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Transcript: The Path Forward: Cryptocurrency with Gary Gensler

MR. IGNATIUS: Welcome to Washington Post Live. I’m David Ignatius, a columnist for The Post.

Today, in our continuing series, "The Path Forward," we're joined by Gary Gensler, Chair of the Securities Exchange Commission. Last week, before the Senate Banking Committee, Chair Gensler talked about the need to regulate cryptocurrency, an issue that's fascinating financial markets. We're hoping to continue that conversation today with Chair Gensler.

Welcome to Washington Post Live.

MR. GENSLER: Good to be with you, David. Good to be with all of you in the audience.

MR. IGNATIUS: So, let's start with the latest significant blip in the cryptocurrency world, and that's the dramatic drop in the value of bitcoin and other tokens last night, down 8 percent. I want to ask you what that experience told you about the basic issue of cryptos' stability as an asset, and the need for some greater regulation.

MR. GENSLER: So, crypto tokens, what you've promoted in this program called cryptocurrencies, even though some of my colleagues in the official sector shy away from that term--I'm comfortable using it--are a highly speculative asset class. I started and was honored to research this and study it and teach it at MIT and work with computer science colleagues, and I think there are innovations in that basic white paper, so to speak, that Satoshi Nakamoto put out about a dozen years ago. And whomever she, he, or they were, we still don't know, had some basic innovations.

But what we have now is an asset class that's highly speculative, stored on a digital ledger, and the values, as you said, yesterday went down, but they could go down dramatically, they could go up dramatically, and in--often cases there's not something standing behind it other than what somebody else will pay you for it.

MR. IGNATIUS: Before we get into the details of what might be involved in regulation, I want to ask you about the underlying economic news that seemed to drive the movement in bitcoin and these other currencies overnight, and that is concern about the highly leveraged Chinese real estate sector and the overhang in financial markets.

And I just want to ask you, as SEC Chairman, whether you have concerns about the possibility of contagion in U.S. and international financial markets as a result of what's going on in China, and what steps you've been taking recently to try to protect our markets and our financial stability in the situation.

MR. GENSLER: We're a highly interconnected, global economy. The U.S., only about 4 percent of the world's people--we're 23- or 4 percent of the economy, but 38 percent of the world's capital markets. So, we have an outsized representation, but it's highly interconnected.

Now, as it relates to China, we've been doing a number of things. We have about 270 China-related companies raising money here in the U.S. We've put a pause on new companies issuing in the U.S. until we can enhance the disclosure. We have a basic bargain in the United States, been around for about 90 years since the Great Depression. Investors get to decide whether you invest, but the issuer has to give you full and fair disclosure, and we protect against fraud and the like in the--and manipulation in the markets. That's one of my worries about crypto and the crypto asset class. But back to China, given some of the changes in the regulatory and political climate in China, we've asked issuers to put greater emphasis on the disclosure that usually all you're buying is a Cayman Islands company that has some legal arrangements with an operating company in China. And you don't actually own directly those Chinese companies.

A second thing happened is about 19 years ago there was another basic bargain that we set up an organization here in the United States to look at the auditing of the public companies. And it's about trust in our capital markets that you have somebody--it's called the Public Company Accounting Oversight Board--that looks at the auditors to ensure that the numbers are accurate. And what do we find? Nineteen years later, 50 or so jurisdictions have allowed that, but two have not, and that's Hong Kong and China. And so, Congress weighed in unanimously in the Senate and it was taken up by the House and weighed in, and we're supposed to basically solve this in the next three years, meaning China needs to comply. Their official sector and auditors need to comply or we're going to be suspending trading for those 270 companies.

MR. IGNATIUS: And let me just ask one more question on this. Given the extraordinary debt pressure on Evergrande, a very large Chinese real estate development company, some analysts have worried there could be contagion in financial markets, like what we remember from 2008 and the failure of Lehman Brothers, and associated derivatives, swaps, that would be impacted by the failure of a very large international player like this.

So, I just want to be clear in asking you, are you confident that our financial markets today are protected in the event that there was such a failure, not necessarily over this company but any large company with that level of debt, anywhere.

MR. GENSLER: Well, David, it's a great question. It's multilayered, some of which I hope you'd understand, I don't want to comment on one company, and particularly this one company that you mentioned isn't registered and traded directly on our capital markets. It's registered in Hong Kong; it operates in China.

