Sen. Pat Toomey on the need for clarity on crypto regulations

Sen. Pat Toomey (R-Penn.) joins “Squawk Box” discuss his questioning of SEC chair Gary Gensler on crypto regulation. For access to live and exclusive video from CNBC subscribe to CNBC PRO:

Securities and Exchange Commission Chairman Gary Gensler on Tuesday assured lawmakers that Wall Street’s top regulator is working overtime to create a set of rules to oversee the volatile cryptocurrency markets while balancing the interests of American innovators.

Gensler told the Senate Banking Committee that he and his team are trying to protect investors through better regulation of the thousands of new digital assets and coins, as well as oversight of the more-familiar bitcoin and ether markets.

The SEC chief noted the enormity of the task, telling Sen. Catherine Cortez Masto, D-Nev., that the regulator could use “a lot more people” to evaluate the 6,000 novel digital “projects” and determine whether they all qualify as securities under U.S. law.

“Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending,” Gensler said in prepared remarks. “Frankly, at this time, it’s more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.”

Still, some lawmakers pressured Gensler to pick up the pace, arguing the opaque definitions and an uncertain marketplace not only lead to unchecked speculation but could also stifle innovation.

Sen. Pat Toomey, a Pennsylvania Republican and the committee’s ranking member, pressed Gensler early in the hearing over whether stablecoins meet the definition of a security since investors don’t necessarily expect those assets to return a profit.

Stablecoins are a type of cryptocurrency linked one-for-one to dollars or other traditional currencies and, as such, tend to be less volatile than their peers in the asset class.

“My whole point is, I think we need clarity on this,” Toomey said. “I think you should publicly disclose this. … And we certainly shouldn’t be taking enforcement action against somebody without having first provided that clarity.”

But where Toomey and his Republican colleagues voiced concern about the SEC’s potential to stifle innovation without a public set of guidelines, Democrats tended to highlight speculative risk they see as rampant in the cryptocurrency market.

Sen. Mark Warner, D-Va., jokingly criticized Gensler for putting only one “wild” in his description of the cryptocurrency industry as the “Wild West” of financial regulation.

“As someone who shares some of your concerns about crypto, I will acknowledge that you only put one ‘Wild’ in front of ‘West,’ as opposed to two,” he quipped. “As somebody who managed to do pretty well financially because of innovation, I’m all in. But we do need some guidance. We do need some direction.”

“I would go to the two ‘Wilds’ in terms of the description of this area, as good as some of the innovation is,” he added.

Controversial practice under scrutiny

Lawmakers also peppered Gensler with questions about the SEC’s ongoing analysis of payment for order flow, a controversial practice that online brokerages such as Robinhood Markets use to make money.

Firms such as Robinhood sell their customers’ trades to market makers such as Citadel Securities that execute the buy and sell orders. Market makers generate profits by pocketing the difference between the price at which they buy shares on the open market and the price they receive from selling them to Robinhood clients.

That means there is an incentive for market makers to inflate the price they quote to Robinhood’s customers. And given Citadel’s commanding market share, some regulators are concerned that investors may not be getting the best deal, since online brokerages themselves have an incentive to keep rosy relations with the companies that buy their trading volume.

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