Meeting

C. Peter McColough Series on International Economics With Gary Gensler

Monday, December 4, 2023
Jonathan Ernst/Reuters
Speaker

Chair, U.S. Securities and Exchange Commission (SEC)

Presider

President, Council on Foreign Relations

Gary Gensler of the U.S. Securities and Exchange Commission (SEC) discusses investor protection, fair markets, capital formation, and the role of American capital markets in the global economy.

The C. Peter McColough Series on International Economics brings the world’s foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.

FROMAN: Well, good morning, everybody. Thank you for being here. I’m Mike Froman, president of the Council, and I am delighted to be here to welcome Gary Gensler, chair of the U.S. Securities and Exchange Commission. We’re joined by about seventy-five people in the room and about another 275 attending over Zoom, so thank you all for being here.

This is part of the C. Peter McColough Series on International Economics. Peter McColough was CEO of Xerox. He was on the CFR board for about a decade. He did international business, and he was very much focused on that nexus between domestic and international economic policy. And this series is very much about that, and the dialogue we’re going to have today is very much in that—in that spirit.

Gary’s last appearance was in 2010, I’m told, at CFR up in New York, so he’s had a—the world’s changed a little bit in the last thirteen years. He’s had some new experiences. We’re looking forward to hearing about them.

I’m fortunate to know Gary as a friend and as a former colleague at the Treasury Department in the ’90s, as well as when he joined the Obama administration. You know his background, an extremely distinguished background in finance, in academics, and in policy. I will say academically he was very much involved in cryptocurrency long before it was fashionable, teaching it at MIT.

What you may not know is that he’s also a great athlete in that he was a cockswain on the UPenn team. And a cockswain, just so you know, is the one person who faces forward when everybody else is looking backwards. And so Gary’s always been looking forward, trying to figure out where to steer the boat, make sure it doesn’t sink along the way.

So we’re looking forward to hearing about his perspective on the U.S. economy, the capital markets, the dollar. Gary’s going to give some remarks, and then we’ll have a brief fireside chat, and then open it up to questions from people in the room and on Zoom. Gary Gensler. (Applause.)

GENSLER: Well, I am truly honored to be here with you today. Mike, thank you so much for the kind introduction.

Now, you all know Mike has a very long and distinguished career in public service and he’s really achieved an awful lot. There are some things he’s been involved in, though, that you might not know, and you might question his judgment. But Mike actually was involved and participated in hiring me not once, but twice. He was Secretary Rubin’s chief of staff when I was first hired into the Clinton administration, so thank you, Mike. I’m sure there were other great candidates. You can look them up now. And then again he ran point for his law school friend Barack Obama, who was president-elect, and he ran point for the Obama-Biden transition selecting a Cabinet and some of us in smaller roles or lesser roles. So thank you twice. This time around you weren’t involved; it was others. But maybe behind the scenes. You never know.

Look, as is customary, I have to say that my remarks today and my—are my views as my—as chair of the SEC but not speaking on behalf of the Commission or the staff. I’ve gotten that out of the way.

I’m going to go back to 1965. I’m going to do a little bit of talk about things earlier as well. But in 1965, Valéry Giscard d’Estaing—then finance minister of France, later president of France—coined the term “exorbitant privilege.” He was referring to the privilege the U.S. enjoyed due to the dollar’s dominance, what some call the dollar’s hegemony. In choosing the word “exorbitant,” Giscard may have been suggesting the U.S. had unwarranted privilege. Though I would frame it differently—I wouldn’t say it’s unwarranted privilege—I think his message remains relevant: being the dominant world currency comes with responsibilities and challenges.

Now, those of you at the CFR might be wondering, what does the chair of the SEC have to say given the vast body of work on currency hegemons? I mean, Rogoff and others, I mean, have just written extensively on these matters. With your indulgence, I’ll summarize in three points.

First, the U.S. capital markets play an integral role in the dollar’s dominance.

Second, the financing privilege that accrues to us—to the U.S.—by that role is not only for us, but it’s anyone who borrows or, I would contend, invests through the dollar capital markets.

And then, third, though this privilege may be secure in the near term or even possibly in the intermediate term, that should not lead to complacency. We need to have an eye on the long term as well.

So let me do a little walk down history lane. Four centuries of history give us a window into the responsibilities and challenges that come from such privilege.

Preceding the U.S. dollar, the British pound sterling was dominant. Before that, as some of you know, it was the Dutch florin.

History tells us that currency dominance comes from a mix of factors. To be a leading economy, for sure that’s important, but not necessary. In fact, notably, it doesn’t always work that way.

The Dutch and British show us also how important a strong rule of law is, along with strong institutions. Both nations were amongst the earliest to have central banks, and, for their times, responsible and consistent monetary and fiscal policy.

