This article is from: Washingtonpost, Interview with David Ignatius
Odaily Planet Daily translator | Moni
The SEC is one of the most powerful financial regulators in the world and a key participating agency for governments to push for regulation of the cryptocurrency industry. Recently, Washington Post columnist David Ignatius interviewed SEC President Gary Gensler about the outlook for cryptocurrencies, the growth of digital trading platforms, and stricter financial disclosure requirements.
The following is a transcript of the interview:
MR. IGNATIUS: Welcome to the Washington Post Live, I'm David Ignatius, columnist for the Washington Post.
Today, SEC Chairman Gary Gensler joined the livestream as he spoke at last week's Senate Banking Committee hearing about the need to regulate cryptocurrencies, an issue that attracts financial markets, and we hope to continue our dialogue with Chairman Gary Gensler.
Welcome again to Gary Gensler to The Washington Post Live.
MR. GENSLER: It's a pleasure to be interviewed by you, David, and it's a pleasure to be with the audience.
MR. IGNATIUS: So, let's start with a couple of recent major events in the cryptocurrency industry, where the value of Bitcoin and other tokens has fallen sharply, by more than 8%. I would like to start by asking you the basic questions about the stability of cryptocurrencies as an asset, and whether some stricter regulation is needed?
MR. GENSLER: Well, Crypto tokens, what you mention in this show is something called cryptocurrencies, and although some of our colleagues in the official sector are always avoiding that word — but I'm happy to use it — I think cryptocurrencies are a highly speculative asset class. I've had the privilege of working with computer science colleagues at MIT, when I also specialized in and taught cryptocurrencies, and I think the Bitcoin white paper published more than a decade ago was extremely innovative, and while we still don't know Satoshi Nakamoto, no matter who she, he, or who they are, Bitcoin brings some inherent innovation.
However, we now have a highly speculative asset class that is stored on a digital ledger, and as you said, there has been a recent decline in cryptocurrency market prices, which can sometimes fall sharply or rise sharply, and in general, cryptocurrencies don't have anything to actually back up except that someone else will pay you.
MR. IGNATIUS: Before we get into the details of what regulation might involve, I want to ask you some of the potential economic news that seems to be driving Bitcoin and other of these currencies overnight, which is the high leverage of China's real estate sector, and the problem of excess in financial markets. What I want to ask you is whether, as chairman of the SEC, are you concerned that what happened in China could spill over into the U.S. and international financial markets as a whole, and what steps you've taken recently to try to protect our markets and our financial stability.
MR. GENSLER: We are a highly interconnected global economy. The United States, while the population is only 4% of the global population – we account for 23% (and possibly 24%) of the global economy and 38% of the global capital markets. So, we are highly interconnected with the global economy.
Now, as far as China is concerned, we've been doing a lot of things. We have about 270 Companies affiliated with China raising capital in the United States. For new companies going public in the U.S., we have suspended them for now until we are able to ask them to strengthen disclosure. Investors can decide whether or not to participate in the investment, but issuers must provide investors with complete and fair disclosure of information, the U.S. Stock Exchange Commission to prevent fraud and other behaviors, and market manipulation, which is one of my concerns about crypto and crypto asset classes. But back in China, given some changes in Chinese regulation, we've asked issuers to put more emphasis on disclosure, because U.S. investors typically buy just a Cayman Islands company, but this company operates in China. And you don't actually own these Chinese companies directly.
The second thing that happened was that about 19 years ago, we set up an organization in the United States to audit public companies. It's about trust in our capital markets, and you have a person – it's called the Public Company Accounting Oversight Board – who is responsible for checking auditors to make sure the relevant business figures are accurate. What was the impact after that? Now, 19 years later, about 50 jurisdictions are starting to do this, but China hasn't. So, the U.S. Congress unanimously participated in the Senate, and the House passed and participated, asking the SEC to basically solve this problem in the next three years, which means that China needs to comply with the relevant constraints, and their official departments and auditors also need to comply, otherwise we will suspend the transactions of these 270 companies.
MR. IGNATIUS: Let me ask one more question. Given the over-debt pressures of Evergrande, a major Chinese real estate development company, some analysts fear that risks could spread in financial markets, as we remember the 2008 financial crisis and the collapse of Lehman Brothers and related derivatives and swaps, which will eventually have a huge impact. So, I just want to ask you definitively, do you believe that our financial market today can still be protected in the event of such a problem, not necessarily Evergrande, but any large company with such a high level of debt anywhere.
