Sec Speeches Cryptocurrency “We’ve Seen This Story Before” Remarks before the Piper Sandler Global Exchange & Fintech Conference

Thank you, Rich, for that kind introduction. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I’m not speaking on behalf of my fellow Commissioners or the SEC staff.

Well-regulated Markets

Rich, I’m honored to speak at what I’m told is your last of a 20-year run of conferences.

I’d like to focus on one area, which I think sits right at the intersection of the two things you highlight in the title of this conference—Exchanges and Fintech—and that’s crypto.

The U.S. capital markets thrive because we’ve had rules of the road that have helped ensure for investor protection, transparency, and competition for 90 years—since the signing of the Securities Act of 1933. A year after signing that law, President Roosevelt worked with Congress to pass the Securities Exchange Act of 1934 to regulate securities intermediaries, such as exchanges and broker-dealers. That law also created the SEC, and this past Tuesday was our 89^th birthday.

Crypto Securities

There is nothing about the crypto securities markets that suggests that investors and issuers are less deserving of the protections of our securities laws.

Congress could have said in 1933 or in 1934 that the securities laws applied only to stocks and bonds.

“Congress’s purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.”[1] This is not just a talking point. This is the law of the land, as Justice Thurgood Marshall wrote in the Supreme Court’s famous Reves decision.

Congress included a long list of 30-plus items in the definition of a security, including the term “investment contract.”

As articulated in another famous Supreme Court decision, SEC v. W.J. Howey Co.,[2] an investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. This test has been reaffirmed by the Supreme Court numerous times—the Court cited Howey as recently as 2019.

In the Howey decision, the Court said that definition of an investment contract “embodies a flexible, rather than a static, principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”

As I’ve said numerous times, the vast majority of crypto tokens meet the investment contract test. Not liking the message isn’t the same thing as not receiving it.

These tokens have teams promoting them with websites and Twitter accounts. Investors may even meet the entrepreneurs. These tokens are not coming out of thin air. They are not growing out of the ground like corn or wheat. That they’re digital doesn’t differentiate them from huge swaths of the capital markets, where securities and currencies already are digital.

Satoshi Nakamoto’s innovation spurred the development of crypto assets and the underlying blockchain ledger technology. Regardless, however, of the ledger being used, be it a spreadsheet, a database, or blockchain technology, when investors put their money at risk, it’s the economic realities of the investment that matter.

Thus, crypto security issuers need to register the offer and sale of their investment contracts with the SEC or meet the requirements for an exemption. For decades, we’ve had rules governing how issuers must do that. We have flexible rules for the disclosures required in registration statements—Regulation S-K and Regulation S-X—and exemptions from registration, including Regulation A or Regulation D.

We’ve also provided years of guidance to market participants on what does or does not constitute a crypto asset security, including the DAO report in 2017[3] and the staff’s “Framework for ‘Investment Contract’ Analysis of Digital Assets” in 2019.[4] More than 100 Commission orders, settled actions, and court decisions also have made clear when the offer and sale of a token is a security, including our actions against Telegram,[5] LBRY,[6] and Kik.[7]

In fact, we alleged just this week that Binance’s chief financial officer and chief compliance officer were aware of the Kik case’s relevance to their own business.[8] According to our complaint against Binance, as a result of the SEC’s action against Kik, Binance insiders realized that they would need to “start prepping everything” for a subpoena and Wells notice relating to their exchange token, BNB, including a “War chest.”

When crypto asset market participants go on Twitter or TV and say they lacked “fair notice” that their conduct could be illegal, don’t believe it. They may have made a calculated economic decision to take the risk of enforcement as the cost of doing business.

Just as in other parts of the securities markets, registration and compliance takes work— something that the debt and equity issuers at this conference know well. This is appropriate, though, because it’s the work that ensures that investors get the full, fair, and truthful disclosure they deserve.

Some promoters of crypto asset securities contend that their token has a function beyond simply being an investment vehicle. As the courts in the Telegram case[9] and others[10] have said, however, some additional utility does not remove a crypto asset security from the definition of an investment contract. The investing public generally buys these crypto assets, at least in part, anticipating profit based on the efforts of those token issuers.

In fact, in that famous Howey decision, the Supreme Court wrote that, if the investment contract test is satisfied, “it is immaterial whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value.”[11] Still, for those tokens that are used exclusively within their blockchain ecosystems, the staff has shown willingness to provide no-action letters.[12]

Crypto Intermediaries

Given that most crypto tokens are subject to the securities laws, it follows that most crypto intermediaries have to comply with securities laws as well.

Again, these laws have been on the books for decades. Sections 5, 15(a), and 17A(b) of the Exchange Act require that intermediaries acting as securities exchanges, brokers and dealers, and clearing agencies are subject to the securities laws, and must register or satisfy requirements for an exemption.

Again, these crypto entities know the rules. As Binance’s chief compliance officer put it bluntly to a colleague in 2018, “[w]e are operating as a fking unlicensed securities exchange in the USA bro.”

Registration is not just a process issue. Failure to register isn’t just a foot fault in a tennis game. It’s core to providing the investing public and our markets with basic protections.

This year, we alleged in separate actions that Beaxy,[13] Bittrex,[14] Binance,[15] and Coinbase[16] commingled and unlawfully offered securities intermediation functions without registering them with the SEC. The Commission settled actions against EtherDelta in 2018[17] and Poloniex in 2021.[18]

These alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosures, segregation of customer assets, safeguards against conflicts of interest, oversight by a self-regulatory organization, and routine inspection by the SEC. When intermediaries don’t register, it’s investors who get hurt and the American financial markets that may suffer.

In other parts of our securities markets, the exchange, broker-dealer, and clearing functions are separate. Separation of these core functions helps mitigate the conflicts that can arise with the commingling of such services.

