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After successively suing Binance, the world's largest cryptocurrency exchange, and Coinbase, the largest cryptocurrency exchange in the United States, U.S. SEC Chairman Gary Gensler attended the Piper Sander Global Exchanges and Fintech Conference on the 8th and delivered a speech. At the height of the controversy, he once again publicly elaborated on some of his ideas and concepts on cryptocurrency regulation.

1. 90-year-old securities laws and securities exchange laws apply to the crypto market

Gary Gensler said that the Securities Act of 1933 and the Securities Exchange Act of 1934 have effectively protected investors over the past 90 years. Congress did not limit the scope of the securities laws to stocks and bonds. He also quoted Justice Thurgood Marshall in the famous Supreme Court decision Reves, "Congress enacted the securities laws to regulate investments, no matter how they are made or what name they are called."

He then cited the Howey test (established by the Supreme Court case SEC v Howey Co.), saying, "An investment contract exists when money is invested in a common enterprise with a reasonable expectation of profits from the efforts of others." The U.S. Congress has more than 30 definitions of securities, one of which is "investment contract."

This is the flexibility and unique advantage of common law. It does not need to be rigidly defined in legal provisions, but can be continuously supplemented and improved by the courts through case law.

2. The vast majority of crypto tokens are securities, and issuing them without registration is suspected of illegal issuance of securities

Gary Gensler said that crypto securities issuers need to register their offers and sales of investment contracts with the SEC or meet exemption requirements. The SEC has comprehensive registration rules SK and SX, as well as exemption regulations A and D. And from 2017 to 2019, it has provided guidance to the market on what constitutes and what does not constitute securities. But many people have turned a deaf ear to it.

Don't use ignorance of the law as an excuse. People who don't know that murder is a crime will still be convicted if they kill someone, and murderers cannot use ignorance of murder as a defense.

3. The token has intrinsic value or utility, which does not eliminate its securities attributes

Gary Gensler said that the additional utility of tokens that function more than just as investment vehicles does not free them from the definition of investment contracts. "The investing public often purchases these crypto assets, at least in part based on the expected profits of the efforts of these token issuers." He also quoted the Supreme Court's case text in the Howe case: "It does not matter whether the enterprise is speculative or non-speculative, or whether it sells property with or without intrinsic value."

However, Gary Gensler added that “for tokens used exclusively within their blockchain ecosystem, the staff expressed a willingness to provide no-action letters.” It seems that the SEC can “turn a blind eye” to tokens used “internally.”

4. Crypto exchanges are intermediaries and need to comply with securities laws

Gary Gensler said that Sections 5, 15(a) and 17A(b) of the Securities Exchange Act require intermediaries that serve as securities exchanges, brokers and dealers, and clearing organizations to comply with the securities laws and must register or meet exemption requirements. These laws have also been in place for decades.

In fact, in terms of statutory law and common law, the case law system and more flexible common law are more difficult to bypass, circumvent or exploit. On the contrary, if the statutory law that judges cases according to the law cannot be revised in time and keep pace with the times, new things will escape from the constraints of the old law.

5. DEX is no exception

Gary Gensler talked about several centralized exchanges (CEX) sued by the SEC this year. He also mentioned EtherDelta and Poloniex, which were sued and settled in 2018 and 2021. It was noted that EtherDelta was considered by the industry to be a so-called decentralized exchange, or DEX, but was still sued by the SEC.

So this time, the SEC hit CEX hard, and a large amount of trading volume moved to DEX. DEXs, such as the leading Uniswap, fell instead of rising, which is actually due to this. Under the iron fist, the industry is in a panic, and everyone is beginning to be unsure whether the so-called "decentralization" can really be "anti-regulation" and "anti-censorship" as claimed by KOLs on Twitter? Moreover, since the SEC launched an investigation into Uniswap in mid-2021, it has not yet announced a conclusion, which is also a sword of Damocles hanging in the air.

6. Exchanges, brokerages, and clearing firms need to be separated

Gary Gensler said that in other securities markets, exchanges, brokers and clearing houses are separate. The separation of these core functions helps mitigate the conflicts of interest that may arise from mixing such services.

Yes, human nature is like this. No one is a saint. No one can overcome the temptation of hundreds of billions of dollars in front of them and not think about "reasonably" using these deposited funds to do something and make more money. No exchange can overcome the temptation of huge profits from jointly harvesting leeks with market makers.

The core function split is the basic idea of ​​decentralization and mutual supervision and checks and balances. These best practices, which have been practiced in the traditional financial market for many years, are refused to be implemented because of the special characteristics of crypto assets. In fact, it is not that it is technically impossible, but who would be so pure as to take the initiative to split themselves without making huge profits from mixed operations?

7. Staking services are securities, regardless of whether the collateral is cryptocurrencies or other assets

Gary Gensler reiterated the accusation that CEXs such as Kraken and Coinbase, which also operate staking as a service, are illegal securities businesses. He pointed out that "it doesn't matter what assets investors put into lending or staking as a service platforms - cash, gold, Bitcoin or anything else." "These are classic securities, whether or not they involve cryptocurrencies."

8. Today’s crypto market is like the US stock market in the 1920s, full of scammers and fraud artists

Gary Gensler said that in the 1920s, securities laws had not yet been introduced in the U.S. stock market. The market was full of thieves, swindlers and scam artists. Ponzi schemes were everywhere, and retail investors and leeks lined up to leave the bankruptcy court.

Financial adventurers, sickle artists, and social engineers may hold the opposite view from Gary Gensler: What a wonderful golden age the US stock market was in the 1920s! There were juicy leeks and fat lambs waiting to be slaughtered everywhere!

Finally, Gary Gensler ended his speech with three sentences: Public trust in the market depends on the market's compliance with securities laws. The crypto-securities market should not be allowed to undermine public trust in the capital market. The cryptocurrency market should not be allowed to harm investors.

One of the spirits of Bitcoin is "Don't trust, verify!" Centralized exchanges cannot be verified, so you can only choose to trust. When you have to choose to trust a person or an institution, who is worthy of your trust? This is a question that everyone needs to think about.