'That's A Grave Concern': Hagerty Grills SEC Chair On Lack Of Regulatory Clarity For Crypto Markets

3 months ago

At a Senate Appropriations Committee hearing earlier this month, Sen. Bill Hagerty (R-TN) questioned SEC Chair Gensler about FTX.

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Transcript

00:00For those interested we will do one more round and the way we're going to do it is we'll

00:03have Senator Hagerty, Senator Kennedy, Senator Bozeman if he wants to stay and then I will

00:10ask my round of questions last and close out the hearing.

00:13Senator Hagerty.

00:14Thank you.

00:15I'm going to come back to the exchange, Chairman Gensler, that you just had with Senator Durbin.

00:20I think it raises an interesting question that may seem like a broken record but this

00:24is a serious concern of mine.

00:26You were describing the circumstances around FTX and its ability to do many things that

00:32I think have upset most regulators, it should, the wild west manner in which they are performing.

00:38But I think there's a root issue here.

00:42What jurisdictions did FTX choose to domicile itself in?

00:48They had legal entities here in the U.S., they had legal entities overseas and this

00:53I think you've hit on it.

00:54They were in Hong Kong and Bahamas.

00:57That's where their operations were located.

01:00The presence here in the United States was minimal and I think that was intentional.

01:05But they were offering and selling securities to Americans here in the U.S. you could access

01:14through websites and this is the case for a number of these other crypto exchanges as

01:18well.

01:19We're trying to paper it in layer to make it harder for agencies, both of our agencies

01:25to bring the, be the cop on the beat.

01:29But American investors are accessing them here in the U.S. and under our authority.

01:35That's a grave concern.

01:36I just think that the important thing here is that FTX chose to avoid the U.S. market

01:42because we don't have certainty here, we don't have regulatory clarity here that would allow

01:46these exchanges to come and operate clearly.

01:48As I mentioned in our first discussion, it's a matter of resource allocation in my view

01:53at the SEC.

01:54In allocating resources to put in place a clear and constructive framework for the ecosystem

01:59to exist here, to have the resources necessary to do what you described with Senator Durbin

02:04I think would be a very big help.

02:06I appreciate what you're saying but I'm with all respect going to differ with you.

02:11They did not avoid U.S. jurisdiction.

02:13I mean, Sam Bankman-Fried's in jail right now.

02:16So they didn't avoid U.S., they might have been trying to.

02:20But they harmed U.S. investors.

02:21And they did in other crypto exchanges, I believe, are putting at risk Americans.

02:27But it's not about just jurisdiction.

02:29But had they been subject to a set of laws and enforcement provisions right here, I think

02:34we would have been on top of it much sooner.

02:35They are currently subject to Congress's laws written over 90 years called the Securities

02:39Laws, Commodity Exchange Act laws, I'm not going to leave you out, Russ.

02:43They are subject to those laws.

02:45As it relates to crypto security tokens, which again without prejudging anyone, I think the

02:50vast majority of these are, they're subject to the laws right now and they're not giving

02:55the proper disclosure to your constituents and the crypto intermediaries are improperly

03:00commingling and we're in court right now pursuing those.

03:05And I believe Americans would be better protected.

03:08So it's not about, there's nothing about crypto that's inconsistent with the Securities Laws.

03:12It's the exchanges and exchanges can't get through the process here because it's become

03:17so difficult.

03:18It's been made so difficult for crypto exchanges to flourish here, to register here, and to

03:23operate.

03:24And I'm encouraging that.

03:25That's because, with all respect, that's because they are choosing to try to not comply with

03:30U.S. law that so well protects our capital markets.

03:34And I would go a little further.

03:35We have taken up and written some rules in this area where we think it was appropriate

03:43and talked about the application, whether it's in custody, whether it's in what's called

03:50dealers and when are you a dealer and so forth.

03:53And so we have, in certain circumstances, done that.

