Gensler highlights potential dangers to investors and markets.
Gary Gensler publicly voiced his disagreement with the Financial Innovation and Technology for the 21st Century Act in a statement released on Wednesday. Gensler highlighted the potential negative outcomes of the FIT21 bill, expressing concern that it could create regulatory loopholes and undermine decades of investment contract oversight, thus putting investors and capital markets at significant risk.
The FIT21 bill, developed by the House Agriculture Committee and the House Financial Services Committee, aims to provide clarity on how the Securities and Exchange Commission (SEC) classifies cryptocurrencies by introducing the term “digital commodity” for digital assets.
Gensler raised seven specific concerns about the bill, primarily focusing on the exclusion of investment contracts recorded on the blockchain from the protection of federal securities laws. He argued that this exclusion could expose investors to risk. Furthermore, the bill proposes a way for crypto contracts to become “decentralized” and escape SEC oversight, effectively removing any involvement from the SEC. Under the bill, companies would be able to self-certify that they are issuing “digital commodities,” with the SEC having only 60 days to approve if the asset meets the criteria for a digital commodity.
Gensler stated that more than 60 days would be necessary for the SEC to properly oversee these assets. He emphasized that with over 16,000 existing crypto assets and limited staff resources, it would be impractical for the SEC to review and challenge more than a fraction of those assets.
Gensler also argued that the bill would harm the U.S. capital markets by allowing questionable investors and companies to evade SEC regulations by claiming to be decentralized networks. He posed the question of what would happen if individuals involved in pump and dump schemes or penny stock manipulation labeled themselves as crypto investment contracts or self-certified as decentralized systems to avoid securities laws.
The House of Representatives is expected to vote on the FIT21 bill later on Wednesday.
In response to Gensler’s statement, Alexander Grieve, government affairs lead at Paradigm, noted that it was unclear whether Gensler’s statement represented his personal or official view or the view of the SEC commission. Matthew Graham, Managing Partner of Ryze Labs, echoed this sentiment, suggesting that the SEC’s decision on the Ethereum ETF appeared politically motivated and further undermined the legitimacy of the SEC. Congressman Wiley Nickel humorously acknowledged Gensler’s point about the outdated securities laws being 90 years old.
If FIT21 is passed later this week, it will proceed to the Senate for approval and will not become law until the end of the year.
