In recent months, SEC Chair Gary Gensler has made a number of remarks about cryptocurrency that have been interpreted by many as being critical of the industry. In a speech at the Penn Law Capital Markets Association Annual Conference in April, Gensler said that he believes that most cryptocurrencies are securities and that they should be subject to regulation by the SEC. He also said that he is concerned about the risks of fraud and manipulation in the crypto market.
These are interesting remarks as the industry has pushed back on the idea of blanketing tens of thousands of assets, many of which act in their own unique ways, as simply being “securities.” Additionally, when the SEC has been asked to show any and all proof to support their claims, they remain unable to do so. It is important to note, however, that not all inside the SEC think this way. SEC Commissioner, Hester Pierce, known within the crypto industry as “Crypto Mom,” has spoken out against the SEC’s handling of crypto, noting that the SEC has been “disappointing” when it comes to the industry and innovation in general.
Now, tackling the second statement by Chair Gensler reveals some interesting information. There is no doubt that crypto, like any other currency, has been involved in illicit activity. However, the overall amount may shock you. In their recent “Crypto Crime Report,” Chainalysis - a go-to leader for market data in the industry - noted that “transactions involving illicit addresses represented just 0.15% of cryptocurrency transaction volume in 2021.” While this number may either be an over or an understatement of the true underlying amount, it is important to note that this is down from 0.62% the year prior, suggesting that crime is becoming an increasingly smaller part of the industry.
Personally, I attribute the decrease to 3 primary reasons:
More people are becoming educated on the industry and how to invest safely (more on this in a moment).
More protocols are being adopted across the industry to limit illicit trade.
More agencies/companies are cracking down on security.
I want to take a quick moment to focus on the education side of things. Due to the high volatility in the markets and the "meme coin" boom supposedly nearing an end, investors are becoming more picky about their investments. Meaning that they are turning to well-conducted analyses prior to making an informed investment decision. Additionally, many people are choosing to learn about the underlying technology and safe investment strategies, leading to safer investments overall. Companies such as Omnia Markets, offer leading analytics for users to get involved and learn about how to make well-educated investments. As the industry continues to expand, more and more investors are choosing to educate themselves before putting their money in.
Now, taking one final look at the report we can see that, by far, the main “crime type” in the industry is attributed to “stolen funds” - which is a separate type to scams. The vast majority of stolen funds come from DeFi Protocols, namely code exploits - showing the need for significantly enhanced audits and cybersecurity systems. This is also caused by weak, centralized systems allowing hackers a way in to manipulate data behind the scenes.
It is still too early to see what impact Gensler's remarks will have on the industry. However, it is clear that his comments have raised concerns among investors and industry participants. It is also possible that Gensler's remarks could lead to increased regulatory scrutiny of the market, which could make it more difficult for businesses to operate in the industry, something many large firms in the industry have spoken out on in the past, with many now threatening to leave the U.S. if no regulatory clarity is given in a timely manner - which I would highly doubt as many regulators are not properly educated on the industry in the first place or have shown clear biases.
Gensler's remarks are hurtful to the cryptocurrency industry as they:
Create uncertainty for businesses and investors.
Could lead to increased regulatory scrutiny.
Could make it more difficult for businesses to operate in the industry.
Could discourage innovation in the industry.
It is important to note that Gensler has not yet taken any concrete steps to regulate crypto. However, his remarks have already had a negative impact on the industry. It is possible that Gensler's remarks could lead to even more negative consequences for the cryptocurrency industry in the future.
One final point I want to make is that remarks such as Gensler's have also had a positive effect on the industry as it leads to more people investigating on their own - sort of leading down an "all publicity is good publicity" path. However, it is also leading many to develop a lack of trust in governmental figures and agencies as they begin to realize that they are unable to properly handle regulations for new, innovative technology - and any future technology as a result.
It is important to remember that the industry is new and innovative. It has the potential to revolutionize the way we think about money and finance. However, while the industry is still in its early stages of development, we have seen many meaningful use cases leading to many prominent companies adopting the technology; most recently Goldman Sachs joining Deloitte, Microsoft, & S&P Global, among many others to adopt a blockchain-based payment infrastructure. It is important for the industry to continue to grow and mature in order to reach its full potential. Gensler's remarks could hinder this growth and maturation. The industry somehow needs to work with regulators to ensure that crypto is regulated in a way that protects investors while promoting innovation.
With much-needed education among regulators being the first step in doing so.
You simply cannot regulate an industry or technology that you know shockingly little about!