03:57But in the main, whether it's stored on an accounting ledger called blockchain technology

04:04or stored on a notepad doesn't matter.

04:07It's the economics that matter, is investing public, investing, anticipating profits based

04:13on the efforts of others.

04:14What actually does matter is having clarity here in this marketplace.

04:17That does not exist.

04:18I can tell you from talking to many market participants, we don't have adequate clarity

04:21and they can't get answers out of the SEC.

04:23So again, I'm going to finish this line of questioning and move to something else.

04:27But this is something I want to encourage you to focus on.

04:30This industry needs to have a proper ecosystem here in America so that we're not shoving

04:34it offshore.

04:35If I can say, breaking the law and not liking the law are different than lack of clarity.

04:40And with all respect, I think that's what we have a lot in this field.

04:43And we also have a lot of uncertainty and a lot of lack of clarity coming out of the

04:47SEC in terms of how these applications are being evaluated.

04:50There's a lot of mystery around it.

04:51It need not be that way.

04:53To come back to another point that Senator Kennedy raised regarding the Fifth Circuit

04:59ruling, it raises a question in my mind, is how you balance the risk at the SEC of

05:05loosing in court versus the allocation of resources that it takes to undertake these

05:11rulemakings that I think you probably know are going to be subject to the type of scrutiny

05:16and the type of resistance because of the controversy that they raise.

05:20It's on my mind on a very real basis, sir.

05:24It has been for my whole three years in the job.

05:27But I really do think it's such a privilege to serve and the important thing we do is

05:31we look out for 330 million Americans.

05:34And in this field, this ever-growing field, $30 trillion of assets under management, more

05:40than the whole U.S. banking system, what we believe and I still believe that to have greater

05:47transparency so that once a quarter, investors know their fees, performance, and your arrangements

05:53with others, that will help promote greater competition and efficiency, lower the cost.

05:59We're talking about very sophisticated investors with respect to the private funds rule.

06:03Very sophisticated players in the marketplace and plenty of competition is noted by how

06:06many thousands of funds exist there.

06:09Last question I'd like to ask you, and this gets to a concern I think we have for many

06:13of the agencies here in Washington, and that is the effort to get people to come back to

06:18their office.

06:20And in April of last year, the OMB issued a directive to get 50 percent of the staff

06:24back into their offices.

06:26And I think the OMB and the White House expect this to occur.

06:30And I'm interested in how the Commission is thinking about compliance with this rule.

06:34Where are you?

06:35And to let you just wrap it up, are there real estate implications for this that we

06:40need to be considering?

06:42All very good questions.

06:45When I was honored to take over the Commission, we were in mandatory remote.

06:49And we then, Chair Clayton had done that because of COVID.

06:53We then entered into negotiations with the bargaining unit, the union, and went to impasse.

07:02There's a federal impasse panel.

07:03And as a result of that, we have an arrangement through 2026, so it was entered into in 2023,

07:13and staff have to come in two days of pay period.

07:18You can think of it on average one day a week.

07:20That was a result of the impasse.

07:23And that runs through the end of 2026.

07:26In terms of real estate, we have been shedding real estate.

07:29We shedded one of the buildings here in D.C.

07:32We had three buildings, saves about $14 million a year.

07:36We've shed a space in New York.

07:38I think we're going through something in Chicago right now.

07:41And we also just announced last week that we would be closing the real estate in our

07:47Salt Lake City office as well.

07:49Got it.

07:50Thank you.

07:51Thanks, Mr. Chairman.

07:52Thank you.

07:53Thank you.

07:54Thank you, Senator.

07:55Senator Hagerty.

07:56Senator Kennedy.

07:57No, go ahead.

07:58I'm going to wrap it up.

07:59I'm going to wrap it up at the end.

08:00Yep.

08:01Thanks.

'That's A Grave Concern': Hagerty Grills SEC Chair On Lack Of Regulatory Clarity For Crypto Markets

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