My thesis, though, is that capital markets are integral to establishing and maintaining currency dominance. The allocation and pricing of money and risk—that’s what capital markets actually do—contributes to powerful network effects, or you might call them network economics, around the currency’s role in invoicing, and banking, and trade settlement that intersect with the network economics of the capital markets themselves.

It’s critical that capital markets are accessible—you can go in and out of them readily; that they’re deep, what those of us that are from markets call liquid; and that they’re trustworthy. Looking back at the Dutch, starting early in the seventeenth century they had important innovations in their capital markets. One of the world’s first central banks the first decade of the seventeenth century; the first joint stock company, that Dutch East India Company that you may have heard about; and, yes, the world’s first stock exchange—all Dutch.

Further, capital markets must have a recognized safe, liquid, and reliable asset in which to invest. The Dutch, they had their florins. It was safe.

Now let’s look at the Spanish just in that same time. The Spanish empire’s economy was multiple times larger than the Dutch, some estimate three to five times larger. Yet Spain had a history of debt defaults. We’ll come back to that later. Further, it lacked deep capital markets, a central bank, and a joint-stock corporation.

The Dutch experience, though, also tells us something about how to lose hegemony. They lost two wars in the late eighteenth century, first to the British, then to the French. But they also made a series of policy mistakes in the 1780s.

It took about forty years. By the 1820s, the pound became the international currency of choice. And once again, the currency hegemon was associated with a nation with a leading capital market. They had a safe, tradeable asset. It was called the British consol. Some of you might know they consolidated all their British debt into a consol—consolidation—and they had great liquidity.

Great Britain’s experience shows us something about maintaining a hegemony when you’re not the largest economy as well. You see, by the 1870s the U.S. had actually surpassed them as the largest economy. The pound sterling remained the hegemony, though, for roughly seven decades, even though we had surpassed them.

Several things happened to change the dynamic. Of course, there were two world wars that led to the diminution of the British empire power, but I contend there was another important aspect that—to this story, and it relates to the U.S.

We set up institutions and rules that were important to our capital markets. We set up a central bank in 1913. We established the securities laws and the SEC that I’m proud to chair in the 1930s. We developed a deep, tradeable Treasury market, in part because we had to fund those two world wars. And we also saw the broad public get significantly involved in the capital markets, starting in the 1920s. I don’t think it was just about what was happening in Great Britain; I think it also related to what was happening here in the U.S.

So where are we today? The U.S. dollar is dominant. You can see it measured in many different ways.

There’s mutually reinforcing effects of using the leading currency as a medium of exchange—in essence, to settle your transactions; a unit of account—in essence, to price your transactions; and then to store value. Those are the three core bits of what a currency is. Plato wrote about it if you want to go back to it. Aristotle wrote about it. Further, there are reinforcing network effects of being able to settle, price, invoice, borrow, invest in that dominant currency. And the U.S. dollar consistently has been leading in currency foreign exchange markets, 88 percent last year; SWIFT payments, 40-plus percent. The U.S. dollar is used in more than 60 percent of the world’s invoicing—and if you take Europe to the side, it’s over 70 percent in the rest of the world.

There are numerous ways to consider whether something’s a store of value. I know that a lot of people focus on central bank reserves, but it’s only one way to measure what is a store of value, and it’s about 58 percent if you’re curious. But also the private sector, significantly, uses the U.S. dollar as a store of value. Further, nearly 70 percent of other nations, weighted by their share of GDP, anchor their currency in part to the U.S. dollar.

Now let’s come to the U.S. capital markets. The U.S. capital markets are the deepest, most liquid in the world. We’re 40 percent of the world’s capital markets. We’re only 24 percent of the world’s economy, so we’re outsized. And you know we’re only 3 or 4 percent of the world’s population.

So where does that come? Why is that, that we’re 40-plus percent? I want to highlight a couple of important features of our markets.

First, there’s significant competition in our markets. It’s about 100 (trillion dollar), $110 trillion capital markets. But significant competition between banks and nonbanks alike. I think this is a feature of our markets. Our banking sector is about 23 trillion (dollars), to give you a sense of size. And in the U.S., debt capital markets facilitate fully three-quarters—75 percent—of debt financing of nonfinancial corporations. You go to Europe, you go to China, it’s the reverse. It’s only about 12 percent to 29 percent in those other jurisdictions in the capital markets. Dominantly, it’s 80—generally 80 percent in the bank markets, a very real distinction.

Second, we have significant and robust competition between both private and public capital markets. I think this is a feature of our markets, that you can raise capital and not necessarily tap the public markets, this $26 trillion private funds market.

And third, we have a remarkable history of financial innovation, whether it was money market funds, whether it was index funds, exchange-traded funds, securitization markets, the swaps markets. It’s not all without risk—there’s risk in these innovations—but we’re very innovative.

