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In a wide-ranging interview with Yahoo Finance's Brian Cheung, SEC Chair Gary Gensler discusses cryptocurrency regulation, the GameStop trading frenzy, and various conflicts tied to retail investing.
BRIAN CHEUNG: Gary Gensler is chair of the Securities and Exchange Commission, the government's top financial markets watchdog. Gensler joined the SEC in April 2021, and is facing many regulatory puzzles from payment for order flow to ESG corporate disclosures to, of course, cryptocurrencies.
The former MIT professor and Baltimore, Maryland native is no stranger to the regulatory world. Having served as the head of the Commodity Futures Trading Commission under the Obama administration. He's also an alumni of Goldman Sachs with a deep knowledge of Wall Street.
I'm Brian Cheung with Yahoo Finance. Thrilled to be joined this morning by SEC chair Gary Gensler. Chair Gensler, good morning. Happy Monday.
GARY GENSLER: Happy Monday to all your viewers and good to see you, Brian.
BRIAN CHEUNG: So Chair Gensler, plenty of topics to talk about. A lot happen, even just last week. But want to start off in one of the hottest spaces, obviously crypto. A lot of excitement over those Bitcoin futures ETFs that we saw last week, a few products that were launched.
Just wondering if you had any thoughts about how those two products rolled out, the ones from ProShares in addition to Valkyrie. Is anything that you're seeing, the volume and interest in this brand new product also guiding your thoughts on maybe the possibility of these applications that you're working through on a Bitcoin spot ETF?
GARY GENSLER: Brian, we really take a look at these when effective as you know last week. But we look at these is the Chicago Mercantile Exchange has Bitcoin futures, it's been regulated by our sibling regulator, the Commodity Futures Trading Commission for four years. And then on top of that, there's the regulatory regime, which we've had for nearly 80 years for investment funds and the like.
We'd already had some Bitcoin futures mutual funds. They didn't get as much publicity. And these weren't effective along with that. It's really a matter of bringing as much of this space within the investor protection remit. And I think that that's really the story here, is if projects, tokens come to us, work with us, and bring themselves inside the regulatory perimeter, investors will be better protected.
BRIAN CHEUNG: So on that point, I mean, just to kind of drill down. The Bitcoin spot ETF. You've expressed concern about what the underlying risk might be with Bitcoin, whether that's anti-money laundering or other types of issues.
Do you feel like anything that you've seen, though, with the Bitcoin futures products last week are resolved? Are any of those concerns kind of alleviated given what we've seen, the response to those products be? And are you becoming more friendly towards the idea of a spot ETF because of what you saw last week or are you still trying to kind of form what your thoughts are on the underlying product first before you try to move forward on any sort of other product there?
GARY GENSLER: Brian, you can imagine I'm not going to speak to any individual filings that might be in front of us or prejudge anything. But I think that the concern for the investing public is the crypto asset space to plus 2 and 1/2 trillion dollars.
Most of it has not come within an investor protection remit. And thus, investors are protected the way they are, whether they go into the stock or bond markets that we've overseen for so long. Without that, I think that it's really is, as I've said to others, a bit of the Wild West. And these markets largely around the globe, 24 hours a day, seven days a week don't have the similar protections against fraud and manipulation and front-running and other abuses.
BRIAN CHEUNG: So let's move on to stablecoins kind of sub corner in the crypto space. They've been eating a lot of lunch from the prime money market funds. And there's been some media reporting that's gotten a lot of attention about the transparency by which some of these stablecoins are detailing what's actually underlying the reserves that back these assets. You've compared stablecoins to chips at a Casino. Do you think that stablecoin should be regulated as banks?
GARY GENSLER: Well, there's about $130 billion stablecoins today. That's up nearly tenfold in the last year. And they are intertwined inside of crypto exchanges, crypto lending platforms, so-called DeFi. And those poker chips, so to speak, are facilitating 80% of the volume. So there are only 5% of the crypto market.
But 80% of the volume in this token to token, crypto to crypto trading. And so I think there's a lot of speculative activity. And again, it's best to bring that inside regulatory investor protection remit. So I do think there's work to be done here.
BRIAN CHEUNG: By extension, I mean, what you kind of said right there about the amount of volume that we've been seeing in this space does kind of also extend to the broad DeFi movement. Just wondering what your thoughts are on DeFi. Obviously, it stretches into a lot of different areas. What do you feel like the SEC's role is in regulating that space? Just kind of your broad thoughts on that.
