Crypto market turmoil not finished yet, SEC's Gensler predicts

WASHINGTON — Securities and Exchange Commission Chairman Gary Gensler said Wednesday he worries that more investors will be harmed in cryptocurrency markets, after this month’s implosion of the stablecoin known as TerraUSD.

"I think a lot of these tokens will fail," Gensler told reporters after a House Appropriations Committee panel hearing Wednesday. "I fear that in crypto…there’s going to be a lot of people hurt, and that will undermine some of the confidence in markets and trust in markets writ large."

Crypto markets have shed more than $1 trillion of value over the past six months as the Federal Reserve started to unwind its easy-money policies and regulators dialed up their attention regarding crypto. The selloff accelerated in early May after the central bank lifted interest rates. TerraUSD, a token whose price was supposed to remain pegged to the dollar, suddenly dropped, along with the coin that was meant to back it, known as Luna.

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The turmoil has sparked unease in some corners about the possibility of contagion to other asset classes. Rostin Behnam, chairman of the Commodity Futures Trading Commission, cited Monday the potential for a "knock-on effect on traditional assets and traditional markets" if cryptocurrency prices fall sharply.

Gensler said Wednesday that exposure to crypto in SEC-registered asset managers isn’t significant but that the agency has less visibility into private funds and particularly in family offices. The SEC proposed a rule in January that would increase the amount and timeliness of confidential information that private-equity and hedge funds provide it through a document known as Form PF.

In a letter to shareholders, the crypto evangelist Mike Novogratz said Wednesday that his firm, Galaxy Digital Holdings Ltd. , invested in Luna in late 2020. Though he didn’t say how much the firm lost or gained on the investment, Galaxy reported earlier this month that sales of Luna were the biggest contributor to its $355 million in net realized gains on digital assets during the first quarter.

The SEC said earlier this month that it plans to add 20 investigators and litigators to its unit dedicated to cryptocurrency and cybersecurity enforcement, nearly doubling the unit’s size. In Wednesday’s hearing, which focused on the SEC’s budget, Gensler said he wished the agency had more.

"We’re really outpersonned," he said.

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Most cryptocurrencies likely meet the legal definition of a security that should be registered with the SEC, both Gensler and his predecessor, Jay Clayton, have said. No major cryptocurrency issuer or trading platform has opted in to the commission’s oversight, however.

A hallmark of Gensler’s tenure has been trying to persuade trading platforms such as Coinbase Global Inc. to be regulated as exchanges, saying many of the assets they list are securities. The platforms deny this, and many lawyers say it isn’t clear how an SEC-registered exchange could allow trading in securities that haven’t been registered with the commission.

Gensler said Wednesday the agency can use its authority to create exemptions where necessary.

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"There is a path forward that we’re talking with these exchanges about to do both: to get the platforms registered and have a pathway for the tokens as well," he said. "They should move towards getting registered or, you know, we’re going to be the cop on the beat, and we’re going to bring the enforcement actions."