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SEC Chair, Gensler, Calls for Increased Regulation on Security Backed Crypto Swaps

The key regulatory body on assets in the United States continues to build a fighting stance against the crypto industry.

Priced off of the Value of Securities

The Head of the Securities and Exchange Commission (SEC) left no room for speculation on the treatment of token-based securities when addressing the American Bar Association on July 21, 2021.

SEC Chair Gary Gensler’s statement came after Binance announced that it will cease offering stock tokens a day after the Hong Kong Securities and Futures Commission issued a warning citing the risks involved in participating in unregulated platforms.

Gensler said, "There are initiatives by a number of platforms to offer crypto tokens or other products that are priced off of the value of securities and operate like derivatives." 
Source: SEC calls for increased regulation for security backed swaps

The warning from the SEC leader specifically identified stock tokens as securities and that they fall within the definition of ‘regulated activities’ requiring permission by the regulator. 

Security-based swaps are financial contracts where two counterparties agree to exchange or ‘swap’ payments for securities. The 2010 Dodd-Frank Act made the SEC the regulatory regime to govern the portion of the market known as ‘security-based swaps. 

Derivative Assets 

The derivatives market was a $21 trillion industry in 2020. The sheer size of the opportunities in this market makes it an attractive investment to both the institutional and retail players.

“Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities" said the SEC chair in his prepared speech referring to crypto tokens. He continued that "These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime.”  
Source: Centralized and decentralized platforms in the finance space are all implicated by securities law

Stock tokens are derivatives of the underlying asset. If the asset is a security, the derivative takes the characteristic of a security. New regulations are being put in place for security-based swaps to increase transparency and reduce risk to the market. 

These changes include counterparty protection, requirements for capital and margin, internal risk management, supervision and chief compliance officers, trade acknowledgment, recordkeeping, and reporting procedures.  

Abra’s Settlement

The SEC’s concern is not new. In July 2020, the SEC charged Abra, a California-based crypto investment app developer, for offering and selling security-based swaps to retail investors registration. Abra agreed to the cease-and-desist order and paid $150,000 in fines. 

Apart from the SEC’s order, Abra also received an order from the Commodities Futures Trading Commission (CFTC) to cease-and-desist further off-exchange swaps and faced a fine of $150,000 for violations under the Commodities Exchange Act. 

The concerns of the SEC should be addressed through an established compliance regime, not rhetoric and palaver. 

Binance makes its position clear that they are shifting their commercial focus to other product offerings. It is possible for Binance to offer stock tokens in the future if it decides to comply with the conditions imposed by the regulators. 

Clarity in Regulation 

The current confusion in the crypto market is a result of unclear guidelines. Crypto regulations are developing, and the problem arises when it tries to fit into the traditional regulatory framework. 

The second problem that arises is the scope of the regulators’ jurisdiction. Crypto can take several forms and may exhibit different characteristics that may not mimic the existing asset classes. This problem has to be the first thing resolved. 

Companies operating with a high volume of transactions, such as Binance, cannot afford to jeopardize the entire operation. Regulatory clarity will eventually emerge, but until then, innovation must take a back seat until there is clearance to proceed. 

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