MR. GENSLER: Well, David, that's a good question, it's multi-layered, some of which I hope you can understand, and I don't want to comment on a company, especially the one you mentioned that isn't directly registered and traded in the U.S. capital markets. Evergrande is registered in Hong Kong, China and operates in Chinese mainland.
But it is possible to say precisely that we are a highly interconnected global economic system, just as the financial crisis that erupted in the United States in 2008 spread from our housing bubble, and the rest of the world responded to these shocks. In fact, we in the United States will also react to the shocks of other economies and countries, especially when China's economy is already so large relative to the size of the Economy in Europe or the United States itself.
On your second question, I do think the reforms that followed the 2008 financial crisis made the U.S. financial system stronger. That doesn't mean we don't pay attention to the regulatory issues of the SEC and other important regulators (such as the Federal Reserve, banking regulators, and the CFTC), I've had the privilege of chairing the SEC, and I do think we're in a better position to absorb some financial risk shocks in 2021 than we were before the 2008 financial crisis, but that doesn't mean we're isolated and the economies are interconnected globally.
MR. IGNATIUS: Let's go back to some encryption issues. You've used some very "strong" language in your recent speeches and testimonies about encryption —
MR. GENSLER: David, David, I want to clarify first if I can, and if I can, I do think that the new technology of crypto is very interesting – no matter who Satoshi Nakamoto is, Bitcoin has caused the change and is pushing central banks around the world to rethink how they provide payment systems. Bitcoin is driving financial change, the so-called "fintech," the intersection of new technologies and finance. I taught cryptocurrency at MIT and studied it for a few years, and if I didn't think it was fun and innovative, I really wouldn't have spent my time on it. But at the same time, I don't think technology will last long if it's outside the framework of social and public policy.
In this case, we have to make sure that investors and consumers are protected, which is what institutions like the SEC do, but at the same time, we also have to make sure that other public policy objectives are done, which are people complying with taxes and complying with so-called anti-money laundering and so on, and the SEC doesn't destabilize the system, so I think it's best to incorporate cryptocurrencies into the public policy framework and make sure that we achieve these important public policy goals, and I'm sorry, I had to interrupt you to explain because you said the word "strong".
MR. IGNATIUS: No, I - in my opinion, "strong" is not a bad word. So, let's dive into this detail. In your testimony, you said, "If we don't address these issues that exist with cryptocurrencies, I'm afraid a lot of people will be hurt." "You said in your testimony last week that the SEC already has the authority needed to regulate cryptocurrencies. But when I read your testimony, you also talked about the SEC wanting more power to do the "cryptocurrency regulation" thing more appropriately. So, tell us, what can the SEC do now with the powers it already has? And what else do you want to do in areas that can't be regulated right now?
MR. GENSLER: In fact, the SEC started in the 1930s and was given a very broad mandate. Congress decided to write a broad definition of "securities," which includes 30 or 35 subsections. Then, of course, this is sometimes challenged in the courts, in the Supreme Court. But as Justice Thurgood Marshall wrote in 1990 on the definition of "securities," Congress used a bold stroke to protect investors from fraud.
In the financial world, you know, it's the nature of people to try to sell something and exaggerate things like — you know, the typical hawker in the world. Therefore, this broad definition gives a lot of authority to institutions like the SEC. If there are people — if these tokens — and there are five or six thousand different projects — if these tokens have investment contract or note attributes, or have stock or bond attributes. Essentially, one of the core questions is whether there is a platform: a trading platform, a lending platform where you can buy and sell these tokens, or whether you can get a return on these tokens, the cryptocurrency industry not only owns dozens of tokens, but sometimes hundreds or thousands of tokens. It's likely that they have played a defined role in securities, investment contracts or notes or other roles on these platforms, so these platforms should be regulated, and they should figure out how to register and take on the responsibility of investment — investor protection.
Right now, not many people are doing that, so I'm really worried that we're going to keep bringing these enforcement cases, but if we don't do that, there's going to be a problem. There will be problems with lending platforms or trading platforms. Frankly, when that happens, I think a lot of people get hurt.
MR. IGNATIUS: So, the question is whether you want Congress to give you more power to regulate this new area of crypto. You mentioned that some of these tokens may have the attributes of securities, which will fall within your regulatory scope —
MR. GENSLER: Well, actually - if I could say, I think my predecessor Jay Clayton said it well around February 2018 and also thought he was right, namely: a lot of tokens are securities. You know, this is a basic idea. David, if you ask some of the show's listeners to give you their money, you say you're going to offer something of value. They rely on you, David, and maybe five or ten other entrepreneurs and computer scientists to build a platform, or tokens, etc., and they give you the money in the hope of making a profit. If this is the case, the U.S. Supreme Court made it clear a long time ago that this is an investment contract.
