Transcript: The Path Forward: Cryptocurrency with Gary Gensler
By David Ignatius
The SECURITIES and Exchange Commission (SEC) is one of the most powerful financial regulators in the world and a key player in the government's push to regulate the cryptocurrency industry. Washington Post columnist David Ignatius recently spoke with SEC Chairman Gary Gensler about the future of cryptocurrencies, the growth of digital trading platforms, and stricter financial disclosure requirements.
The following is the transcript of the interview:
Mr. IGNATIUS: Welcome to the Washington Post live.I'm David IGNATIUS, a columnist for the Washington Post.
Joining us live today is SEC Chairman Gary Gensler, who spoke at a Senate Banking Committee hearing last week about the need to regulate cryptocurrencies, an issue that appeals to financial markets, and we look forward to continuing our conversation with chairman Gary Gensler.
Welcome again Gary Gensler to the Washington Post live.
Mr. GENSLER: It's a pleasure to be here with you, David. It's a pleasure to be here with the audience.
Mr. IGNATIUS: Well, let's start with a couple of recent major events in the cryptocurrency industry, where the value of Bitcoin and other tokens has recently dropped precipitously, by more than 8%. I want to start by asking you basic questions about the stability of cryptocurrencies as an asset, and whether there is a need for some stricter regulation?
MR GENSLER:Well, Crypto Tokens, what you're referring to in this show is something called cryptocurrencies, and while some of our colleagues in the official sector always shy away from that word -- but I'm happy to use it -- I feel like cryptocurrencies are a highly speculative asset class. I am honored to be at the Massachusetts institute of technology and computer science colleagues work together, then studies and professor encryption currency, I think in the hearing to publish a white paper on the COINS in a dozen years ago, offers an innovative, although we still don't know in the hearing, in spite of her, he is who they are, bring some COINS in essence of innovation.
However, we now have a highly speculative asset classes, stored in a digital ledger, as you said, the recent encryption price decline in the money market, the sharp decline in prices might sometimes, may also rose sharply, but in general, in addition to others will pay you, encryption currency is not a thing to be unsustainable.
Mr. IGNATIUS: Before we get into the details of what regulation might involve, I want to ask you about some of the underlying economic news that seems to be driving bitcoin and these other currencies overnight, and that is the high leverage in China's real estate sector, and the excesses in the financial markets. I want to ask you, as chairman of the SECURITIES and Exchange Commission, whether you are concerned that what is happening in China could spread to the United States and the international financial markets as a whole, and what steps have you taken recently to try to protect our markets and our financial stability.
MR GENSLER:We are a highly interconnected global economy. The United States, though only 4 percent of the world's population -- we are 23 percent of the world economy (maybe 24 percent) and 38 percent of the world's capital markets. So we are highly interconnected with the global economy.
Now, as far as China is concerned, we have been doing a lot of things. We have about 270 China-related companies raising capital in the United States. For new companies that want to list in the United States, we have put a moratorium on that until we can require greater disclosure from them. Investors can decide whether they want to participate, but issuers must provide investors with complete and fair disclosure, and the SEC prevents practices like fraud and market manipulation, which is one of my concerns about crypto and crypto asset classes. But going back to China, given some regulatory changes in China, we have asked issuers to put more emphasis on disclosure, because us investors typically buy only a Cayman Islands company that operates in China. And you don't actually own these Chinese companies directly.
The second thing that happened was about 19 years ago, we set up an organisation in the US to audit public companies. It's about trust in our capital markets, and you have someone -- it's called the Public Company Accounting Oversight Board -- who checks the auditors to make sure the business numbers are correct. What was the effect? Now, 19 years later, about 50 jurisdictions have done so, but China has not. So, the United States Congress, unanimously in the Senate, unanimously in the House of Representatives, passed and joined to require the SEC to basically resolve this issue within the next three years, which means that China needs to comply with the relevant constraints, and their authorities and auditors need to comply, or we will suspend the transactions of these 270 companies.
Mr. IGNATIUS: Let me ask one more question. Given the excess debt pressure of Evergrande, a major Chinese real estate developer, some analysts worry that risks could spread in financial markets, as we remember in the 2008 financial crisis and the collapse of Lehman Brothers and related derivatives and swaps, with huge repercussions. So I just want to ask you explicitly whether you believe that our financial markets today would still be protected in the event of such a problem, not necessarily evergrande, but any large company anywhere with such a high level of debt.
