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SEC Chair Gensler Tells Capitol Hill That Cryptos, Stock Trading Platforms Need Updated Regulations

Mr. Gensler goes to Washington.

You’ve seen this movie before, and there’ll be sequels down the line.

Securities and Exchange Commission Chair Gary Gensler fired several shots across the regulatory bow at industries as wide-ranging as online stock trading and cryptocurrencies during a visit to Capitol Hill Tuesday (Sept. 14).

The common theme: Rules are needed, but rules should be structured in such a way that does not curtail innovation.

Nonetheless, given the tone and tenor of his testimony on the Hill before the Senate Banking Committee, it’s a fair bet that Robinhood is due to have some further scrutiny from the SEC and that controversial practices such as payment for order flow are going to be reshaped, if not, we’d hazard to guess, eliminated.

As Gensler said in his testimony, with particular focus on the equity markets, “Every so often, in response to new technologies, the SEC updates its rules around market structure. After the internet came along, buyers and sellers could meet in new trading venues … Retail investors can trade over commission-free brokerage apps. Telecommunication has transformed the speed of high frequency trading. That wasn’t the case even a few years ago.”

But against that backdrop, regulators have been relying on rules that stretch back decades and need a approach that would “freshen up” the market structure to reflect technology and changing trading activities. Gensler said it is important to facilitate greater competition and efficiency on an order-by-order basis.

“I believe payment for order flow and exchange rebates may present a number of conflicts of interest,” he said.  That spells some bumps ahead for Robinhood, where, as we’ve noted in this space before, Robinhood seems to be betting that the SEC won’t ban the practice.

“The idea of banning payment for order flow is pretty draconian,” Robinhood Chief Legal Officer Dan Gallagher, who is a former SEC commissioner, told Barron’s recently. “This is the revenue that provided us the ability to offer commission-free trading with no minimum balance.”  Someone’s going to win that bet – we’re just not which side. Incidentally, Robinhood is reportedly recruiting on college campuses to broaden and increase its customer base.

Read also: Robinhood: SEC Won’t Ban Payment for Order Flow

Taking Aim at Cryptos 

As for cryptos: “Right now, large parts of the field of crypto are sitting astride of — not operating within — regulatory frameworks that protect investors and consumers, guard against illicit activity, and ensure for financial stability,” Gensler told the senators. “Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending.” Evoking the by-now-familiar “Wild West” parallel, he said, “This asset class is rife with fraud, scams, and abuse in certain applications. We can do better.” The SEC is being tasked with working with slew of other regulators such as the Commodities Trading Futures Commission (CTFC) to bring investor protection to the crypto markets — with an eye on trading, on stablecoins and others.

Gensler expanded on his sentiments in an interview with CNBC, with particular reference to the news that it had been in contact, threatening to sue over the crypto exchange’s lending products.

Related: SEC Threatens Coinbase With Lawsuit Over Lending Scheme

Gensler said that “the laws are clear — the case law. The Supreme Court’s weighed in on this multiple times and said that many of these tokens do come under the securities laws.”

Later in the interview, during discussion on Robinhood, Gensler said that “it’s a positive that more Americans are investing in the market, but investing for the long run is different than trading daily or trading, hour to hour on an app … day trading often lowers your returns.”

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