GARY GENSLER: My broad thoughts are it's one of the innovative areas in this crypto movement. I mean, we start with Satoshi Nakamoto who was pressing up against the definition of money and ledgers, sort of an old, thousands of years old technology, money and ledgers.
But decentralized finance has started to press up some other innovations. While that's all interesting, it reminds me a lot about when peer-to-peer lending came along about 15 years ago. People said, well, I'll lend money to you and it would just be peer-to-peer. And we had to take 3, 4, 5 years to bring it within an investor protection, and in some cases, banking regulation.
And I would say that's what we're going through right now. The same process, hopefully, we get to the other side where whatever innovation it's there survives. But again, the public is protected. We protect against financial stability concerns as well. There's a lot of lending going on. There's a lot of trading going on. And without protections, I fear that it's going to end poorly.
BRIAN CHEUNG: And you draw the comparison to banking. Does that mean that-- because it's not just the SEC that's in that space-- the Federal Reserve, the OCC, the FDIC. So have you had discussions with them also about the proper way to approach these types of new offerings?
GARY GENSLER: Well, under Secretary Yellen's leadership at the Treasury Department, the president's working group, a group of financial regulators, were working together around stablecoins. And again the stablecoins of today, this $130 billion or so which has been rapidly growing, could lead to payment tokens and general purpose payment tokens in the future.
But even the current system, the current remit, we're working most closely with, again, our sibling market regulator, the Commodity Futures Trading Commission, but also along with the bank regulators and lastly, the Consumer Bureau, the Consumer Financial Protection Bureau that has a lot of authorities around payment systems as well. So we're all working together trying to bring the protections that we've had in our traditional securities markets, derivatives markets, and the like.
BRIAN CHEUNG: I have a big picture question for you. How would you describe your broad relationship with the crypto industry? Things are changing by the day, it seems like, and on one hand, you have to develop those types of relationships, engage with people in the industry to just learn more about it.
But then on the other hand, as a regulator, you're trying to make sure that investors are safe as well. There's these anecdotes of SEC officials going to conferences, serving subpoenas. It's the subject of a lawsuit filed over the weekend. I know you won't speak specifically to that.
But in describing the broad crypto space as the Wild West, just to stress the analogy, I mean, sometimes the gunslinging Sheriff that comes into town is just as privy to all the wildness and the Wild West as well.
GARY GENSLER: Well, I just like to sort of speak to what I see to be the lay of the land as it is right now. And my role changed on April of this year when I took an oath of office and was honored to be in this job. Before that, I was at MIT, very intrigued by the field by Satoshi Nakamoto's innovations, but also the innovations along the way in this space.
Look, the crypto field has been a catalyst for change. It is pressed up against what we think about money, about ledgers, about finance, and so forth. But at the same time in my new role, my relationship shifted in April. It's about trying to ensure that the public policy framework. We still guard against money laundering and terrorist finance. And yet, Bitcoin and other tokens are being used for ransomware by bad actors.
We still want to guard against and guard for investor protection, and make sure that people aren't defrauded. And yet, there's dozens and dozens of cases where we know that people have basically perpetrated scams and frauds on the public.
There's 5, 6,000 of these projects out there. Many of them, as my predecessor Jay Clayton would say, are likely to be within the securities law, but they haven't come in and registered. You can't prejudge any one of them, depends on the facts and circumstances. But this is a bit of the Wild West and I'm going to continue to speak openly and actively, direct staff to investigate fraud where they see it, try to bring those projects in to a better, more appropriate public policy framework.
BRIAN CHEUNG: And you mentioned you started in April. It's felt like a lifetime since then. But one other thing that you dealt with was the GameStop situation that happened in January. But the SEC just released that over 40-page report last week.
Now, there were no specific policy recommendations after that report. So I guess, can you just walk us through what might be the next steps for all these brokerages, wholesale market makers, clearinghouses, investors that are walking away from the events of January and wondering what might the SEC do next?
GARY GENSLER: So we have a number of projects. Some of those highlighted in the report. There was a page or two at the end caught additional considerations. One is related to equity market structure itself. Are we today in the 2020s appropriate using technology of the 2020s to look out for regular investors?
And nearly half of the market, the stock market, this is, doesn't trade on lit, transparent exchanges, but in dark pools or off exchange. And instead of having orders compete, one-by-one compete so that the investing public, the retail public gets the best price or what's called best execution.
Right now a lot of this is flowing into the dark poles to the wholesalers through something called payment for order flow. Secondly is a bit of the plumbing. I know it's not as exciting for your listeners, but it has to do with the clearing and settlement cycles and shortening those, so there's less risk. In the January events, people had been restricted from trading.