MR GENSLER:Well, David, that's a good question, it's multi-layered, some of it I hope you understand, AND I don't want to comment on a company, especially the one you mentioned is not directly registered and traded in the US capital markets. Evergrande is registered in Hong Kong and operates in mainland China.
But it is accurate to say that we are highly interconnected global economic systems, just as it is possible that the financial crisis that erupted in the United States in 2008 also spread from our housing bubble, and that the rest of the world reacted to these shocks. In fact, we react here in the United States to shocks in other economies and countries, especially when the Chinese economy is so large relative to Europe's or the U.S. economy itself.
On your second question, I do believe that the reforms after the 2008 financial crisis have made the US financial system stronger. That doesn't mean we don't take the regulatory issues of the SEC and other important regulators like the Federal Reserve, bank regulators, and the CFTC lightly, and I have the honor to chair the SEC, and I do think we are better positioned in 2021 to absorb some of the financial risk shocks than we were before the 2008 financial crisis, But that doesn't mean we're isolated. Economies are globally interconnected.
Mr. IGNATIUS: Let's go back to some encryption issues. You have recently used some very "strong" language in your speeches and testimony about encryption --
MR GENSLER:David, David, IF I may, I just want to clarify, if I may, that I do think this new technology of encryption is very interesting -- whoever Satoshi nakamoto is, Bitcoin is causing change and is pushing central banks around the world to rethink how they provide payment systems. Bitcoin is driving a financial revolution known as "fintech," or the intersection of new technology and finance. I taught cryptocurrency at MIT and researched it for several years, and I really wouldn't spend my time on it if I didn't think it was interesting and innovative. But at the same time, I don't think technology will last long if it's outside the framework of social and public policy.
In this case, we have to make sure that investor and consumer protection, which is what an agency like the SEC does, but at the same time, we also make sure that other public policy goals are accomplished, which is that people comply with taxes and comply with so-called anti-money laundering and so forth, that the SEC doesn't destabilize the system, So I think it's better to incorporate cryptocurrencies into the public policy framework and make sure that we achieve these important public policy goals, and I'm sorry I had to interrupt you because you said the word "strong."
Mr. IGNATIUS: No, I -- in my opinion, "intense" is not a bad word. So, let's dig into this detail. In your testimony, you said, "If we don't address these issues with cryptocurrencies, I'm afraid a lot of people will get hurt." You said in your testimony last week that the SEC already has the authority it needs to regulate cryptocurrencies. However, when I read your testimony, you also talked about the SEC wanting more authority to do "cryptocurrency regulation" more properly. So tell us what the SEC can do now with the authority it already has. And what else do you want to do in areas that you can't regulate right now?
MR GENSLER:In fact, the SEC got its start in the 1930s with a very broad mandate. Congress decided to write the definition of "security" broadly, with 30 or 35 subsections. And then, of course, that's sometimes challenged in the courts, in the Supreme Court. But as Justice Thurgood Marshall wrote in 1990 in his opinion on the definition of a "security", the reason Congress used bold ink was to protect investors from fraud.
In finance, you know, it's the nature of people, they try to sell something and exaggerate it, like -- you know, the typical huckster in the world. So this broad definition gives agencies like the SECURITIES and Exchange Commission a lot of authority. If someone -- if these tokens -- and there are five or six thousand different projects -- if these tokens have the property of an investment contract or a note, or a stock or a bond. In essence, one of the core questions is whether there are platforms: trading platforms, lending platforms, where you can buy and sell these tokens, or whether you can get a return on those tokens. The cryptocurrency industry has not just dozens of tokens, but sometimes hundreds or thousands. They probably have securities or investment contracts or notes or other roles that fit the definition on these platforms, so these platforms should be regulated and they should figure out how to register and take on investment-investor protection responsibilities.
Right now, not a lot of people are doing that, so I'm really concerned that we're going to continue to bring these enforcement cases, but if we don't there's going to be a problem. Lending platforms or trading platforms can have problems. And frankly, when that happens, I think a lot of people get hurt.
