SEC's Gensler Faces Scrutiny Over Digital Asset Regulations
September 19, 2024 | Financial Services: House Committee, Standing Committees - House & Senate, Congressional Hearings Compilation
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In a recent government meeting, significant concerns were raised regarding the Securities and Exchange Commission's (SEC) regulatory approach to digital assets under Chairman Gary Gensler. Witnesses criticized the SEC for allegedly undermining the ability of individuals to custody their own digital assets, suggesting that the agency is pushing custody services towards third-party entities that it can control.
Mr. Fazaro highlighted challenges within the current regulatory framework, particularly for Bitcoin and crypto exchange-traded products (ETPs). He noted that established custody banks are effectively barred from participating in the digital asset space, limiting the options available for custody services. Additionally, he pointed out that the inability of broker-dealers to handle Bitcoin and crypto complicates the creation and redemption mechanisms typically used in ETPs, potentially increasing costs for end users.
The discussion also touched on the SEC's use of the term \"digital asset security,\" which witnesses argued lacks a basis in existing statutes or regulations. Mr. Gallagher confirmed that the term does not appear in any congressional statute, SEC rule, or Supreme Court precedent, suggesting that the SEC may have created it without proper legal grounding. This has led to confusion regarding the classification of various digital assets, including Ethereum, which Gensler has asserted is a security, despite the absence of a central entity managing it.
Further scrutiny was directed at SEC Accounting Bulletin 121, which requires custodians to place digital assets on their balance sheets, a practice deemed non-customary and potentially harmful to the tokenization of real-world assets. Witnesses expressed concern that this requirement could inadvertently mirror practices seen in the collapse of FTX, where custodial assets were mismanaged.
The meeting concluded with a call for a more nuanced regulatory approach that considers the unique characteristics of digital assets, rather than applying traditional securities regulations indiscriminately. The ongoing debate highlights the need for clarity and consistency in the SEC's regulatory framework as the digital asset market continues to evolve.
Mr. Fazaro highlighted challenges within the current regulatory framework, particularly for Bitcoin and crypto exchange-traded products (ETPs). He noted that established custody banks are effectively barred from participating in the digital asset space, limiting the options available for custody services. Additionally, he pointed out that the inability of broker-dealers to handle Bitcoin and crypto complicates the creation and redemption mechanisms typically used in ETPs, potentially increasing costs for end users.
The discussion also touched on the SEC's use of the term \"digital asset security,\" which witnesses argued lacks a basis in existing statutes or regulations. Mr. Gallagher confirmed that the term does not appear in any congressional statute, SEC rule, or Supreme Court precedent, suggesting that the SEC may have created it without proper legal grounding. This has led to confusion regarding the classification of various digital assets, including Ethereum, which Gensler has asserted is a security, despite the absence of a central entity managing it.
Further scrutiny was directed at SEC Accounting Bulletin 121, which requires custodians to place digital assets on their balance sheets, a practice deemed non-customary and potentially harmful to the tokenization of real-world assets. Witnesses expressed concern that this requirement could inadvertently mirror practices seen in the collapse of FTX, where custodial assets were mismanaged.
The meeting concluded with a call for a more nuanced regulatory approach that considers the unique characteristics of digital assets, rather than applying traditional securities regulations indiscriminately. The ongoing debate highlights the need for clarity and consistency in the SEC's regulatory framework as the digital asset market continues to evolve.
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