The size, depth, liquidity, and features of the U.S. capital markets bring privileges to anyone raising funds in our markets and lowers the cost of funding. Again, I believe that’s not just for the U.S. government; it’s for private sector, it’s around the globe.

Europe’s vibrant capital markets are only 15 percent of the world’s capital markets, versus our 40 (percent), but those markets are more fragmented, as you know. They don’t have one safe asset. They don’t have one stock exchange; you have to go to Frankfurt and Paris and so forth. In fact, Christine Lagarde recently called for a European-style SEC. Maybe Christine was looking over here at what we have. Thank you, Christine.

China’s capital markets are distinct from Europe and the U.S. in that they don’t have a fully convertible currency, of course. You can sort of challenge yourself to think about their rule of law, as well, and about their great institutions. Nonetheless, China has sizeable capital markets. Depending upon whether you measure their equity or fixed income, it’s between a quarter and 40 percent the size of our capital markets. Depends on whether you add Hong Kong in or not, but give or take. So it’s not small. And importantly, in the last ten years their growth rates are more than double what ours are, about 10 to 11 percent a year growth rates. We’re about 4 or 5 percent.

That brings me to responsibilities and challenges. The privilege of the dollar, of course, comes with them. And one of those responsibilities relates to the resiliency of the dollar-based financial system, the system that’s worldwide.

First, given the significant use of the dollar, offshore banking and funding markets, when stress occurs in those markets, it can disrupt the U.S. economy. So our Federal Reserve has set up international swap lines, international funding markets called repo markets. There’s a lot that our central bank has done to bolster the U.S. dollar markets overseas, ultimately because disruptions overseas in the dollar funding markets can hurt us back here in the U.S. So it’s about the U.S. and their dual mandate, but it comes with a responsibility.

Second, given how integrated our capital markets are, our instability also can flow overseas. We certainly saw that in ’08. We saw where our mortgage crisis reverberated overseas and then made our crisis even worse back here.

In terms of challenges, foremost, of course, is that nothing stands still. The economies, rule of law, capital markets of other countries will continue to evolve and compete. Technology and business models, they continue to change as well. Further, nation-states, including the U.S., dare I say can be prone to policy mistakes.

I’ll just mention one that we should avoid here in the U.S. Defaulting on our debt would be one such example, with significant negative consequences. Spain continually defaulted on their debt in the seventeenth century. Those two wars and the Dutch were—you know, led to default. It’s just not—it’s not a way to keep a safe asset a safe asset in capital markets.

Another challenge is something we’ve done collectively around the globe in the last fifty years. We have layered onto currencies an additional role that Plato and Aristotle and others would not have written about, and that is to guard against illicit activity, tax evasion, anti-money laundering, sanctions. We all know we’ve layered that over.

We fully live in a digital currency age. When you—when you get paid, when you pay your rent, when you buy your cup of coffee, that’s digital money. But layering this additional set of priorities about illicit activity and sanctions on top of our digital money creates incentives for nations and private actors alike to seek ways for possible alternatives to sidestep. Not so surprising what Satoshi Nakamoto came up with in 2008 on Halloween night around crypto, but also not so surprising that you have great nations banding together to sort of see can they have alternative payment mechanisms and messaging to SWIFT and other things.

So where does the SEC come in? Let me bring it back home, and then close and take great questions.

I take a long view on this as chair. If we invest in our capital markets now, it can benefit us in the decades to come. It also helps investors and issuers today in the near term, but I think it’s about the long term as well. To put this in context, let me mention a few of our projects.

First, as it relates to that $26 trillion Treasury market, we’ve been working closely with Secretary Yellen, with Chair Powell, Chair Behnam, and really on a whole set of reforms about our Treasury market, the safe asset. It’s the base of our capital markets. I would contend it’s, frankly, the base of the worldwide capital markets. These include registering and regulating Treasury dealers and platforms, as well as facilitating greater central clearing of the Treasurys themselves.

Second, we have numerous initiatives related to the efficiency of our other markets. Our equity markets there’s a series of things. We’ve finalized some rules around efficiency and competition in that $26 trillion private funds market as well.

Third, regarding access to our capital markets, we sorted through what was actually a pretty tough issue, a near twenty-year challenge of ensuring that Chinese-related companies listed in the U.S. would allow for the proper inspection and investigation of their auditors. You see, they still wanted access to this, the world’s leading capital markets. There’s about 1 (trillion dollars) to $2 trillion of Chinese-related companies here in the U.S.

And lastly, we have numerous initiatives related to resiliency: shortening our settlement cycle, money market reforms, cyber risk, and the like.

Though Giscard’s “exorbitant privilege” may be secure in the near term, I don’t think we can take anything for granted. I think it would be unwise to be complacent. We need to have our eye on the long term.

The U.S. capital markets play an integral role in the dollar’s dominance. And, further, history tells us that such privilege comes with responsibilities and challenges.

