Bring Crypto-exchanges Inside Public Policy Regime: Gensler



· 2020.11.16

About two years ago, a former Goldman Sachs partner told TMTPost Group's ChainDD that he did not want to predict what U.S. securities regulator would do to tackle the wild crypto-exchanges. Now he is set to be the top cop for U.S. financial markets. A revisit to a past interview will offer some clues to his regulatory philosophy.

Credit: TMTPost

Credit: TMTPost

By Huixia Sun

BEIJING, November 16 (TMTPOST) – Gary Gensler, the financial policy leader for projected President-elect Joe Biden’s transition team, stressed the significance of regulations for innovation, pointing out that crypto-exchanges are rife with fraud and scams without investor protection in an interview with ChainDD, a subsidiary of TMTPost Group.

Gensler, a professor of the Practice of International Economics and Management at MIT, said he did not intend to predict what U.S. securities regulator would do in the face of unruly crytpo-exchanges during a global blockchain forum held by ChainDD in October 2008 in New York City. However, he will be steering the financial policy-making when Joe Biden is sworn in as U.S. president in January 2021.

As market observers guess about his future policy moves, the past interview with China’s most influential media outlet on blockchain technologies and applications would shed some light on his regulatory philosophy.

“Treat investors with respect. Not pick their pockets,” the Wall Street and Washington veteran warned some ICO issuers in the interview with ChainDD. “We will shrink rather than grow without investor protection.”

“First, we have to make sure crypto-exchanges are fully regulated. Until that happens, there should be no confidence in this market. I repeat. No confidence in this market,” said Gensler.

“I think that regulations and innovation go hand in hand. They don’t conflict,” he added.

He went on to compare trucks on the highway to innovators in the blockchain sector. Without traffic lights, stop signs and speed limits, drivers would find roads too dangerous. Although trucks are slowed down by the rules, people feel safe to buy a car and drive on the highway, he explained.

Similarly, some innovators are slowed down by regulations but investors would have confidence in the market and participate more in the markets and take risks, he told ChainDD.  

He saw initial coin offerings (ICOs), a way to raise money by venture capitalists and entrepreneurs, as “very interesting” and even “exciting.”

However, without investor protection, it is a world with a lot of fraud and scams. "Until we sort of bring it inside the public policy regime, I think the real potentials (of blockchain technologies) won’t be achieved,” he said.

Gensler pointed out that the crypto-exchanges around the world are generally not regulated for investor protection. He emphasized that IOC issuers should give “full and fair disclosure” to the public as they always have more information than investors.

He used the lesson from the 1930s Great Depression to explain the significance of regulation. The U.S. stock market rebounded after the investor protection regime had been  implemented, he told ChainDD.

In China, investor protection reforms came later. But these reforms in the 1990s and later in China played the same role of protecting investors from market manipulation and fraud as in the west, he added.

Go Against Illicit Activities    

Gensler cautioned against the misuse of blockchain technologies after acknowledging the possibility of promoting economic activities by being technologically neutral.

“Whether it is in the United State, Europe or China, we still want to collect taxes,” he said. Governments around the globe don’t want to see people avoiding paying taxes or using new means and methods to perpetrate old crimes, such as fraud and terrorist activities, he added.

He cited protecting the privacy of customer data as a reason for blockchain technologies to be used by the traditional banking industry.

The professor said that blaockchain, on some level, is a database system. The use of the blockchain instead of some traditional database is mainly because of its time-stepping nature. One of good commercial uses for blockchain technology is to store information about property rights, he added.

He argued there were still “many technological challenges” in terms of scalability, performance and efficiency. “For example, you can only do about seven transactions in a second on Bitcoin. In the main credit card system in the U.S., you can do 25,000 transactions in a second,” he told ChainDD.

He believed that blockchain technologies were still in their early stage and it would take three to seven years to overcome the technical issues.

He singled out privacy as one of the main challenges. The financial industry also needs to use “new means to keep the privacy of customer data”  in additon to the use of open blockchain technologies like Bitcoin, he said.

He suggested to hold off on exchange traded funds (ETFs) before crypto-exchanges, where 98% to 99% of trading activity is, are fully regulated because ETFs are based on the exchanges. He predicted the current 200 crypto-exchanges would be conslidated to a few eventually.

Gensler has a strong track record in regulating the financial sector during the Obama administration by introducing new derivatives rules in the wake of the 2008 financial crisis. He was also a senor official in the Treasury Department under the Clinton presidency. 

As an expert of global blockchain technologies and applications, Gensler also delivered a keynote speech at the forum held by ChainDD in New York City in 2018.

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