Securities and Exchange Commission chair Gary Gensler believes the regulator needs to get ahead of potential major financial harm to investors caused by cryptocurrencies being traded outside of the “securities or banking perimeter.”

There are thousands of tokens competing to raise money from the public in a sector “rife with fraud and abuse and hucksters and the like,” Gensler said Tuesday during a livestreamed interview with a Washington Post columnist.

That competition isn’t sustainable, and it opens the door for tax fraud, money laundering and other concerns, according to the SEC chief.

“History tells us that private money doesn’t last long,” Gensler said. “I don’t think there’s a long-term viability for 5,000 or 6,000 private forms of money … So, in the meantime, I think it's worthwhile to have an investor protection regime placed around us.”

Gensler compared the cryptocurrency landscape to the Wildcat banking era of the 1830s to 1860s, after then-President Andrew Jackson eliminated the Second Bank of the United States and there was no national currency. There were notes issued by banks in Philadelphia that were different from notes issued by banks in Baltimore, which created a chaotic system that gave way to what eventually became the Federal Reserve, Gensler noted.

In this current era, Gensler wants the SEC to be proactive.

“I don't think it's a good idea to wait until there's a spill in aisle three,” he said, without giving a specific example of what such an event might look like in the crypto world. “If we have lending platforms that are outside either the securities perimeter or banking perimeter, usually they get excess leverage, and we have financial stability issues.”

“I think it's better to bring it inside the public policy framework and ensure that we address these important public policy goals,” he added.

Reacting to China

Bitcoin lost more than 10% of its value in a little more than 48 hours over the weekend and into Monday, falling from above $48,000 to lower than $41,000 Monday morning. When asked about a possible driving force — the severely indebted Chinese real estate developer Evergrande — and the possibility of “contagion” in U.S. markets, Gensler said it’s possible the U.S. could react to shocks in other markets as the world did to the U.S. housing bubble in 2008.

“We're a highly interconnected, global economic system, and just as the U.S. propagated a bit of a crisis from our housing bubble in 2008 and others around the globe reacted to those shocks, it is possible from time to time that we too and America will react to other economies and nations' shocks,” Gensler said.

“I do think that the reforms after the 2008 crisis stood up a much stronger U.S. financial system,” he added. “It doesn't mean that there aren't issues … but I do think that we're in a better position in 2021 to absorb some of those shocks than we were prior to the ‘08 crisis.”

Do you have a news tip you’d like to share with FA-IQ? Email us at editorial@financialadvisoriq.com.