As part of our three-part mission at the SEC—which is about investors, issuers, and markets—our role is about promoting the efficiency and resiliency of our capital markets. I think it’s good for issuers and investors alike in the near term, but I also think it’s integral to our standing as a currency leader in the long term.

Mike? (Applause.)

FROMAN: Well, that was great. Thank you. And thank you for drawing the connections between the core SEC functions, the broader role of the dollar. And we rarely get a discussion that goes back four centuries here at the Council, so it’s nice to bring in a little bit of—

GENSLER: I even threw in Plato.

FROMAN: And Plato, Aristotle. Fantastic. So terrific. What a great way to open it.

Let me start a little bit where you left off, exorbitant privilege. Yes, it is an exorbitant privilege, as you said—or as Giscard said—but it’s not without its costs. And the goal of keeping the dollar as the central reserve currency of the world comes at the cost of a stronger dollar. You know, you and I both studied at the knee of Bob Rubin, who always said a strong dollar is in the interest of the United States. But you can have too much of a good thing. And a strong dollar also means pressure on manufacturing, pressure on exports. At what point does that exorbitant privilege actually become too much of a burden?

GENSLER: I think it’s a great point. There are tradeoffs. And Triffin wrote about this in the 1960s, about this dilemma, because it also leads to a requirement to have dollars offshore. And, thus, you run trade deficits. Or the challenges that Henry Kissinger sorted through when there were the petrodollars offshore, and how to recycle those, which also led to some real calamitous things in Latin America, because there’s—so, I think it’s a set of tradeoffs. But I do think, and maybe because I’m a capital markets guy, it does lower the cost of capital here in the U.S. And if we—if we were not the leading or the dominant currency, if somebody supplants us later in this century, our nation will be strong and well, but we’ll have higher cost of capital. And then there might be some other tradeoffs as well.

FROMAN: Let’s talk about that, because you mentioned in your remarks the effects of bad policy, the effect of sanctions. These sorts of things that can diminish the role of the dollar. And some efforts to try and find alternatives. One, what do you think are the biggest threats of the role of the dollar? I mean, have we weaponized the dollar and weaponized finance in such a way that we’re really driving people out of dollar-based transactions, dollar-based institutions? Or is it the threat of debt default? What do you think is the most—the greatest threat?

GENSLER: So, again, I don’t think it’s in the near term, but with an eye on the long term if other great nation-states, such as China, even India, surpasses economically, they’re in a possible competitive role. Or if Europe had a less fragmented set of capital markets. I do think that fragmentation—and that they don’t have one safe asset. But if a nation were to have that sort of dominant safe asset, then they could possibly surpass us. Now that’s not self-inflicted on us. That’s competitors.

If China, for instance, said one day, look, we’re going to have a fully convertible currency. We’re going to have a better rule of law that people trust. And they’d also have to have an offshore renminbi market. And we have this $10 (million) to $12 trillion offshore euro dollar market. Dollars can be created by foreign banks. That’s part of the burden you mentioned. In terms of what we could self-inflict, which we’d like to avoid, yes, defaults. That would be, let me say, a significant challenge to us. But I also think letting our capital markets get less efficient. That’s where I think we come in. It’s, like, we’ve got to constantly sort of focus on how do we keep them as efficient as possible.

You asked about sanctions. I think sanctions and broadly what we’ve done in fifty years of layering over digital money, another imperative—guarding against—a law enforcement imperative and a geopolitical imperative, layering that on for good public policy reasons comes with some tradeoffs. And so competitors are saying, how do I—how do I maybe sidestep that, circumvent that?

FROMAN: So when you see China and Russia agreeing to denominate their trade in oil, for example, or other trade, in something other than dollars, or Russia, Iran, others doing the same thing, how worried are you that—or is this all very much at the margin? And, you know, do you think that central banks are less willing to hold dollars than they used to be? Are you tracking that in a way that raises red flags?

GENSLER: I think each of these, how you—how one settles a transaction, how one prices a transaction, how one borrows and invests all interrelate and support one another. So I’m not worried in the near term about the U.S. dollar, because we’ve seen that dominance in each of these five or six aspects. And it’s not just about the central bank reserves. It is multiple aspects.

But, on the other hand, if you were a competitor, you’d say, well, let’s build up our invoicing. Let’s build up the settlement. Maybe we’ll just settle in renminbi and not price in renminbi. But build that up over time. Have offshore renminbi banking. Have offshore other features. And to slowly build it up. There’s this great Hemingway quote, if I might go there, but about, you know, when did you go bankrupt? And he said, well it—or how long did it take you to go bankrupt, I think was the question. And the answer is something, like, well it happened slowly over time, and then all at once.