Think about it. It's a straightforward idea. You, David, raised some money. People rely on you and expect profits. As Thurgood Marshall wrote, we have given a broad definition of securities through Congress to ensure the safety of those investors. So, I think there are actually a lot of tokens that are securities, and that's what we're trying to do.
Now, as far as Congress is concerned, I think there are already two market regulators in the United States, and I now have the honor of serving as the chairman of the SEC, a sister agency of the U.S. Commodity Futures Trading Commission, which is responsible for regulating derivatives and has strong derivatives regulatory powers, with various commodity enforcement powers, and although some of the crypto tokens have more commodity attributes, most of them are securities, and there are some tokens that have both commodity and securities attributes.
I think it's very important how we coordinate, and while we're all strong regulators, the CFTC has some authority that we don't have — so there needs to be coordination with each other. Also, it's important how we coordinate with the banking regulator about a new feature – I don't know if we're going to work with banking institutions, especially on stablecoin regulation – and we also do so with marketing agencies because these stablecoins may have investment contract attributes, have some attributes like banking products, but banks don't currently have the full scope they need, so we need to look at how we can work with Congress to solve these issues.
MR. IGNATIUS: So, I just want to make sure I know that. You said that securities law and banking law have a broad definition of securities, but this definition is like being drawn with a wide brush. Do you have a clear definition?
MR. GENSLER: Well, at least the securities law, at least the securities law.
MR. IGNATIUS: So, my question is simple: What do you think you need an extra congressional mandate to do? In your judgment, is there no way for the SEC to better regulate, censor, and transparent cryptocurrencies? Or do you already have enough power, especially given the way the law is currently being made?
MR. GENSLER: I think the SEC already has powerful powers, and we will continue to use those powers. I also think there needs to be a better definition for some of the platforms, such as platforms that trade securities, platforms that offer lending products, platforms that have so-called "collateral products", and I'm happy to describe that to the audience, but in reality, if you put tokens on the platform and then you get a return, then those platforms will be regulated and we will also become "police" and take some law enforcement action.
Working with Congress will certainly help because there's a lot of coordination between our financial regulators. I'll let the banking regulators speak for themselves, but we're now working under Treasury Secretary Yellen and writing a report on stablecoins, and in the world of stablecoins, I do think there's going to be some help from Congress, which can help us with coordination on commodities and securities. But as far as the SEC is concerned, I do think we already have a strong authority, but there is still a gap compared to other regulators, as I'm sure.
MR. IGNATIUS: The appeal of these new instruments and cryptocurrencies is precisely that they are not regulated by banks, existing financial institutions, and they are not subject to traditional regulation, which is actually part of the reason for their emergence. The question is whether the kind of system you're talking about will accelerate the development of these tools in other jurisdictions or other unregulated areas. You know, it's almost like a reverse arms race. People will always find new ways to evade your scrutiny. Are you worried?
MR. GENSLER: David, new technologies have emerged, the Internet has emerged, and we've all seen the Internet catch on in the 1990s. It's a question – well, how will regulation fit into our public policy goals and frameworks? Do we tax businesses on the Internet? What about speech on the Internet? We have to sort this stuff together.
Frankly, new technology is usually a good thing, but it challenges the system, yet I don't think new technology really exists outside the framework of public policy for a long time. Congress can come together and change new technologies, and they can say, "Listen, whatever the new technologies are. We, Congress, don't mind whether people are being deceived or whether people manipulate the market. "But I don't think Congress would say that. Cryptocurrencies are an emerging field, and as I've said publicly, it's rife with issues like fraud and abuse. As you said, cryptocurrencies are a global marketplace, 24 hours a day, 7 days a week, and there are some innovations that are challenging traditional finance, which is actually a very exciting thing and why I studied cryptocurrencies so carefully at MIT. But I would also say that cryptocurrencies need to evolve within the framework of public policy.
Think about it, those crypto projects, more than 5,000, 6,000 crypto projects are raising money from the public. If it's not raising money from the expected profits of the public, and the public wants to retire better or enjoy better vacations next year, what else is there to invest?
