It’s not every 350-person trade conference that could attract a Cabinet member and the chairs of two U.S. regulatory agencies. But, that’s the importance of the annual meeting of the Securities Industry and Financial Markets Association (SIFMA) to the Biden Administration and keepers of the financial system at-large. And crypto took a “bow” repeatedly during the day-long agenda.
SIFMA defines itself as representation for broker-dealers, investment banks and asset managers and was formed in the early 2000s from the merger of the Bond Market Association and the Securities Industry Association according to Wikipedia. The day’s content showed that crypto is a subset of key concerns for the industry which include public policy & financial regulation, “modernization of finance” and retail investors.
As stated during the meeting by SIFMA President and CEO Kenneth Bentsen, consumer protections are at the top of the list – at least publicly – in terms of his organization’s views on crypto’s entry into the global financial system.
Janet Yellen – prepared remarks
The first U.S. government representative to take the stage was U.S. Treasury Secretary Janet Yellen.
Her prepared remarks are here. The highlights include:
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- On the U.S. economy – Sec. Yellen began by reassuring the audience that there is “significant strength” in the U.S. economy amid the global tempest of war and inflation to name a few. But, “inflation remains too high, and we are contending with serious global headwinds.”
- On crypto – She touted recent reports from Treasury in response to the Biden Executive Order on digital assets saying, “Our goal is to realize the potential benefits of digital assets while mitigating and minimizing their risks.” She stressed the need for “adequate regulation.”
Janet Yellen – Q&A
During the Q&A with SIFMA’s Bentsen, Sec. Yellen said regarding digital assets:
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- Need for more robust enforcement authorities – She noted again Treasury’s EO reports which found “too many instances of fraud and scams and operational failures” – she noted that existing enforcement authorities (presumably the SEC and CFTC) should be beefed up for digital assets.
- Crypto is not a threat to the U.S. financial system, yet – On posing significant risks to U.S. financial stability, she said, “It’s not yet big enough or connected enough to our banking system. The connections are not sufficient to do that. (…) Nevertheless, it could pose a risk and we would like to see regulatory holes [filled] there. And in the set of [Executive Order reports from Treasury], we indicated a number of areas where we think crypto regulation is necessary and appropriate.” This is the tightrope being walked by some in government: create urgency around regulation of a volatile market versus raising unnecessary fears in the near-term for a market which may one day grow the U.S. economy and even, possibly, cement the U.S. dollar as the world’s reserve currency in the future – see Project Hamilton, for example.
- Some crypto is not a security – “One example I would give you is spot markets for crypto assets that are not securities. That’s a regulatory hole.” Interesting to contrast this statement with Chair Gary Gensler who would never say such a thing and reiterate his long-standing belief that the existing Howey Test is sufficient. Also, Sec. Yellen didn’t specify but this statement could reference efforts underway from Senators Stabenow (D, MI) and Boozman’s (R, AR) DCCPA, RFIA from Senators Lummis (R, WY) and Gillibrand (D, NY) and/or bipartisan legislation known as DCEA led by Rep. Thompson (R, PA) in the House.
- Stablecoins – Sec. Yellen said Treasury is “very focused on stablecoins.” Presumably this relates to the regulation being created by Chair Maxine Waters (D, CA) and Ranking Member Patrick McHenry (R, NC) on the House Financial Services Committee and where Treasury’s involvement has been mentioned.
- Regulatory arbitrage – Pointing to the President’s Working Group proposals that she said provided an example of “regulatory arbitrage,” she said “that that’s essentially a banking product that really needs a much firmer regulatory framework to operate safely.”
- Customer protections – “The areas where we’re seeing vertical integration by crypto asset firms – so the customers will be given direct access to markets when that happens, they will be missing some of the customer protections (…). We would like to see improvements in regulation in these areas, but that’s something else we’re looking into.” No doubt customer protections are critical, but it sometimes feels as if regulators and government executives use this phrase when they don’t understand something. No one can disagree with “customer protections” – protecting the voter.
Gary Gensler – prepared remarks
Next up at SIFMA’s Annual Meeting was SEC Chair Gary Gensler. Gensler made the unique analogy that equated the SEC (Securities and Exchange Commission) with the SEC (Southeastern Conference) and its football conference due to both group’s focus on competition.
His prepared remarks are here. The highlights include:
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- On competition – The pedagogical Chair Gensler noted the history of amendments made to the original Securities and Exchange Acts of 1933 and 1934 – all in the interest of competition. No doubt he was attempting to assuage concerns of many in the SIFMA audience who believed Chair Gensler represented an SEC with an activist, rule-making agenda that is less about consumer protections and more about targeting the banking industry, which in turn could increase costs and complexities for the securities and bond industries.
