U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler has expressed strong opposition to the Financial Innovation and Technology for the 21st Century (FIT21) Act, a crypto bill that is currently up for a House vote. Gensler emphasized that many players in the crypto industry do not adhere to regulations, resulting in widespread fraud, bankruptcies, failures, and misconduct.
Gensler’s Statement Against FIT21 Act
Gary Gensler, the Chairman of the SEC, issued a statement on Wednesday regarding the FIT21 Act, which is scheduled for a House vote today. Representative Patrick McHenry, the chair of the House Financial Services Committee, described the bill as a comprehensive reform of the market structure for cryptocurrencies.
Gensler argued that the rules already exist, but many participants in the crypto industry have demonstrated their unwillingness to comply with the applicable laws and regulations. He emphasized the consequences of this widespread noncompliance, including fraud, bankruptcies, failures, and misconduct.
Regarding the FIT21 Act specifically, Gensler cautioned that it would create new regulatory gaps and undermine decades of oversight precedent for investment contracts. He warned that this would put investors and capital markets at an immeasurable risk.
Firstly, Gensler raised concerns about the bill’s proposal to remove blockchain-recorded investment contracts from the definition of securities, thereby exempting them from many federal laws. Secondly, he expressed worries that the bill allows crypto issuers to self-certify as “decentralized,” categorizing them as “digital commodities” outside SEC oversight. Gensler noted that with over 16,000 crypto assets and the SEC’s resource constraints, it is unlikely that the agency can review these assets within the required 60-day window. This could potentially enable many crypto assets to evade even the minimal oversight proposed by the bill.
Thirdly, Gensler argued that the bill replaces the Supreme Court’s Howey test, which determines whether investments are securities based on economic realities. He explained that the result of this replacement would be weaker investor protection for assets that meet the Howey test.
Furthermore, Gensler stated that the bill reduces SEC protections for crypto investment contracts that still fall under the agency’s jurisdiction. This increases risks for the American public compared to previous standards. Additionally, he pointed out that the bill specifically excludes crypto asset trading systems from the definition of an exchange. This would allow these platforms to combine their functions in a way that fosters conflicts of interest, potentially enabling trading against their customers and reducing custody protections for customers.
Moreover, Gensler highlighted that the bill introduces a regulatory exemption for any group labeled as “Decentralized Finance,” without considering potential conflicts of interest. The bill also proposes a new framework that exempts crypto securities from current offering restrictions, allowing non-accredited investors to purchase crypto assets up to 10% of their net worth or annual income without requiring issuer disclosures. This could potentially increase risks for ordinary investors.
Gensler further asserted that the self-certification process outlined in the bill poses a significant risk to investor protection and could destabilize the $100 trillion capital markets. He raised the question of what would happen if perpetrators of pump and dump schemes and penny stock pushers claimed to be outside of securities laws by labeling themselves as crypto investment contracts or self-certifying as decentralized systems. In such cases, the SEC would only have 60 days to contest their self-certification.
Gensler concluded by stating that the failures, frauds, and bankruptcies in the crypto industry are not due to a lack of rules or unclear rules. Instead, they occur because many players do not abide by the rules. He emphasized the importance of prioritizing the protection of the investing public over facilitating the business models of noncompliant firms.
What are your thoughts on SEC Chair Gary Gensler’s concerns about the FIT21 bill and the crypto industry? Let us know in the comments section below.