But it is accurate to say that we are 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 in America will react to other economies' and nations' shocks. And particularly China's economy is so large relative to Europe's or our own.

To your second question, I do think the reforms after the 2008 crisis stood up a much stronger U.S. financial system. It doesn't mean that there aren't issues that we look at, at the SEC and other important regulators like the Federal Reserve and the bank regulators and CFTC, that I once was honored to chair. But I do think that we're in better position in 2021 to absorb some of those shocks than we were prior to the '08 crisis, but it doesn't mean we're isolated. Our economies are connected around the globe.

MR. IGNATIUS: Let's come back to some crypto issues. You used some very strong language recently in both speeches and testimony referring to crypto on--

[Overlapping speakers]

MR. GENSLER: David, David, if I might, I like to speak clearly, if I can, and I do think this new technology is a very interesting--and whomever she was, Satoshi Nakamoto, it's led to change. It's pushing at the side of central banks around the globe to reconsider how to provide payment systems. It's pushing on the side as a catalyst for change in finance, so-called "fintech," the intersection of new technologies and finance. I taught this and studied it for several years at MIT and really wouldn't have dedicated my time to it if I didn't think it was interesting and innovative. But at the same time, I don't think technologies long last outside of a social and public policy framework.

And in this case, we have to ensure for investor and consumer protection, that's what an agency like ours, the SEC, does, but also ensure other public policy goals, that people are compliant with taxes and compliant with what's called anti-money laundering and the like, and we don't undermine the stability of the system. So, I think it's better to bring it inside the public policy framework and ensure that we address these important public policy goals, but I'm sorry I interrupted you about this strong words that you were saying I had said.

MR. IGNATIUS: No, I--that's not a bad phrase, in my book.

So, let's get into the details of this. In your testimony, you said, "If we don't address these issues with cryptocurrencies, I worry that a lot of people will get hurt." You said in your testimony last week that the SEC already has authority it needs to regulate crypto. But then, as I read your testimony, you also talked about wanting more authority to do that more properly. So, tell us what you can do now with the authority you have and what you'd like to do additionally in areas that you're not now able to regulate.

MR. GENSLER: So, the SEC stood up in the 1930s got a very broad remit to cover securities. And Congress decided to write this definition broadly. It included 30 or 35 subparts to it. And then, of course this sometimes gets challenged in the court, in supreme courts. But as Justice Thurgood Marshall wrote an opinion about this definition of security back in 1990, that Congress painted with a broad brush, and the reason was to protect investors against fraud.

And in the world of finance, you know, it's human nature that people come along and they try to sell something and exaggerate or--you know, the classic sort of hucksters in the world. And so, this broad definition gives an agency like ours a great deal of authority. If somebody--if these tokens--and there's five- or six thousand different projects--if these tokens have the attributes of an investment contract or a note, or have attributes of equities or bonds. And in essence, one of the core issues is that there are platforms: trading platforms where you can buy and sell these tokens; lending platforms, where you can earn a return on these tokens that have not just dozens of tokens but sometimes hundreds or thousands of tokens. And it's highly likely that they have on these platforms, securities, investment contracts, or notes or others, that fit the definition of security. Those platforms should come in, they should figure out how to register, be an investment--investor protection remit.

Now, not many have, and so I do really fear that we'll keep bringing these enforcement cases, but there's going to be a problem. There's going to be a problem on lending platforms or trading platforms. And frankly, when that happens, I think a lot of people are going to get hurt.

MR. IGNATIUS: So, the question is whether you'd like additional congressional authority to regulate in this new sphere. You mention that some of these tokens may have the attributes of securities and they would fall under your ambit to regulate--

MR. GENSLER: Well, I actually--if I might say, I think my predecessor Jay Clayton said it well in February or so of 2018. I think he had it right, then. I think it's true in the fall of 2021, is that many of these are securities. Look, it's a basic idea: If you, David, ask some of the listeners from this program to give them your money, something of value. And they were relying on you, David, with maybe five or ten other entrepreneurs and computer scientists to build a platform--build a platform, that token and so forth, and they were giving it to you with an anticipation of profits. Our Supreme Court long ago said that's an investment contract.

Just think about it. It's sort of a straightforward idea. You, David, raise some money. People are relying on you or relying on you in a common enterprise, anticipating profits. And as Thurgood Marshall wrote, we, through Congress, painted with a broad brush. So, I think it's many of these tokens, in fact. And that's what we're trying to do.

