SEC's Gensler says crypto exchanges trading against clients

Gary Gensler is ratcheting up his criticism of digital-asset exchanges, arguing that some platforms are shirking rules and may be betting against their own customers.

The U.S. Securities and Exchange Commission chairman reiterated Tuesday that most digital assets fall under his agency's purview and venues trading them should register with the regulator. The SEC is also beefing up its enforcement efforts, he added.

Speaking in an interview with Bloomberg News, Mr. Gensler said he's concerned that crypto exchanges aren't putting up proper walls between different parts of their businesses such as custody, market-making, and offering a trading venue. He said the "commingling" of services may not be in clients' best interests.

"Crypto's got a lot of those challenges — of platforms trading ahead of their customers," Mr. Gensler said. "In fact, they're trading against their customers often because they're market-marking against their customers."

The securities regulator also raised issues with stablecoins, digital assets that are typically pegged to the dollar or another fiat currency. The three largest stablecoins — Tether, USD Coin, and Binance USD — are all affiliated with exchanges, Mr. Gensler said in the interview.

"I don't think that's a coincidence," he said. "Each one of the three big ones were founded by the trading platforms to facilitate trading on those platforms and potentially avoid AML and KYC," he added, referring to anti-money laundering and know-your-customer controls.

The largest stablecoin, Tether, which has an $83 billion market value, has ties to the people behind the Bitfinex crypto exchange. Another major one, USDC was created by a consortium of several companies including Coinbase Global Inc. The world's biggest crypto exchange, Binance, is connected with Binance USD, which has a $17 billion market value.

In response to Mr. Gensler's comments, Binance referred to a blog where it says its stablecoin adheres to "strict guidelines and remaining transparent with the user community." Coinbase declined to comment and Bitfinex didn't immediately respond to a request.

On Tuesday, Coinbase's shares tumbled after its first-quarter revenue missed estimates and it warned its trading volumes in the current quarter will be lower than in the first. Bitcoin is down more than 50% since its all-time high in early November.

Concerns around stablecoins have also proliferated in the past week on Capitol Hill after TerraUSD, or UST, lost its peg to the dollar over the weekend.

UST is a so-called algorithmic stablecoin, meaning that it's not backed by assets like cash or cash-equivalents. Instead, it relies on trading and treasury management to maintain its value.

The backers of the TerraUSD are trying to raise about $1.5 billion to shore up the token after it crashed from its dollar peg, according to Kumar Gaurav, the founder and chief executive of crypto liquidity provider Cashaa.

The whole episode demonstrates the need for "some kind of framework" to assure investors that stablecoins are in fact stable, Sen. Mark Warner said in an interview on Tuesday.

"Frankly, maybe this disruption in the market may take some of the some of the air out of this very overheated balloon," said Mr. Warner, a Virginia Democrat.