Investors using cryptoasset platforms are not adequately protected. According to Gensler, crypto-finance platforms permit trading and lending of tokens, and the American public is buying, selling, and lending crypto on these venues, on both centralized and decentralized finance (DeFi) platforms, which implicate the securities laws.

Some platforms can also implicate the commodities laws and the banking laws. This raises a number of issues related to protecting investors and consumers, guarding against illicit activity, and ensuring financial stability.

The probability is quite remote, where a platform offers 50 to 100 tokens, as is common, that the platform is not offering any securities for sale. According to Gensler, many tokens may be unregistered securities that have been issued without required disclosures or market oversight.

The test to determine whether a cryptoasset is a security is clear. The SEC has taken and will continue to take its authority as far as it will go. Gensler notes that over the years, the SEC has brought dozens of actions in this area, prioritizing token-related cases involving fraud or other significant harm to investors and has yet to lose a case. To the extent that there are securities on these trading platforms, under US law they must register with the SEC unless they meet an exemption. If a lending platform is offering securities, it also falls under SEC jurisdiction.

There are initiatives by a number of platforms to offer crypto tokens or other products that are priced off of the value of securities and operate like derivatives. Stock tokens, stable value tokens backed by securities, or any other virtual product that provides synthetic exposure to underlying securities are subject to the securities laws.

The current value of the stablecoin market is $113 billion, including four large stablecoins, some of which have been around for several years. These stablecoins are embedded in and facilitate trading on crypto trading and lending platforms. In a crypto-to-crypto transaction, stablecoin is usually involved. According to Gensler, in July 2021, nearly three-quarters of trading on all crypto trading platforms occurred between a stablecoin and some other token. The use of stablecoins on these platforms may facilitate those seeking to sidestep a host of public policy goals connected to our traditional banking and financial system: anti-money laundering (AML), tax compliance, sanctions, and so forth.

While many overseas platforms state they don’t permit trading by US investors, there are allegations that some unregulated foreign exchanges facilitate trading by US traders who are using virtual private networks (VPNs). Unlike other trading markets, where investors go through an intermediary, people can trade on crypto trading platforms without a broker, 24 hours a day, seven days a week, from around the globe.

The legislative priority should center on crypto trading, lending, and DeFi platforms. Regulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending. Gensler notes that the SEC needs additional congressional authority to prevent transactions, products, and platforms from falling between regulatory cracks and that more resources are needed to protect investors in this sector.

Cryptocurrency and Virtual Currency Regulatory Tracker.

SEC Regulation of Digital Assets.

FinCEN Regulation of Virtual Currency: Overview.

Decentralized Finance (DeFi): Overview.