Now, in terms of Congress, I think that there are--there are two market regulators here in this country. I was honored to chair the sister agency, the Commodity Futures Trading Commission, that oversees derivatives and has robust regulatory authority of derivatives. It has various enforcement authorities on commodities. Some of these tokens, a few of them--but some of these have more of the attributes of commodities; most of them securities; some have attributes of both.

I think just how we coordinate, particularly that we have robust regulatory authorities that our sibling agency doesn't have. They have some authorities that we don't have--and how we coordinate. Also, how we might coordinate with the banking regulators on a new feature--I don't know if you're going to go there, but on something called stable coins, and how the banking agencies--and we, too, market agencies--coordinate because these stable coins may have attributes of investment contracts, have some attributes like banking products, but the banking authorities right now don't have the full gamut of what they need, and how we work with Congress to sort through that.

MR. IGNATIUS: So, I just want to make sure I'm clear on this. You're describing existing securities and banking laws as being broad. They were painted with a broad brush. You have definitions--

MR. GENSLER: Well, at least the securities laws. At least the securities laws.

MR. IGNATIUS: So, my question is a simple one: Do you think you need additional congressional authorization to do what, in your judgment, is required to bring these instruments under better regulation, scrutiny, transparency; or do you have enough authority, given the way the laws are currently written?

MR. GENSLER: I think that we have robust authorities at the Securities and Exchange Commission and we're going to use them and continue. I think it would be better--the platforms that are trading securities, the platforms that have lending products, who have what's called "staking products," and I'm glad to describe that for your listeners, but where you actually put a coin at the platform and you earn a return--that they come in and we sort through, figure out how best to get them within the perimeter. We'll also be the cop on the beat and bringing those enforcement actions, as well.

Working with Congress would help, because there's a lot of coordination by and amongst our financial regulators. I would let the banking regulators speak on their own, but we're working right now under the guidance of Secretary Yellen and working on a report around stable coins, and in the world of stable coins, I do think that there would be some help from Congress. I do think that we can work with Congress with regard to the coordination, again, commodities and securities. But in terms of the SEC, I do think that we have robust authorities, but there are gaps, as I've identified them.

MR. IGNATIUS: So, just to play devil's advocate on this for a moment, the appeal of these new instruments, of cryptocurrencies, is precisely that they're not mediated by banks, by existing financial institutions, and that they're outside of traditional regulation; that's part of why they've arisen. And the question is whether if you institute the kind of regime you're talking about, that wouldn't just accelerate the push of these instruments in the other jurisdictions, other unregulated areas. You know, it's almost like a reverse arms race. People would find new ways to escape your scrutiny. Are you worried about that?

MR. GENSLER: David, new technologies come along. The internet came along and we all saw it popularized in the 1990s. It was a question--well, how is that going to fit within our public policy goals and framework? Do we tax commerce on the internet? What about speech on the internet? And we had to sort through these things.

So, new technology is generally a good thing; it challenges the establishment. But I don't think that new technologies really long exist outside of public policy frameworks. Congress can come together and change it. They could say, "Look, leave it out. We, Congress, don't mind if people are defrauded. We don't mind if people manipulate markets." I don't think that's what Congress is going to say, though. And that's what is all too often happening. This is a field, I've said it publicly, it's rife with fraud and abuse and hucksters and the like. And it is, as you said, a global market, 24 hours a day, 7 days a week. And there are innovations that are challenging finance, and that's a really exciting thing. It's why I studied it so closely at MIT. But I would also say that if it's going to take off at all, inside a public policy framework.

And think about it, those projects, those five- or six thousand projects are raising money from the public. What else is an investment if it's not raising money from the public anticipating profit, and the public is hoping for a better retirement or a better vacation next year if they make some money on this crypto or that crypto?

I'd lastly say we've experimented historically with private forms of money. In the U.S., those of you listening might even remember something called the wildcat banking era, and it's in--from the 1830s to the 1860s, after President Jackson got rid of the Second Bank of the U.S.--sorry for the history lesson. But we had banks issuing bank notes and they competed. Philadelphia bank notes were different than Baltimore bank notes and even within Philadelphia had different bank notes competing, and the like. Well, that all had a lot of cost, a lot of problems and so forth, and Abraham Lincoln put in place an oversight called the Controller of the Currency, and then the Federal Reserve came 50 years later.

