SEC Chair Gensler: Crypto Exchanges Need 'Protections' From Front-Running

U.S. Securities and Exchange Commission (SEC) chair Gary Gensler wants to see more oversight of crypto exchanges.

Speaking at a hearing of the Financial Services and General Government subcommittee of the House of Representatives, Gensler said that the SEC is trying to bring "similar protections" for consumers on crypto exchanges to those seen at the New York Stock Exchange or the Nasdaq. 

"Without a cop on the beat and some rules of the road, then market participants can front-run your orders," Gensler explained, referring to a practice that's prohibited in conventional financial markets. 

In crypto, front running involves gaining knowledge of pending transactions, which are publicly available on blockchains, and getting a transaction in ahead of its completion by bidding a higher gas price.

SEC cites DeFi as a challenge

Gensler also said that the crypto space is expanding rapidly. 

"Bitcoin we've all heard about, but there are over 80 other tokens that have over a billion-dollar market cap right now and 1,700 that have over a million dollars," he told the subcommittee. New data analytics would help the SEC monitor the sector but would also "stretch our resources."

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In prepared remarks delivered to the committee, Gensler described crypto as a "highly volatile and speculative asset class," making oversight on trading platforms critical. He noted that recently reported crypto trading volumes have ranged between $130 billion and $330 billion a day but that the figures are unreliable because they're unaudited and reflect trading on unregistered crypto exchanges.

Among other crypto-related challenges facing the SEC, Gensler pointed to crypto lending platforms and decentralized finance (DeFi) platforms, which "raise a number of challenges for investors and the SEC staff trying to protect them." 

The SEC, he added, is also seeking comment on crypto custody arrangements by broker-dealers.

Gensler's appointment was welcomed by many in the crypto space, who pointed to his having taught an MIT course on blockchain as well as a 2019 op-ed in which he described crypto and blockchain as a "catalyst for change." 

Since his confirmation as SEC chair, he's taken a more measured line on crypto, telling the 2021 FINRA conference that the agency "should be ready to bring cases involving issues such as crypto." 

He also highlighted the need for "rules of the road and a cop on the beat to protect everyday investors," a line he returned to in his remarks to the House of Representatives.