And so it’s the—it’s the nature of what’s called network economics. Network economics were largely on the Dutch side. They were on the British side. The British maintained their hegemony for seventy years nearly before we surpassed them. But the four centuries also tells you, you usually have one. You don’t—you don’t stay in this 40-50 percent each circumstance. So when I look at the long term, I come back to let’s do everything we can to make sure that we have the most efficient—which means the lowest cost—but the most efficient capital markets that have access.

We’re also a destination. We have 1,100 foreign private issuers registered in our capital markets. Only about 175 from China, but there’s another 900 from elsewhere. We have 1,800 others that trade in our over the counter markets. We have $23 trillion of foreign investment in our capital markets. You see, being that destination of choice. But I’d say it’s more that our friends over at the U.S. Department of Treasury, the State Department, where you used to work, the National Security Council—like other nations will find a way to sidestep sanctions, and private sector actors figure out ways to sidestep anti-money laundering. I mean, you know, crypto is used by terrorists.

FROMAN: We’re going to get to crypto in a second, but before we do I wanted to just touch on China. You alluded to it in your—in your remarks. The agreement that you negotiated with the Chinese to have Chinese firms listed in the U.S. subject to the oversight board, the Accounting Oversight Board’s supervision, that was really quite a remarkable agreement, at a time when very little else positive was going on in the U.S.-China relationship. Is that an indication—is that a data point in support of your overall thesis that the U.S. capital markets are really absolutely key to our leadership? And why do you think China was willing, ultimately, to adhere to what we were pressing for, what you were pressing for, in order to maintain access to the U.S. markets?

GENSLER: To your first question, I think yes. I think when you have a market that’s as big, $110 trillion in size, and trades on every day trillions of dollars of transactions a day, you get better pricing. You just do. There’s more liquidity. When you’re buying and selling you have access. You’re in and out. And I think that from a policy perspective, leading folks in that government, in China’s government thought, you know, we don’t want to lose access. We might be forced to. I don’t think it was ever clear.

We were supported by the U.S. Congress late in 2020. In the prior administration, they passed something called the Holding Foreign Companies Accountable Act. And it gave the SEC leverage because it said that if within three years there wasn’t an agreement, and if a nation didn’t comply with this idea that auditors have to be audited or inspected, that they’d have to leave our capital markets. But I would compliment the Chinese leaders of—you know, I dealt with the Ministry of Finance and the CSRC, our counterparts. And they were very respectful. We were very respectful. We had ongoing dialogues, even when there were other parts of the administration not having a dialogue.

They kept open lines of communication. And we were firm with what we needed to do, but we were consistent in what we needed to do. And we entered into, like, a fifty- or sixty-page written statement of protocol and the procedures. Very detailed. And in 2022, the authorities there let—that was signed in August at ’22. They let the auditors in and fully inspect. And just last week again, the PCAOB announced that they were able to do it again this year. And I do think it’s because we have something that other nations want, this access to this remarkable capital markets. But it comes—it comes with obligations.

But it’s also a way that we keep the best capital markets. And we say, look, you have access but you have to give what Roosevelt called complete disclosure, and then with Paul Sarbanes put in place with Mike Oxley later that you’ve got this idea that somebody’s checking the numbers.

FROMAN: So, in the meantime, we’ve got this select committee of the House on the Chinese Communist Party, chaired by Congressman Gallagher, co-chaired by—or, vice-chaired by Krishnamoorthi.

GENSLER: You did an event with them.

FROMAN: They were—they spent two days at the Council up in New York. We did a great event up there with them. They’re talking about cutting off China’s access to U.S. capital, including passive capital—ETFs or index funds. That if U.S. investors are investing in such funds, they are indirectly supporting a whole range of Chinese firms, including firms that contribute to China’s military efforts or their intelligence efforts. If they proceed with that kind of recommendation, will we see the fragmentation of capital markets? And how do you—what effect will that have ultimately on the efficiency of the U.S. market and the ability of one country to rely on another country for funding?

GENSLER: Look, these are decisions that great nations from time to time take. And they sanction or partition out that somebody doesn’t have access to their capital markets. And I’m going to leave that to Congress and other parts of the Biden administration. But I would say that one of the assets we have in this capital market—U.S. capital markets, is that there’s access. That whether you’re a French company, or a Chinese company, or Indian company, Australian company, you can have access to these markets.

But I would secondly say, the dollar capital markets are significantly offshore as well. You can do a dollar loan from a bank. It could be a Chinese bank or a French bank. And that’s a $10 to $12 trillion market. Let me just put in kind of—the whole U.S. banking sectors is only 23 trillion (dollars), of which 3 trillion (dollars) is subsidiaries of foreign banks. So it’s really just about 20 trillion (dollars) of U.S. banks. The offshore dollar market is 12 trillion (dollars). So it’s not as all clear, at least in the lending and credit markets, what you could do. In the private—

FROMAN: On the equity side, if they’re preventing U.S. investors or investors in dollars from investing in Chinese firms, would they be able to do that?

