Learn crypto from Biden’s SEC chair pick, part 2/3

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This is the second in a three-part series based on Gary Gensler’s extensive prior public statements on crypto. Here is part 1. A link to part 3 will appear here when it is published. 

Gary Gensler will likely become chairman for the U.S. Securities and Exchange Commission, or SEC, in the coming days. A professor at the Massachusetts Institute of Technology, or MIT, Gensler knows his way around crypto and blockchain, evident in his leadership of a class on the subject at MIT’s Sloan School of Management. 

While teaching the Fall 2018 semester, Gensler gave a wealth of insight into crypto regulation. In 2018, U.S. regulators were very much struggling to get a grip on the industry. But between the Bitcoin bull market that ended 2017 and the subsequent surge in initial coin offerings, it had become a top priority among the financial regulatory apparatus. Gensler’s thinking was reflective of many broad trends that has since come about.

Crypto exchanges as the regulatory chokepoint

One element of crypto regulation that Gensler gives particular attention to is exchanges. A paper that Gensler authored with several of his colleagues at MIT around the time laid out their centrality to regulators:

“As most jurisdictions around the globe do not yet have specific regulatory regimes governing cryptocurrencies, ICOs or related tokens, exchanges are a critical gateway to protect against illicit money transmissions.”

Which largely remains true. Also called “fiat on- and off-ramps” in legalese, crypto exchanges function as centralized intermediaries in a largely decentralized economic system. The U.S. government thus pressures exchanges first in the crypto industry. Gensler’s team argued that the situation was untenable:

“In the US to date, the only regulatory safeguards have been through state-administered money transmission regulations. This approach — regulating exchanges’ custodial duties in the same manner that Western Union and MoneyGram are regulated — has not been satisfactory.”

 The paper elaborated on the need to treat exchanges like exchanges, which register nationally: “To better protect the investing public, though, crypto-exchanges will need to be regulated more akin to traditional exchanges.”