SEC Chairman Signals Intensified Enforcement and Regulatory Scrutiny of Crypto and DeFi

SEC Chairman Gary Gensler took aim at a host of crypto-related topics in a recent speech, signaling his agency will continue leveraging existing authorities to regulate digital assets while calling for expanded powers.  

The SEC has long targeted digital assets, mostly through enforcement actions involving unregistered initial coin offerings. Gensler endorsed these efforts but acknowledged regulators have been hampered by their limited authority. Decrying a "Wild West" environment that undermines investor protection and national security, Gensler signaled the SEC would "take our authorities as far as they go" while also asking Congress for additional tools to regulate the crypto and DeFi industries.  

Gensler also sent warning signals on a number of crypto-related topics: 

• Echoing his predecessor, Gensler noted that "many [digital] tokens may be unregistered securities" and signaled the SEC would continue to police unregistered token offerings while also targeting derivative-like "crypto tokens . . . priced off of the value of securities." 
• Gensler explained that this may create registration obligations for platforms that support crypto trading and lending. 
• He singled out "stablecoins," which he suggested "may be securities and investment companies," and indicated the SEC would "apply the full investor protections . . . of the federal securities laws to these products." 

While Gensler has spoken previously on crypto-related topics, market participants should pay close attention to these remarks, which are the clearest sign yet that the SEC will intensify and expand scrutiny of this developing industry under its new Chairman.  

Though an increased SEC role may be welcomed by some, the CFTC has also staked a significant position regulating crypto. Indeed, Gensler's remarks drew an immediate challenge from CFTC Commissioner Brian Quintenz, foreshadowing a potential inter-agency clash and highlighting the need for cooperation to ensure the agencies do not stymie innovation or undermine certainty.  

Despite Gensler's calls for new authorities, his reputation as an aggressive enforcer suggests the SEC is unlikely to wait on Congress to take action. Going forward, market participants should prepare for close scrutiny of the crypto and DeFi industries by the Enforcement Division, including in new areas the SEC has not targeted to date. Those who ignore Gensler's warnings may find themselves facing an enforcement action in the years ahead. Indeed, just days after Gensler's speech, the SEC announced its first-ever enforcement action involving DeFi technology and another involving an unregistered digital asset trading platform, emphasizing the Enforcement Division's intent to actively police this space.