GENSLER: Well, as a matter of congressional will and law, likely yes. But money has a way to find its way around the globe. And investors may invest in other ways.

FROMAN: Speaking of money finding his way around the globe, let’s talk about cryptocurrencies. And as I mentioned, you’ve been—

GENSLER: Except for, crypto’s not money.

FROMAN: Ah, OK, here we go. Excellent. All right. You’ve already preempted my question. (Laughter.)

GENSLER: You worked at MasterCard. You—

FROMAN: You’ve been involved in this for some time. And I really do commend Professor Gensler’s lectures online. They really are terrific.

GENSLER: Thank you.

FROMAN: It’s a great course. You’ve been very proactive in this area, and in somewhat a controversial way, in deeming virtually all cryptocurrencies—correct me if I’m wrong—as securities subject to SEC jurisdiction, and taking a number of enforcement actions to try and establish some parameters around that market. Many of which have been successful, a couple of which courts have pushed back on—Ripple, Greyscale, things of that sort. What are the lessons? First of all, taking one step back, where is there a legitimate role for cryptocurrencies in the U.S. economy? And what role can they play? Secondly, what lessons do you draw from the positive and the less positive experiences of enforcement that the SEC has faced in terms of how regulation should move forward looking ahead?

GENSLER: Let me say something about the SEC that was debated in the 1930s. We’re merit neutral. And this is going to be if you start asking me about climate as well, climate risk.

FROMAN: That’s next.

GENSLER: Yes. I kind of figured. It’s all the Cs—China, crypto, climate. We’ll see what he gets to something that’s not a C. But we’re merit neutral. But in terms of—

FROMAN: Merit neutral, what does that mean?

GENSLER: Merit neutral is that Congress debated whether a federal regulator—this is 1933—whether a federal regulator should actually pass on whether it was a good investment or not a good investment. And Congress decided, no. We’re largely disclosure based. We also have some other features about protecting the integrity of markets—anti-fraud, anti-manipulation, and the like. But we don’t get really involved in whether you should be investing in this company. And Roosevelt said, as long as there was complete disclosure—he called the 33 Act the Truth in Securities Act. That was the kind of core policy decision.

So now let me pull it up to crypto. Satoshi Nakamoto’s eight-page white paper—and if you haven’t read it, go read that. Don’t look at my course. And Halloween night in 2008, it’s published on a on a cypherpunk mailing list. It was about a ledger technology. It was about—it was—in essence, you might say it was competing with an accounting system. But it was a ledger technology, how to store data on a decentralized distributed ledger. That may or may not have uses. You were at MasterCard. I remember that you all got many patents in this area. I used to teach this at MIT and was impressed by all the patents MasterCard would have, even including one on fractional crypto banking, if I recall, that Mike might not even remember.

But that technology has not really taken off, but it could have some uses. That’s for the markets to figure out. Then there’s the other thing about, well, what about the movement of value on the internet, these 15(,000) to 25,000 tokens? And most of them have—the use case is raising money from the public. And the public is investing their money based upon the hope that it would go up in value and based on the efforts of other Well, that’s the definition of a security. And you don’t have to look to me. Just look to the Supreme Court. It’s the law of the land as written by the Supreme Court and reaffirmed multiple times.

Look, some of the use of crypto is to sidestep the sanctions and anti-money laundering rules that were put in place. And so is it surprising that we layer a law enforcement and geopolitical thing over our digital money? And, again, digital money already existed. And then you see fifteen or twenty years later some alternative Natoshi’s (sic; Satoshi’s), you know, paper? Is it surprising that you see that crypto’s used in ransomware attacks, and funding, you know, terrorism, and in so many other ways?

FROMAN: Is there any legitimate use for it, do you think?

GENSLER: Well, let’s just say that’s for the markets to figure out. But if it’s being used to—as an investment contract, that’s the legal term. But if it’s being used as an investment contract where the public is anticipating profits based on the efforts, a common enterprise, then it’s a security and it should give that full fair and truthful disclosure Roosevelt talked about. If it’s not that, like Bitcoin for a minute, it’s competing—as Nathaniel Popper’s book was, it’s like digital gold. Gold’s existed for 10,000-plus years. We humans kind of like it. But all the gold that’s ever been mined in the history of the world, I’m going to ask Mike a question. He’s pretty good at this stuff. How many Olympic size pools would it fit in?

FROMAN: Ten.

GENSLER: A little high, but you’re under the right order of magnitude. Four.

FROMAN: Four.

GENSLER: So I don’t know. If humans around the globe, seven billion people, want to invest in a digital asset, it’s kind of up to them. But if it’s an investment contract under securities laws, we need to protect the public. We need to protect the public. Crypto, I sometimes say it’s like the wild west, but it also has some similarities to the 1920s, before we had securities laws and we protected the public. It’s rife with fraud and manipulation. It’s rife with bad actors. It’s hucksters and the like.