Mr. IGNATIUS: So, the question is whether you want Congress to give you more power to regulate this new area of encryption. You mentioned that some of these tokens might have the properties of securities and that they would fall under your jurisdiction --
MR GENSLER:Well, actually -- if I may say, I thought my predecessor Jay Clayton said it well and I thought he was right around February 2018, namely: a lot of tokens are securities. You know, this is a basic idea. David, if you asked some of the listeners of this programme to give you their money, you said you would provide something of value. They rely on you, David, and maybe five to ten other entrepreneurs and computer scientists to build a platform or a token or whatever, and they give you money and expect to make a profit. If that's the case, the U.S. Supreme Court made it clear long ago that it's an investment contract.
Think about it. This is a straightforward idea. You, David, raised some money. People depend on you for profit. As Thurgood Marshall wrote, we passed a broad definition of security through Congress to ensure the safety of those investors. So, I think a lot of these tokens are actually securities, and that's what we're trying to do.
Now, in terms of congress, and I think the United States already has two market regulator, now I have the honor to as the commodity futures trading commission sister institution, the chairman of the U.S. securities and exchange commission and the commodity futures trading commission, which regulates derivatives and has a strong derivatives regulatory powers, with a wide variety of goods law enforcement power, While some of the crypto tokens have more commodity attributes, most are securities, and some have both.
I think it's very important how we coordinate, and while we're both strong regulators, the CFTC has some authority that we don't -- so there needs to be coordination. In addition, how do we and bank regulators is a new feature to coordinate is also very important, I don't know if I will cooperate with banking institutions, especially in a stable currency regulation, coordinate with our marketing agencies, because these properties and a stable currency is likely to have investment contracts, which have some properties such as bank products, but there is no bank they need the full range of, So we need to look at how we can work with Congress to solve these problems.
Mr. IGNATIUS: So, I just want to make sure I understand that. You say that securities laws and banking laws have a broad definition of securities, but that definition is drawn with a broad brush. Do you have a clear definition?
MR GENSLER:Well, at least the securities laws, at least the securities laws.
Mr. IGNATIUS: So, my question is simple: What do you think you need additional congressional authorization to do? In your judgment, is there nothing the SEC can do to make cryptocurrencies subject to better regulation, scrutiny, and transparency? Or do you already have enough power, especially given the way the law is made?
MR GENSLER:I think the SEC already has strong powers and we're going to continue to use those powers. Needed to some platform is given, I also think a better definition of, such as securities trading platform, lending to provide product platform, with so-called "mortgage products" platform, I am very glad to describe these to the audience, but in fact, if you can put tokens in the platform, and then will return, then the platform are regulated, We will also become "police" and take some enforcement action.
Working with Congress would certainly help, because there is a lot of coordination among our financial regulators. I'll let the banking regulators speak for themselves, but we're working under the direction of Secretary Yellen right now and putting together a report on stablecoin, and in a stablecoin world, I do think we can get some help from Congress, which can help us coordinate on the commodities and securities side. But as far as the SEC is concerned, I do think we already have strong authority, but there is still a gap compared to other regulators, as I'm sure there is.
Mr. IGNATIUS: The appeal of these new instruments, cryptocurrencies, is that they're not regulated by banks, by established financial institutions, and they're not regulated by traditional regulations, which is actually part of the reason they're emerging. The question is, if you put in place a system like the one you're talking about, would that accelerate the development of these tools in other jurisdictions or other unregulated areas. You know, it's almost like a reverse arms race. People will always find new ways to evade your censorship. Are you worried?
MR GENSLER:David, new technologies came along, the Internet came along, we all saw the Internet become popular in the 1990s. It's a question of -- well, how will regulation fit into our public policy goals and frameworks? Do we tax commerce on the Internet? What about the Internet? We must sort these things out.
Frankly, new technology is usually a good thing, but it challenges the system, yet I don't think new technology really exists outside the public policy framework for long. Congress can get together and change the new technology, and they can say, "Look, whatever the new technology is. We, Congress, don't care if people get cheated, don't care if people manipulate the market." But I don't think Congress would say that. Cryptocurrencies are an emerging field, and AS I've said publicly, they're rife with problems like fraud and abuse. As you said, cryptocurrencies are a global market, 24 hours a day, 7 days a week, and there are innovations that are challenging traditional finance, which is actually a very exciting thing, and that's why I'm studying cryptocurrencies so carefully at MIT. But I would also say that cryptocurrencies need to develop within the framework of public policy.
Think about all those crypto projects, 5,000, 6,000 crypto projects that are raising money from the public. What is investment if not money raised from the public's expected profits, and the public's desire to retire better or take better holidays next year?
