Video: Senate Banking Committee Chair Slams Crypto In Congressional Hearing
In explosive opening remarks in today’s Senate Banking Committee hearing, Chairman Sherrod Brown offered a scolding rebuke of the crypto sector saying FTX wasn’t a lone bad apple - just the biggest and the ugliest.
In his opening remarks to a hearing of the Senate Banking Committee, Chairman Sherrod Brown left no doubt as to his views on the crypto asset sector, and his feelings around upcoming digital asset legislation.
Brown stated: "We only need to look to events in the crypto markets in the last year to see what happens when markets lack transparency and conflicts [of interest] go unchecked. Americans lose money. Since you testified last year, Mr Chair, the FTX collapse showed how dangerous crypto can be. But FTX wasn’t a lone bad apple, it was just the most explosive example of the problems in crypto. It seems like every day, before and after FTX collapsed, there’s another crypto scam, hack or insider taking advantage of people and another few million dollars lost. That’s because the problems we saw at FTX are everywhere in crypto. The failure to provide real disclosure, the conflicts of interest, the risky bets with customer money that was supposed to be safe. FTX was just the biggest and the ugliest. For consumers it adds up to billions of dollars gone. Meanwhile bad actors keep flocking to crypto, they use it to launder money, to evade sanctions, to fund crime and human trafficking and terrorism. We need to protect workers and families in these markets, we need to clean up the scams and fraud. As this congress considers digital asset legislation, I’m glad the SEC is using its tool to crack down on abuse and enforce the law."
In his prepared statement for the Banking Committee meeting, the head of the U.S. Securities and Exchange Commission (SEC), Gary Gensler emphasized the transformative impact of Artificial Intelligence (AI) and predictive data analytics on the financial sector. The SEC chief also once again outlined the regulatory body’s stance on cryptocurrency, reiterating that crypto assets and intermediaries must comply with existing securities laws.
Gensler – AI and Predictive Analytics are A Double-Edged Sword
The SEC head lauds the advancements in AI and predictive analytics, noting their potential to revolutionize the economy and enhance financial inclusion. However, he also warns of the ethical dilemmas these technologies could pose, particularly when financial advisers or broker-dealers prioritize their interests over those of investors.
To address these concerns, he says the SEC introduced a proposal in July requiring brokerage firms to scrutinize any conflicts of interest that may arise when using predictive analytics to interact with investors. The proposal mandates firms to identify and neutralize such conflicts, ensuring that the firm’s interests do not supersede those of the investors.
There is a long history of US investment firms betting against their own clients – a practice that came into sharp focus in the wake of the Global Financial Crisis in 2009. Indeed, the SEC regulary charges mainstream financial organizations for breaches of securities laws for sums that dwarf actions taken against crypto firms.
Crypto Assets Under the Regulatory Spotlight
Turning his attention to cryptocurrency, the SEC chief asserted that crypto investors and issuers are equally deserving of the protections provided by U.S. securities laws. He reminded Congress that the definition of a security is broad and includes "investment contracts," a category into which he thinks most crypto tokens likely fall.
"As I’ve previously said, without prejudging any one token, the vast majority of crypto tokens likely meet the investment contract test" – Gary Gensler, SEC Chairman, Sept 12th 2023.
Given the widespread noncompliance with securities laws in the crypto industry, the SEC has initiated multiple enforcement actions to hold wrongdoers accountable. The regulatory body has also issued guidelines clarifying the applicability of existing rules to crypto asset securities, including decentralized finance (DeFi) platforms.
Future Regulatory Measures
The SEC is also considering updating its investment adviser custody rule to cover all crypto assets and bolster the protections provided by qualified custodians. The SEC requires that SEC-registered investment advisers who have custody of their clients’ funds or securities must safeguard those funds as required by the SEC’s “custody rule.”
The custody rule is designed to provide additional safeguards for investors against the possibility of theft or misappropriation by investment advisers who are registered with the SEC. The application of the SEC’s custody rules to crypto exchanges, for example, could require;
- Use of “qualified custodians” to hold client assets. Cuurently, qualified custodians can be banks, registered broker-dealers, futures commission merchants, and some foreign entities.
- Notices to clients detailing how their assets are being held.
- Account statements for clients detailing their holdings.
- Annual surprise exams where an accountant will contact some of an exchanger’s users to confirm their holdings with those listed on the records of the adviser.
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