FROMAN: Last question before we open it up. And you alluded to, the third—the third C, climate. We got a hundred thousand people right now in Dubai at COP-28 trying to advance the climate agenda. You’ve been very proactive here in thinking about climate disclosures, including scope three disclosures. A lot of—again, a lot of pushback in terms of the specifics of the proposal. But Europe is moving ahead with what they’re going to do. So I guess a couple of questions. One, when can we expect the final rule? What will it look like? This would be a great place to announce it? (Laughter.) And third, if we don’t move ahead with a final rule that’s equivalent to what Europe does, are we allowing Europe to set the rules for this area as they did with GDPR and privacy? Or is there a role that the U.S. needs to play?

GENSLER: And let me ground it again into we’re a securities regulator. We are not a climate risk regulator. We’re not a climate regulator. We’re not a greenhouse gas regulator. (Laughs.) And that means that companies, through their disclosures, speak to their investors. That’s their role. And we have an important role to make sure that those disclosures are consistent and comparable. Of the 1,000 largest companies—the so-called Russell 1,000, just two years ago in 2021 over 80 percent already made some climate risk disclosures. Fifty-seven percent were disclosing greenhouse gas, the scope one and scope two, primarily. Far fewer in the supply chain.

So you’ve already got that going on. And so how does some—an agency like ours enter into that and bring some consistency and comparability? I have no announcements for when we might do something, but we proposed something in the spring of ’21, and we got over 16,000 public comments. We never get—4(,000) or 5,000 is a big number. And often we get two hundred public comment letters on something we’re doing. I want to go to your second question. It’s, like, the capital markets around the globe, investors are using this information. We think of it through the lens of materiality, and those investors using the information. Other jurisdictions might be looking at it for other reasons. As you say, to lower climate, or greenhouse gas. That’s not our remit. We’re not in that line of work.

If we were not to finalize a rule, or if we finalized the rule and it’s overturned in the courts, either way. But if we don’t have a rule, I would mention that Europe’s framework says that anyone over a certain threshold, 150 million euros of business over there, has to comply with theirs. We also have the state of California. It’s not a member of the CFR, but I mean the state of California, Gavin Newsom signed something that has certain thresholds. So some significant number of U.S. public companies will have to comply with the European standards measured in significant numbers, thousands maybe.

I think if we finalize something, even if it’s different than Europe—and it will naturally, because we have different laws, we have different comment files. There’s always differences. But then we can have some discussions with the Europeans about what’s called substituted compliance possibly.

FROMAN: Right. Good. Let’s open it up here. Yes, please. And then we’ll also take if there are comments online from folks on Zoom.

Q: This is totally different. Esther Dyson from Wellville.

And I want to see you on crypto and raise you one, which is to—

GENSLER: See me and raise me one? But what currency are you using? (Laughter.)

Q: I’m not using crypto because I would say the problem with crypto is it has a valuation and it has a cost, but it doesn’t really have any intrinsic value. By contrast, health is an asset. It’s unfortunately not fungible. So it’s very hard to invest in it. And my question is, what we do think of some kind of a futures market where the price is somebody investing in health, whether it’s housing the homeless, or some kind of drugs, or some kind of care? And the outcome is the outcome versus the counterfactual of had that health intervention not happened. Who pays for it? Is a long-term insurance company or it’s us collectively? What do you—yeah, this is a prompt for you to hallucinate a little about, health an asset. (Laughter.)

FROMAN: Thank you, Esther.

GENSLER: Yeah. Thank you. To the first part of your question, look, there’s a real challenge around these thousands of crypto tokens as to what’s the there, there? What’s the use, as Mike asked about? We’re merit neutral. We’re just trying to drive to compliance that you actually make full fair and truthful disclosure about said token, and so forth. Which most of these tokens are not doing.

In terms of your second question, if somebody actually created a market for, whether it’s the risk—the health outcomes, or other risks, social outcomes and tried to trade it, they might be doing it with us. They might be a security. They may be a type of derivative that our sister agency, the Commodity Futures Trading Commission, does. I would say, if you’re thinking about it, you want to think about, all right, how do you create something that has enough liquidity? That there’s enough buyers and sellers? Because capital markets ultimately are about trading money and risk. And in this sense, is like some risk that you’d have to have enough people on both sides. You need people that, in essence, want to go long and want to go short. Want to provide the insurance, because you called it that, and people that need to buy the insurance.

FROMAN: I think we have one online, or one from our Zoom community, then we’ll come back into the room.

OPERATOR: We’ll take our next question from Rebecca Patterson.

Q: Good morning. Thank you so much, Chairman Gensler.