- On crypto – Gensler said relatively little about crypto in his prepared remarks. But when he did, he may have made an inadvertent case for Decentralized Finance (DeFi) in the financial system saying, “We’ve even seen centralization in the crypto market, which was founded on the idea of decentralization. This field actually has significant concentration among intermediaries in the middle of the market. Thus, we must remain vigilant to areas where concentration and potential economic rents have built up, or may do so in the future.” Concentration – bad. DeFi – good? Capitol Hill staffers seemed open to the idea at a conference in August. But, AML/KYC concerns from Treasury may be a sticking point.
Gary Gensler – Q&A
Chair Gensler’s Q&A mainly stayed in the traditional finance realm. But, SIFMA’s Bentsen brought it back to crypto towards the end asking if the SEC need guidance from Congress to settle that “these are securities, these are commodities.” Like many times before Gensler was adamant that adequate regulation was already in place – though he did not mention the Howey Test as he often does to similar questions.
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- On Howey Test (without mentioning it) – “I’m gonna say what I’ve said before. I think that the laws that are on the books, and the rules and how the courts have interpreted them, that – without pre-judging any one token – that a significant portion of these 10,000 tokens are investment contracts and thus securities under US securities laws.” Echoing previous statements, he said crypto companies should “come in” and talk to the SEC about what they’re doing.
- Protections – He stressed the need for consumer protections against “entrepreneurs in the middle somewhere” and “highly centralized” crypto exchanges and lending platforms.
- On Congress legislating on crypto – “We wouldn’t want Congress to do anything to undermine a $100 trillion capital market. I don’t think SIFMA would either. I think we are probably aligned that we wouldn’t want an inadvertant definition that all of a sudden our whole regulatory remit on money markets is somehow, called into a question or our whole remit in terms of what a stock exchange is or broker dealer is is called into question.
- Room for adjustment at the SEC – Gensler closed with the an “olive branch” comment to the industry though its unclear the depth of his offer: “If you’re an exchange or lending platform coming inside the 34′ and the ’40 Act. Or, tell us how we need to adjust and adjust.” Wiggle room for crypto? Doubt it.
Rostin Behnam – Q&A
Commodity Futures Trading Commission (CFTC) Chair Rostin Behnam participated in a Q&A with SIFMA’s Bentsen and covered a range of digital asset issues facing Behnam. Highlights included:
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- Regulatory gaps identified by FSOC – “Since the day I took over as Chair, there are gaps in the cash market and the CFTC is well-prepared and ready to oversee and fill that gap. However, that would require a statutory change for us -again, going back to this theme of us being a derivatives regulator and not a cash market regulator. My advice to Congress is producing positive legislative proposals, and many of them give us cash authority over commodity digital assets. (…) I heard some of Chairman Gensler’s comments and we are very much in alignment in terms of the range of products that are out there and that many of them are security tokens. But, I believe that several of them are commodity tokens at a minimum, and that we need to understand and think about how we want to regulate the commodity token.”
- Crypto is different – “Just think about a native exchange in the crypto space… it is an exchange, a dealer, a custodian and a bank. All in one. (…) And that’s why we have to be very proactive in coming up with a policy framework that is not too different than what we have right now in our traditional market spaces, but we do have to think about it… because too many rules of the road that we apply [today] are not what native crypto innovators or entrepreneurs think of. I think that’s fraught with potential disaster.”
- On the Stabenow-Bozeman bill (DCCPA) – “It sets up a framework where it would authorize the CFTC to register digital DCMs (designated contract markets – i.e. exchanges). It would authorize us to regulate non-bank custodians and intermediaries or the equivalent of a broker/dealer. (…) The other thing that it would do is it’s a fairly clear definition of what a digital commodity is. It says it’s fungible. And it has certain physical properties to deal with NFT’s. It clearly exempts securities and CBDC’s – digital dollars that are backed by the full faith and credit of the Treasury. From my perspective, it gives a very clear framework from which the regulators and most notably Gary [Gensler], myself and our successors, of course, could have an [understanding] of what a digital commodity is and what a digital security is.”
- Future legal challenges from crypto – “Knowing this community of financial users and innovators, many of the CEOs – many of the leadership folks at these exchanges and companies have been very clear that they’re going to challenge every regulatory decision. So we shouldn’t suspect that this is going to be seamless or folks are just going to come in and register.”