Rich, if one of your earlier speakers said they were combining these functions or that they were surreptitiously trading against their customers without complying with our rules, no one in this room would stand for it.

I disagree with the notion—and recent history disproves it—that crypto intermediary compliance isn’t possible. I do recognize—and, again, think it’s appropriate—that it takes work. It’s not just a matter of “paying lip service to [the] desire to comply with applicable laws”[19] or seeking a bunch of meetings with the SEC during which you’re unwilling to make the changes needed to comply with the securities laws.

Crypto intermediaries may need to separate lines of business, put into place rulebooks that protect against fraud and manipulation, properly segregate customer funds, mitigate conflicts, or change their approach to clearing and custody. These are the things that protect investors. The fact that they didn’t build their platforms with these things in mind shouldn’t be a free pass to put investors at risk.

Each of the registered stock exchanges at this conference has done the hard work of registering and putting in place appropriate rulebooks and surveillance, and each is subject to all of our rules. We shouldn’t undermine 90 years of securities laws.

As SEC Enforcement Director Gurbir Grewal said, “You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great.”[20]

Further, just last month, one firm[21] that limited their business to crypto asset securities was approved by the Financial Industry Regulatory Authority as a special purpose broker-dealer.[22] It can be done.

We have addressed the crypto security industry through rulemaking as well. Though many in the industry who have called for rulemaking have expressed dissatisfaction with said rulemaking.

We issued a reopening release that reiterated the applicability of existing rules to platforms that trade crypto asset securities, including so-called “DeFi” systems. This release also provided supplemental information for systems that would be included in a new, proposed exchange definition.[23]

While our current investment adviser custody rule already applies to crypto funds and securities, our recent proposal updating it would cover all crypto assets and enhance the protections that qualified custodians provide.[24]

These are just two of the rules we’ve proposed that touch the crypto markets.

Further, recognizing the risk and uncertainties related to crypto assets, the staff has stated their view on public company accounting related to crypto assets and disclosure regarding significant crypto asset market developments.[25]

Lending and Staking as a Service

Another prevalent feature of crypto markets is that intermediaries and promoters offer lending or staking-as-a-service programs that promise returns in exchange for investors’ crypto tokens. They have many names for their products and for their promised returns, which often are used to entice users to their platforms.

Across decades of cases, though, the Supreme Court has made clear that the economic realities of a product—not the labels—determine whether it is a security under the securities laws.

It doesn’t matter what kind of assets investors put into a lending or staking-as-a-service platform—cash, gold, bitcoin, or anything else. It’s what the intermediary says that they are going to do with the assets that determines what protections are provided by the law. Customers invest their assets with the platform, which then onlends them or pools and stakes them, in each case promising a return. These are classic securities, irrespective of whether crypto is involved.

Again, the SEC has been clear on this for a number of years. From BitConnect[26] in 2021, BlockFi[27] in 2022, to a series of actions this year, [28] the SEC has consistently alleged that these lending and staking-as-a-service offerings need to register and provide the investing public with proper disclosures.

Just this week, along with 10 states, we charged Coinbase for never properly registering the offer and sale of its staking program.[29]

Conduct: Fraud, Manipulation, and Bankruptcies

With wide-ranging noncompliance, frankly, it’s not surprising that we’ve seen many problems in these markets. We’ve seen this story before. It’s reminiscent of what we had in the 1920s before the federal securities laws were put in place. Hucksters. Fraudsters. Scam artists. Ponzi schemes. The public left in line at the bankruptcy court.

Earlier this week, we alleged that certain Binance entities misled investors about the platform’s risk controls and its corrupted trading volumes while actively concealing who was operating the platforms, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto were custodied.[30]

We also allege that Sigma Chain, an affiliate controlled by Binance founder Changpeng Zhao, acting as the principal market maker on Binance.US, engaged in manipulative trading and conducted wash trading that fraudulently inflated trading volumes on the platform, including around Binance.US’s launch, its subsequent funding round, and when certain new crypto security tokens were recently listed.

Further, through accounts owned and controlled by Zhao and Binance, billions of dollars of customer funds from both Binance platforms allegedly were commingled into an account held by a Zhao-controlled entity, Merit Peak Limited.

The allegations also describe Zhao and Binance’s attempt to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms. Our complaint quoted Binance’s chief compliance officer, who said, “On the surface we cannot be seen to have US users but in reality, we should get them through other creative means,” and that the CCO further said, “CZ will definitely agree to this lol … I have been briefed by top management to always find a way to support biz.”

We also saw deception of investors by FTX.[31] We saw deception with the collapse of Terra and LUNA. Do Kwon and Terraform, we alleged, repeated false and misleading statements to build trust before causing devastating losses for investors.[32]

In the case against Justin Sun and three of his companies, we alleged, among other things, a scheme to pay celebrities to tout tokens without disclosing compensation.[33]

I could go on, but in a market rife with fraud, abuse, and noncompliance, there are too many to list.

We’ve also seen numerous companies—before and after FTX—blow themselves up, hurting countless investors in their wake. As a result of the bankruptcies of BlockFi, Celsius, FTX, Genesis, and other crypto firms, investors often are left lining up in court.

Let me be clear: These types of misconduct and bankruptcies are more likely to happen in markets whose issuers and intermediaries fail to comply with foundational laws. Even when we might not find fraud or such blatant misconduct, investors need proper disclosure, segregation of their hard-earned assets, and confidence that they are not trading against the house.

Conclusion

Markets ultimately are about trust. For 90 years, that trust has relied upon compliance with the securities laws.

The crypto securities markets should not be allowed to undermine the well-earned trust the public has in the capital markets.

The crypto markets should not be allowed to harm investors.