving Coinbase and Binance.US, leaving the issue unaddressed during the hearing.

The hearing served as a critical forum for discussions on the SEC’s evolving stance on emerging technologies and its commitment to ensuring a fair and secure financial landscape for investors and market participants alike.

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