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SEC’s Gensler wants crypto exchanges to segregate market making, custody

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SEC Chair Gary Gensler spoke about cryptocurrency lending and exchange platforms in his recent Office Hours video. He proposed exploring whether exchanges should have custody of private keys and segregating the market-making and exchange activities in a similar way to stock markets.

It’s well known that there’s an ongoing turf war between U.S. regulators, the SEC, and CFTC about which regulator will be responsible for oversight of cryptocurrency markets. The recent lawsuit against an ex-Coinbase executive for insider trading brought that issue to the fore, with the SEC asserting that the cryptocurrencies involved in the insider trading case are all securities. 

Bloomberg subsequently reported that Coinbase is under investigation for allowing Americans to trade digital assets that should have been registered as securities.

During Gensler’s Office Hours, he confirmed that SEC staff are working directly with platforms to get them registered and regulated. And to ensure crypto tokens ‘where appropriate’ are registered as securities.

The SEC Chair said he wants to ensure the cryptocurrency platforms offer similar consumer protection as the stock market. Several recent crypto bankruptcies have highlighted this issue, with lending platform Celsius perhaps more so than others.

Private keys and market making

Gensler said about the custody of private keys, “Imagine handing over all of your stock to the New York Stock Exchange? That would never fly.” He wants to ensure the assets are protected. Will that mean that exchanges are required to use third-party digital asset custodians? It’s certainly the case that some unsuspecting people had assumed their assets would be ring-fenced on crypto exchanges.

Gensler also discussed the inherent conflicts of interest if stock exchanges are their own market maker. Hence he’s looking to push for separating this activity from crypto exchanges.

Image Copyright: SEC