So, public money has a certain place around the globe. Private monies usually don't last that long. So, I don't think there's a long-term viability for five- or six thousand private forms of money. History tells us otherwise. So, in the meantime, I think it's worthwhile to have an investor protection regime placed around this.

MR. IGNATIUS: Let me ask you about one interesting new development in this area of regulation. The Wall Street Journal reported today that big U.S. and European banks had told the Basel Committee on Banking Supervision, which is one of the major global oversight bodies that protects against financial risk--that setting standards for regulations that would have strict capital requirements for bitcoin was something that they would oppose.

And I'm curious whether you've had a chance to look at that, whether you'd be in agreement with the position the banks took, or whether you'd want to push back on that.

MR. GENSLER: David, I have not taken a close look at that, so I don't know. I mean, holding highly volatile asset--bitcoin is that. It's a digital, scarce, I would even say speculative store of value. To hold appropriate capital, if it's on a bank's balance sheet, which seemed to fit into the remit that we've had in the past, that there be appropriate shock absorbers against the potential loss, but I haven't seen that specific release.

MR. IGNATIUS: Final quick question about crypto, and then I want to turn to another subject at the end. Basic question is if these cryptocurrencies, tokens, were subject to regulation, investor protection, is this basic process of money outside of banks and mediation good for the United States? Is this an aspect of financial development, financial engineering that, over the long run, will be beneficial for us as an economy, beneficial for investors, or does it give you basic worries?

MR. GENSLER: So, and I've said this in the classroom and I've said it to my colleagues around the globe in the official sector, I think it's been a catalyst for change. Nakamoto-san's innovation, not only bitcoin as the first sort of one but this whole distributed ledger technology has been a catalyst for change that, around the globe, central banks and the private sector are looking in on how we can enhance our payment systems, and enhancing our payment systems to make them 24 hours a day, 7 days a week, real time, at lower cost. And so, there's some competition right now going on there.

I also think it's raising new and interesting innovations around how exchanges work and how even potentially some forms of decentralized lending. We've had peer-to-peer lending for 15-20 years, we've experimented with it. This is a new type of experiment. So, those, I think, are really interesting innovations challenging the established business models.

On the other hand, I would say I don't think it is a good idea to wait until there's a spill in aisle three, and we hear in the loud speakers overhead, from The Washington Post and your competitors, clean up in aisle three, and then those of us in the official sector have to rush in and we've got congressional hearings, and we're sort of like, well, why wasn't anybody worried there was going to be a need for cleanup in aisle three. And I think at $2 trillion, 5- or 6,000 projects, that it would be better to be inside investor-consumer protection, inside the tax compliance and anti-money laundering and financial stability.

Now, if we don't do anything and there's never a spill in aisle three, great. But I think history tells us private forms of money don't last long. History tells us that investment contracts outside an investment protection remit, people get hurt; that if we have lending platforms that are outside either the securities perimeter or banking perimeter, that usually they get excess leverage and we have financial stability issues. These stable coins are acting almost like poker chips at the casino right now; so, add to the Wild West analogy. I mean, we've got a lot of casinos here in the Wild West and the poker chip is these stable coins, you know, at the casino gaming tables.

And so, I think there's just a lot of kind of warning signs and flashing lights that we might have a spill in aisle three, and I'd rather get ahead of it.

MR. IGNATIUS: So, that's a clear and ambitious agenda. Quick last question: You said recently that you're close to publishing an SEC report on the GameStop trading saga. How soon can we expect that, and can you give us any sense of how detailed that will be and where it will take us?

MR. GENSLER: Well, I don't want get ahead of my fellow commissioners. I'm honored to be chair of a five-member commission. And as I think I said last week, it's in front of my commissioners now, but pretty soon, and you know, a lot of the details are already out. So, maybe I'm lowering expectations a little bit, because, you know, organizations like The Washington Post and others have written extensively on the events in January.

MR. IGNATIUS: So, I want to thank Chair Gary Gensler for a fascinating discussion on one of the hottest topics in global finance. You've really given us, I think, a clear view of what's on your plate, what you're thinking about doing. Thanks for joining us.

MR. GENSLER: Thank you so much, David. Thank you all for listening.

MR. IGNATIUS: So, please come back to Washington Post Live. If you want to see what we’ve got coming up in terms of programming, go to to register for our future sessions.

Thank you for joining us today for this very interesting discussion of something on the cutting edge of finance.

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