Dive Brief:

• Securities and Exchange Commission Chair Gary Gensler slammed the cryptocurrency market for its “frauds and scams” a day after the House of Representatives passed legislation that he said would create a flawed legal framework for digital assets.
• “It comes down to the risk of non-compliance with U.S. law,” Gensler said Thursday, referring to his concern about lax regulation of cryptocurrencies. “It comes down to the frauds and scams — this is a field where some of the leading lights in the field are either now in jail, or awaiting jail or extradition.”
• The world’s 15,000 to 20,000 crypto tokens operate more as tools for ransomware than currencies, with “a number of very significant players in the middle of this market,” Gensler said at an Investment Company Institute event. The so-called exchanges “are operating in ways that are conflicted,” he said, adding “we’d never let a traditional exchange trade against their customers and be an active market maker.”

Dive Insight:

A growing number of firms in the U.S. and other countries have turned to digital assets as an alternative to conventional currencies, according to Deloitte.

“An increasing number of companies worldwide are using bitcoin and other crypto and digital assets for a host of investment, operational and transactional purposes,” Deloitte said in a June 2023 report, adding that in late 2022 roughly 2,352 U.S. companies accepted bitcoin.

Companies may find that cryptocurrencies open access to new demographic groups, including “a more cutting edge and tech-savvy clientele with disposable income for luxury goods and services,” Deloitte said, citing a survey finding that 85% of merchants view crypto payments as a way to reach new customers.

Also, company use of cryptocurrencies may spur staff awareness of the technology and prepare for the possible wider deployment of central bank digital currencies, Deloitte said.

At the same time, weak or nonexistent regulation of digital assets may lead to instability in global finance, according to the World Economic Forum.

“At their current level, crypto-assets represent a small portion of the overall global financial system, but even so the lack of regulation in some jurisdictions and the absence of a harmonized regulatory framework is raising concerns as to whether this market could pose a threat to global financial stability,” the World Economic Forum said in a May 2023 report.

“The impact in the macroeconomic environment could involve spillover effects, market contagion, liquidity crises, sudden job loss and loss of investors’ funds,” the forum said.

In the U.S. House, sponsors of the Financial Innovation and Technology for the 21st Century said the legislation would clarify the regulatory landscape for digital assets while allowing for innovation and market growth.

The law would set a “regulatory framework for digital assets that protects consumers and investors while securing the U.S. as a leader of blockchain innovation,” Rep. French Hill, an Arkansas Republican and a sponsor of the bill, said in a statement after its passage on Wednesday.

Gensler disagreed. In a statement before the House vote, he said the legislation “would create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts, putting investors and capital markets at immeasurable risk.”

Among its several flaws, the bill would remove blockchain investment contracts from the statutory definition as securities, denying investors “the time-tested protections of much of the federal securities laws,” Gensler said.

The legislation would remove crypto investment contracts from SEC oversight by allowing issuers of crypto investment contracts to “self-certify that their products are a ‘decentralized’ system” and be deemed a special class of digital commodities, he said.

“The self-certification process contemplated by the bill risks investor protection not just in the crypto space,” Gensler said. “It could undermine the broader $100 trillion capital markets by providing a path for those trying to escape robust disclosures, prohibitions preventing the loss and theft of customer funds, enforcement by the SEC and private rights of action for investors in the federal courts.”

The House approved the digital assets legislation in a 279-136 vote. It is unclear whether the Senate will consider the legislation.