‘Rife with hucksters’: SEC chair warns of crypto market fraud

SEC’s Gensler on AI, Stock Market Plans and Crypto

In a recent Bloomberg interview, U.S. Securities and Exchange Commission (SEC) chair Gary Gensler raised concerns regarding the prevalence of fraud in the crypto market.

Gensler pointed out that some companies issuing crypto tokens are not transparent with their investors. He said crypto exchanges engage in unacceptable practices that exploit their users.

According to Gensler, crypto investment is speculative and lacks the protections provided by securities laws. He claimed that many cryptocurrencies fall under the jurisdictions of said laws.

“This is a field rife with fraud, rife with hucksters. There are good faith actors as well, but there are far too many that aren’t,” said Gensler.

Gensler also accused crypto exchanges of engaging in actions that would never be allowed on traditional stock exchanges like the New York Stock Exchange, such as trading against its users and commingling funds.

“There’s a lot of noncompliance in this field,” he said. “The platforms themselves, where trading is occurring of various crypto tokens, currently they’re not necessarily compliant with those time-tested protections against fraud and manipulation.”

SEC may challenge Ripple’s ruling

The interview comes after a recent court ruling in favor of Ripple. Earlier this July, Judge Analisa Torres declared that Ripple’s “offer and sale of XRP on digital asset exchanges” did not meet the criteria for investment contracts.

However, the judge also determined that XRP can be considered a security when sold to institutional investors, meeting the conditions set in the Howey Test.

Regarding the possibility of appealing the court’s ruling in the Ripple lawsuit, Gensler clarified that the decision lies with all of the SEC’s commissioners and not solely with him.

“The commission has not acted on that and if the staff makes a recommendation, we will have a discussion of it and we’ll take it up then, but I don’t really have anything more for you for that,” said Gensler.

Ripple CEO Brad Garlinghouse criticized the SEC’s enforcement approach and raised concerns about its jurisdiction over cryptocurrencies. He argued that relying on enforcement actions instead of clear legislative guidelines confuses participants in the Web3 market. Garlinghouse also said the SEC’s action does not adequately safeguard retail investors.

Garlinghouse alleged Gensler of having a bias toward specific players in the crypto sector while simultaneously putting others at a disadvantage due to an inconsistent approach to regulation.

Debate over crypto crackdown

This lack of regulatory clarity has contributed to uncertainty within the industry. According to Garlinghouse, the current situation seems more like a political power play than establishing transparent rules safeguarding retail investors.

Last week, a bipartisan bill about cryptocurrencies moved forward in Congress. The approved bill will decide if a cryptocurrency is a security and establish the oversight of the Commodity Futures Trading Commission (CFTC) in the crypto industry.

At the same time, the bill will make clear the role of the SEC, which is something many crypto supporters have complained about. Among them is Dem. Ritchie Torres, who said the SEC’s approach was an “overly aggressive traffic cop crusading against the industry.”

Critics argue that Gensler’s strict enforcement-based regulatory strategy harms the cryptocurrency sector’s fast growth. It leads companies to move jobs abroad and hinders innovation.

On the other hand, some argue that a crackdown is necessary to weed out bad actors and establish a more robust foundation for the industry’s future growth.

Meanwhile, Gensler has requested extra funding from Congress. The SEC aims to strengthen the commission’s oversight of cryptocurrency markets and combat fraud and market manipulation. It also plans to update crypto business guidelines and enhance exchange registrations’ supervision.