The third thing is something called digital engagement practices or what sometimes colloquially is part of that is called gamification. New digital analytics, new algorithms that are may be promoting more trading rather than investing, promoting activity that is good for the applications, but not good for the individual. So these are some of the projects we're working on.
BRIAN CHEUNG: Now broadly, you know, there were a lot of weird events that happened during the meme stock craze. You saw some funds blow up. You saw some short squeezes get hurt there. I guess I'm wondering based off of what you were seeing tells you that the markets were or were not acting efficiently during that episode when you had stoppages in many cases preventing people from being able to take on new positions, but they were able to sell.
GARY GENSLER: Look, restrictions on trading that fateful Friday in January, that was not good for the retail investors that wanted access to the markets. And we know that. And that's why we're taking a look at these clearing and settlement plumbing.
But also we knew before January that there were inherent conflicts. When a brokerage app is maximizing potentially for their revenues rather than the welfare of their users on the other hand, whether it's because they're using algorithms to sort of encourage us to trade more behavioral prompts to encourage us to trade more, which economics shows usually get lower returns.
Investing is good, but trading actively often lowers / whether it's that or the inherent conflicts of payment for order flow, January just highlighted that we were grappling with those inherent conflicts before January as well.
BRIAN CHEUNG: With some of those conflicts is banning payment for order flow entirely still on the table. And as a kind of extension of that question, does the SEC have the legal authority to do so? Or would that be something that it's kind of a legal gray area that you would need clarification from Congress to go about?
GARY GENSLER: Again, Brian, I'm not going to try to get ahead of a great staff at the SEC and my fellow commissioners. But really, the equity market structure has not been updated since 2005. And that which might have worked in 2005 and there were debates then, 16 years later so much has changed.
And so I've really said to staff, look, payment for order flow and what we do with that, whatever restrictions is on the table, but also we're looking at things that are within the market structure itself. How do we get more transparency, more competition order-by-order?
And these are things like looking at something called the national best bid, best offer, and what's included and what's excluded, even the narrowness of that called the tick size, the minimum tick size. What do we do about that? There are also payments on the exchanges called rebate.
So all of this I think needs to be on the table to think, all right, how do we ensure that the US stock markets are the most efficient in the world? And what that means, when you have efficiency, it's lower cost in the middle, and that's better for companies raising money, and it's better for investors. It might be that there's a little bit less economic rent in the middle for the folks in the middle.
BRIAN CHEUNG: Gary Gensler, do you think that we're going to see more episodes like what we saw in late January? What was interesting was it's not quite to that extent. But social media was driving massive volatility into a SPAC last week that was tied to former President Trump in addition to some other adjacent penny stocks. Do you think that this is something we should just expect to see every now and then?
GARY GENSLER: Look, the retail public is more engaged in the market today than 10 and 20 years ago. And as retail working families investing directly in the market for their future can be a good thing. That could be good to save for retirement and the inevitable bumps along the road.
We at the SEC still need to look at and protect the public against any bad actors. And so that's our role. The retail being part of the mix and a growing part of the mix can be good as long as there's a real cop on the beat looking at the rules in place.
BRIAN CHEUNG: I want to shift gears to the Financial Stability Oversight Council report that we got last week. You mentioned Secretary Yellen is the head of that council. It really talked about the need for more action on climate related risk as it pertains to the financial services industry.
For the SEC, that would likely look like disclosures, increase corporate disclosures kind of detailing what their financial risks might be as climate disasters maybe increase in frequency. What might those disclosures look like? How do you standardize something like that?
GARY GENSLER: So we at the SEC have a role and have over many years to try to bring consistency, comparability, and yes, decision usefulness to disclosures. That's the basic bargain. Investors get to decide what to invest in. Companies need to give full and fair disclosure.
So staffs working on this will serve it up to commissioners in the near term building upon the disclosures that many companies, hundreds and hundreds of companies currently make disclosures, voluntary disclosures around their strategy, around their governance, around their risk management, and yes, certain metrics like greenhouse gas emissions.
And so we think that we can serve a role, put out to public comment as a set of rules, mandatory rules for the disclosure around those areas-- governance, strategy, risk management, and yes, key metrics. And those metrics, including if a company says we're going to be committed by 2030 or 2050 to make certain adjustments to our greenhouse gas emissions, each year, how are they doing in managing towards that transition plan? How are they adjusting that transition plan for instance?
BRIAN CHEUNG: All right. Securities and Exchange chair, Gary Gensler, thanks so much for stopping by our Markets Summit. Hope to talk to you again soon.