My final point is that we have tried private forms of money historically. In America, we probably remember something called the Wildcat Bank era, which came up — from the 1830s to the 1860s, after President Jackson got rid of the Second Bank of the U.S. — sorry my history teacher, I don't remember exactly when. But we have banks that issue paper money, and they're competing with each other. Paper money in Philadelphia is different from paper money in Baltimore, and even within Philadelphia there are different paper money that compete with each other. But it all came at a cost, a lot of problems, so Abraham Lincoln set up a watchdog called the Controller of the Currency, and 50 years later, the Fed appeared.
As a result, only public funds can gain a permanent place on a global scale, and private funds usually do not last that long. Therefore, I don't think those 5, 6,000 private forms of cryptocurrency have long-term viability, because history has already told us the results. So, I think it's worthwhile to build an investor protection system around that.
MR. IGNATIUS: Let me ask you one more "interesting" question about the field of crypto regulation. The Wall Street Journal reported that large banks in the United States and Europe have told the Basel Committee on Banking Supervision that standards need to be set for regulation because they oppose the imposition of strict capital requirements on Bitcoin. The Basel Committee on Banking Supervision is one of the leading global regulators against financial risks. I'm curious if you see the news, do you agree with the position taken by the banks, or do you want to fight them back?
MR. GENSLER: David, I haven't studied it carefully, so I don't know. I mean, a highly volatile asset – Bitcoin is one such asset. Bitcoin is digital, scarce, and I could even say that Bitcoin is a speculative store of value. In order to hold the right capital, if Bitcoin is on the balance sheet of a bank, which seems to be in line with our past duties, then there needs to be appropriate regulatory measures to deal with potential losses, but at the moment I have not seen specific measures.
MR. IGNATIUS: One last quick question about the cryptocurrency industry, and then I wanted to turn to another topic at the end of the interview. The question is – are these cryptocurrencies, tokens regulated, investor protected, and is this basic monetary process and mediation good for the United States? In the long run, is cryptocurrency just one aspect of financial development, financial engineering, and as an economy, good for the United States? Good for investors? Or will it only raise regulatory concerns?
MR. GENSLER: Actually, I talked about these issues in class and when I was working with colleagues. I think cryptocurrencies are a catalyst for change, Satoshi Nakamoto brings innovation, not just Bitcoin, but the entire distributed ledger technology has become a catalyst for change, and central banks and the private sector around the world are looking at how to enhance our payment systems at a lower cost, so that they run in real time 24 hours a day, 7 days a week. So, there's some competition going on right now.
I also think there are some interesting innovations around the way exchanges work, and the potential ways in which some forms of decentralized lending are also emerging. In the United States, P2P lending has been developing for 15-20 years, and we have experimented with it, and decentralized lending is a new type of experiment. So, I think these innovations are challenging established business models and are very interesting.
On the other hand, I don't think it's a good idea to have no regulation. If we, the people in the official regulatory authorities, rush in again, and while we have congressional hearings, the cryptocurrency market has now reached $2 trillion with 5,000, 6,000 projects, although it's best to implement regulations in advance in terms of investor-consumer protection, tax compliance, anti-money laundering, and financial stability.
I think history tells us that private forms of money don't last long. Investment contracts that are outside the scope of investment protection can easily hurt people. If our lending platform is outside the boundaries of securities or banks, it will usually gain excessive leverage, which will eventually lead to problems with financial stability. These stablecoins are now like poker chips in a casino, so I use the Wild West analogy. I mean, there are a lot of casinos in the Wild West where the poker chips in the casinos are these stablecoins, you know, they're going to be on the casino tables.
So, I think there's already a lot of warning signs and flashes, so I'd rather tighten regulation in advance.
MR. IGNATIUS: So, it's a clear and ambitious agenda. One last question: You recently said that the SEC is about to release a report on gameStop trading. How long can we expect and can you let us know some details?
MR. GENSLER: Well, I'm honored to be the chair of a five-member committee. As I said last week, the whole report is now in front of my commissioner and is expected to be released soon, you know, a lot of the details have been made public. So, maybe I lowered my expectations a little bit because, you know, there's already a lot of coverage of the "GameStop incident" in January, like the Washington Post and other media outlets.
MR. IGNATIUS: Finally, I would like to thank Chairman Gary Gensler for his excellent discussion on one of the hottest topics in global finance. I think you did give us a clear idea of what's on the SEC plate and what you're thinking about doing. Thank you for accepting our interview.
MR. GENSLER: Thank you very much, David, and thank you very much for listening.
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