Getting Crypto Firms to Do Their Work Within the Bounds of the Law

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When I taught a course on blockchain and money at the Massachusetts Institute of Technology, I asked my students every semester who they thought Satoshi Nakamoto was.

To this day, no one knows. Nakamoto’s anonymous identity is part of the creation myth of finance without trusted third parties — a new way to move value on the internet, with the goal that there would be no government oversight or central intermediaries like banks.

Since antiquity, however, the financial world has been built on trust and the rule of law. Further, finance has tended toward centralization, concentration, and interconnectedness, from banks to stock exchanges.

The crypto market is no exception. It has many “trusted” — though non-compliant — intermediaries. Today, crypto is dominated by a handful of trading, lending, staking, and other financial intermediaries. The investing public is trusting these entities to be responsible with investors’ assets. According to some data, the three largest crypto trading platforms purportedly account for almost three quarters of all trading volume.

Crypto entrepreneurs might claim, in their own marketing materials, that they’re transparent and regulated. But make no mistake: Very few, if any, are actually registered with the SEC and fully compliant with the federal securities laws.

The lack of compliance puts investors’ hard-earned assets at risk. Investors lack fundamental disclosures about the crypto assets themselves and the firms who execute their trades and custody their assets: What are firms doing with customer assets? How are they funding their promised returns? Are they putting their hands in investors’ pockets? When you buy or sell a token, are you trading against the house? What are the rules to protect against manipulation and fraud? Without disclosure and other investor protections, we simply don’t know.

In essence, these firms are saying, “trust us.” What’s more, when firms go bankrupt (as many have of late), they turn to bankruptcy courts to sort out their mess. Given Nakamoto’s initial vision — in essence, that code is law — that’s somewhat ironic.

As chair of the Securities and Exchange Commission, I have one goal with regard to the crypto markets: to ensure that investors and the markets receive all the protections that they would in any other securities market. How?

First, intermediaries and tokens should properly come into compliance on their own. Crypto intermediaries should structure their businesses to comply with our laws governing securities exchanges, broker-dealers, and clearinghouses; they could put into place rulebooks that protect against fraud and manipulation. Crypto security issuers should file registration statements and make the required disclosures.

These are the same rules that everyone else in the securities markets has played by for decades.

I find the talking point that there’s a lack of clarity in the securities laws unpersuasive. Some crypto companies might message that the laws are unclear rather than admitting that their platforms don’t have sufficient investor protection.

We’ve been clear that most crypto tokens that are backed by entrepreneurs, among other features, are likely to be securities. We've been clear how lending and staking platforms come under the securities laws. We’ve been clear that platforms listing crypto securities must register with the SEC. Further, the securities laws are clear that these platforms are not to combine functions under a single umbrella that creates conflicts and risks for investors.

A common feature of crypto firms that offer trading, lending, or staking-as-a-service is that they generally require users to relinquish control of their crypto assets to the platforms (not your keys, not your coins). Thus, SEC staff has been clear how firms should account for crypto assets that they’re holding for their users, and staff has provided guidance on disclosure obligations arising as a result of recent bankruptcies and financial distress among crypto asset market participants.

We’ve also been clear that, based upon how crypto platforms generally operate, investment advisers cannot rely on them today as qualified custodians. We’ve also proposed rules that would require all assets invested with investment advisers, including crypto assets that aren’t funds or securities, to be custodied with qualified custodians.

Frankly, though, crypto intermediaries aren’t exactly lining up to register with the SEC and comply with the laws enacted by Congress. Maybe it’s simply that their business models rely on being noncompliant. At times, it has felt like some have sought a stamp of approval for noncompliant activity, rather than changing a fundamentally non-compliant business model rife with conflicts.

Of course, another tool in our toolbox is rooting out noncompliance through investigations and enforcement actions.

The SEC has successfully brought or settled more than 100 cases against crypto intermediaries and token issuers, including some who operated Ponzi or pyramid schemes, engaged in unlawful touting, or committed other forms of fraud. We recently brought fraud charges against the CEO and other executives of FTX, as well as Terraform and its founder.

Enforcement actions take time and resources. This is especially true in crypto, as firms often are non-cooperative, claim overseas jurisdiction despite offering products to U.S. investors, and are well-funded for protracted litigation, including potentially using money raised from investors in and on their platforms. We will, however, remain steadfast in our mission to root out wrongdoing in the marketplace.

Some have criticized the SEC for bringing cases — or even just investigating — crypto issuers and intermediaries. Some have said that we should let the innovation flourish or risk it going overseas. But forsaking investor protection puts real people’s life savings at risk. Enforcement is a tool, not the destination. The goal is to get market participants into compliance with laws and rules and to protect our “clients”: U.S. investors.

The fact of the matter is this: Even if Nakamoto’s identity isn’t clear, the laws are. Crypto firms should do their work within the bounds of the law, or they shouldn’t do it at all.