Let me conclude by saying that we have experimented with private forms of money throughout history. In the United States, we may remember something called the Wildcat Bank era, which came about -- from the 1830s to the 1860s, after President Jackson got rid of the Second Bank of the U.S. -- sorry my history teacher, I can't remember exactly. But we have banks issuing notes, and they're competing with each other. Philadelphia's paper money was different from Baltimore's paper money, and there were even competing bills within Philadelphia. But there were a lot of costs, a lot of problems, so Abraham Lincoln basically set up a watchdog called the Controller of the Currency, and 50 years later, the Federal Reserve came along.
As a result, only public money has a lasting global role; private money usually doesn't last that long. Therefore, I don't think there is a long-term viability of those 56,000 private cryptocurrencies because history has shown us the result. So I think it's worth building investor protection around that.
Mr. IGNATIUS: Let me ask you one more "interesting" question about the crypto regulatory space. The Wall Street Journal reported that large us and European banks have told the Basel Committee on Banking Supervision that they need to set standards for regulation because they oppose strict capital requirements for Bitcoin. The Basel Committee on Banking Supervision is one of the main global regulators for financial risk prevention. I'm curious if you've seen this, and if you agree with the position the banks are taking, or if you want to push back against them?
MR GENSLER:David, I haven't really studied it, so I don't know. I mean, highly volatile assets -- bitcoin is one of those assets. Bitcoin is digital, scarce, and I would go so far as to say that bitcoin is a speculative store of value. In order to hold proper capital, if bitcoin is on the bank's balance sheet, which seems to be consistent with our past responsibilities, then there needs to be appropriate regulatory measures to deal with potential losses, but I haven't seen specifics yet.
Mr. IGNATIUS: One last quick question about the cryptocurrency industry, and then I'd like to move on to another topic at the end of our interview. The question is -- are these cryptocurrencies, are these tokens regulated, are these investor protections, are these basic monetary processes and mediations outside of banks good for the United States? In the long run, is cryptocurrency just one aspect of financial development, financial engineering, that is good for the United States as an economy? Good for investors? Or is it just a regulatory worry?
MR GENSLER:In fact, I've talked about these issues in class and with colleagues at work. Encryption, I believe, money ACTS as a catalyst for change, in the hearing brought innovation, not just the COINS, but the whole distributed books as catalysts of change, the central bank and private sectors around the world are studying how to use lower cost to strengthen our payment system, the real-time running 24 hours a day, 7 days a week. So there's some competition going on right now.
I also think there are some interesting innovations around the way exchanges work and some potential ways of decentralizing lending. In the United States, P2P lending has been going on for 15-20 years, and we've experimented with it, and decentralized lending is a new kind of experiment. So, I think these innovations are challenging established business models and very interesting.
On the other hand, I don't think no regulation is a good idea. If when problems occur, for those of us who official regulatory rushed in, although we have congressional hearings, but encryption money market has now reached $2 trillion, 5000, 6000, while the best investors - consumer protection, tax compliance, anti-money laundering regulation in advance and financial stability.
I think history tells us that private forms of money don't last very long. Investment contracts that fall outside the scope of investment protection leave people vulnerable. If our lending platforms are outside the security boundary or the banking boundary, they usually get over-leveraged and end up with financial stability problems. These stablecoins are now like poker chips in a casino, so I use the "Wild West" analogy. I mean, there were a lot of casinos in the Wild West, and the poker chips in the casinos were these stablecoins, and you know, the chips would go on the gambling tables in the casinos.
So, I think there are already a lot of warning signs and flashing lights, so I'd rather tighten up the regulations in advance.
Mr. IGNATIUS: So, this is a clear and ambitious agenda. One last question: You recently said that the SEC is about to release its report on the GameStop deal. How long can we expect this and can you give us some details?
MR GENSLER:Well, I'm honored to be the chairman of a committee of five. As I said last week, the full report is now before my Commissioner and is expected to be released soon, and you know, a lot of the details have already been released. So maybe I lowered my expectations a little bit, because, you know, the "GameStop thing" in January was covered extensively by outlets like the Washington Post and others.
Mr. IGNATIUS: Finally, I would like to thank Chairman Gary Gensler for an excellent discussion on one of the hottest topics in global finance. I think you really gave us a good sense of what's on the SEC plate and what you're thinking about doing. Thank you for joining us.
MR GENSLER:Thank you very much, David, and thank you very much for listening.
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