The former head of the CFTC suggests that regulators may have to lean in and guide the growth of the crypto currency phenomenon.
Gary Gensler, ex-chairman, CFTC
Cryptocurrency exchanges have a long way to go as far as providing protections for investors and other industry participants, says Gary Gensler, the former CFTC chairman who spoke last month at ISITC’s 24th Annual Securities Operations Summit in Boston.
Gensler, who spoke during a wide-ranging political discussion about the changes underway in President Trump’s Washington, D.C., took aim at the exchanges and related venues for cryptocurrency transactions. Gensler was interviewed by former CFTC Commissioner Mark Wetjen, who also served as acting CFTC chairman, but is now the managing director, head of global public policy for the DTCC. Gensler is a senior advisor to the Media Lab Director, senior lecturer, at the MIT Sloan School of Management.
“They’re a bit of a mess. They’re more than a bit of a mess. They’re really a mess,” Gensler said. “They’re not under any sort of norms of behavior. So there’s a bunch of front running, a bunch of manipulation. The custodial functions at these exchanges — some of them are trying to do well but some of it is pretty sloppy. There was an exchange in Japan that lost a half a billion dollars in custodial assets.”
Gensler was referencing the hacking of a crypto currency exchange based in Tokyo Coincheck on January 26. Exchange officials have acknowledged that the hacking resulted in the loss of 58 billion yen, which equals an estimated $533 million. Hackers apparently stole 500 million NEM tokens from what are described as Coincheck’s digital wallets. Further investigation may reveal greater amounts were stolen.
Coincheck officials say via their website that approximately 260,000 people were impacted by the hack, and that they will be refunded via Japanese yen.
“We will calculate the price using the weighted average of the volume, with reference to the virtual currency exchange Zaif’s XEM / JPY (NEM / JPY) operated by Tech Bureau Co., Ltd., which has the largest handling volume of NEM in Japan and overseas,” officials say. “The calculation period is the weighted average price from NEM’s suspension of trading at Coincheck to this release, and will be refunded in JPY.”
In addition, Coincheck officials say that they “would like to offer our sincerest apologies to our customers, other exchanges, and everyone else affected by the illicit transfer of NEM which occurred on our platform. We vow to take action on all of the points listed in the business improvement order handed down from the Financial Services Agency as we work towards resuming normal business operations. Currently, we have suspended various features on our platform including new registrations.”
FTF News reached out to Coincheck via email for further comment, but there was no response by deadline.
Gensler touched on the high risks that digital currency losses represent.
“Can I see a show of hands?” Gensler asked the ISITC audience. “How many of you, if you lost a half a billion, would still actually have your jobs?” There was laughter but no show of hands among the audience members. “That’s what I thought. … It would probably take a smaller number than that [to get fired].”
Gensler acknowledges that the exchange is making amends.
“The 27-year-old that runs this exchange, Coincheck, had made enough money in the two years that he was operating Coincheck that under an agreement with the Japanese government he’s going to, in yen, return the loss of the money that was lost in something called NEM, which is a token,” Gensler says. “But it’s not like the New York Stock Exchange, let me tell you.”
Overall, Gensler says that initial coin offerings (ICOs) should be treated as if they are investment contracts and that the growth of cryptocurrencies, ICOs and related venues “has gotten too big” and may require regulators to “lean in.”
“I think the Securities and Exchange Commission is grappling with some really interesting questions,” says Gensler, noting the new form of capital raising caused by digital currencies. The most useful guidelines to understand ICOs stem from a U.S. Supreme Court decision in the Howie Case from the 1940’s, Gensler says. “It kind of looks like an investment contract,” he says. “Most of the initial coin offerings to date have been investment contracts.”
The crypto exchanges will need clarity on custodial duties, money transmission issues, know your customer (KYC) concerns, anti-money laundering (AML) protections, and counter-terrorism financing prevention among other issues, Gensler says.
“I would say this: I think that the U.S. regulators aren’t really looking to the White House for all of this stuff. They’re just trying to do their jobs,” Gensler says. “The whirlwind of the Twittersphere is not affecting Jay Clayton [SEC chairman] … or Chris [Giancarlo, CFTC chairman] or the remarkable career folks at all these agencies. They’re trying to figure out this new space and make the best judgments. They’re going to make some mistakes … You can help. I would encourage you all to be part of that community discussion. What’s the best custodial for this cryptic space … How do you do custodial issues there? How do you move it across the payment cycles and things like that?”
Citing the help that regulators got from industry players during the Dodd-Frank days, Gensler thanked the audience. “This room helped so much,” he said.
Gensler served as head of CFTC from May 26, 2009, to January 3, 2014, overseeing much of the derivatives industry reforms mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among the overhauls were major changes for the previously unregulated swaps market, including the onset of swap execution facilities (SEFs), the real-time reporting and exchange trading of swap transactions, and centralized clearing for swaps.
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