You mentioned tradeoffs. And one I am wrestling with. and I know that SEC studies as well, is the rise of the U.S. retail investor and the types of trading they’re doing. You know, on the positive side talking about tradeoffs, if they’re participating more that could help the depth of equity markets. It could help the dollar’s global role indirectly, and it also reflects innovation and democratization of markets. But on the risk side, I think some market participants believe these investors could exacerbate volatility in times of stress and that they might not be in a position from a household wealth perspective to take the kind of risk, or even understanding those risks. Things like zero-day options and some of the less liquid cryptocurrencies. It to me, it almost feels like financial markets are moving the same way as sports betting and becoming gamified. And so I’d really appreciate your perspective here. How are you seeing the tradeoffs when it comes to the retail investor these days? Thank you.

GENSLER: Thank you, Rebecca. As I mentioned as part of the little walk down history, I think it was one of the three things that we did in the U.S. in those interwar years, the retail investing public, everyday Americans, got significantly into the markets in those 1920s. And then it was a mess as well, because there weren’t rules of the road to protect those everyday investors. And, thus, you know, Roosevelt stood up the SEC and other things. I think if you look at the more recent history, we’ve seen a significant increase in retail, everyday investors in the markets. I’m going to measure it in one thing. In the last six years, we’ve gone from about thirty million separately managed accounts by everyday investors to, like, fifty-one or -two million. Now a lot of that’s on the back of robo-advising, and these robo-advisor apps can provide you advice for, I don’t know, twenty-five to fifty basis points, a quarter to a half a percent. And it’s automated, and so it’s more efficient and so forth.

I think it’s a great part of the U.S. capital markets. But it’s not without risk, Rebecca. And it’s why we need to have the proper disclosure, whether it’s proper disclosure in the crypto space—which I think Esther would say, well, there might not be there, there. But, you know, to do that. But across the whole market to ensure that the retail public, the investing public, can make their choices. But, again, we made a decision as a nation that we let investors make their choices, as long as people aren’t defrauding them and lying to them and they get the proper disclosure.

FROMAN: OK. Next question. Yes, this gentleman here.

Q: Thank you. Hi, Chair Gensler. Dante with Circle.

I loved your commentary about, you know, the future of money being dictated, almost like the past is prologue argument. And I just be curious, when you consider all of the countries around the world—from, you know, major economies like Europe and many others that have whole of economy regulatory frameworks like the Markets and Crypto Assets Framework for Europe, isn’t there a fear that the United States ends up becoming an outlier in the basic protections that the digital asset industry would need? That’s one part of the question.

The domestic part of the question is that I fear we are facing nothing short of a fintech constitutional crisis in the U.S. The president’s Working Group for Financial Markets has advised that, you know, we need additional authorities here to regulate the space effectively. But yet, Congress has failed to act. So I’d just be curious to get your views on the domestic tensions, and then this growing reality that internationally—

GENSLER: I just don’t accept the premise. I think that this field is so rife with fraud and manipulation. Your company’s stablecoin is used primarily in the casinos in this field. It’s used as a settlement token so people can trade crypto to crypto. It’s rarely being used to buy a cup of coffee. We already have digital money. It’s called bank account money. It could be more competitive. It could be less costly. And to some extent, crypto and stablecoins could be a spur to, you know, more efficient payment rails, the things that Mike used to work at MasterCard.

But defrauding the public is not good. All the bankruptcies in the crypto spaces are not good. It doesn’t instill confidence and trust of the everyday investors Rebecca asked about earlier as well. So, no, I’m not—I’m not—I’m worried about the investing public and the confidence that the people have in the markets. I worry about it for issuers as well, that issuers should get the benefit of markets that are, to the extent we can, free of fraud and manipulation. And I think this—there’s an awful lot of people selling their product. And when I was on Wall Street, I mean, I understood people market their product. But our clients are 330 million Americans. And anybody in the crypto field that wants to comply with the anti-money laundering laws, and the sanctions roles, and the Commodity Exchange Act laws, and, yes, the securities laws, great. But we do have some pretty good public policy on the books.

FROMAN: And the next question. Yes, this gentleman right here in the front.

Q: Thank you. Steve Myrow with Beacon Policy Advisors.

I want to move away from the letter C to two other letters, AI. We know about the predictive analytics rulemaking pending, but you’ve had several prior comments where you’ve raised in a sense of cost benefit of tech versus the risk, that AI poses some risks to financial stability going beyond the financial services companies. But, for example, I think you’ve mentioned the APIs from the tech companies. So I guess it’s a broader question of what role do you see for the SEC more broadly in terms of regulation of AI?

GENSLER: Let me start by saying I think artificial intelligence has already boosted U.S. productivity in the last five to ten years. I think it is a technology that’s being adopted in many parts of our economy. I mean, the postal service doesn’t have to read my scrawl on a written letter. When I put a check into the ATM, it can read it. It’s all AI, way before generative AI. And in finance, it’s being used already extensively in processing claims in insurance companies and back-office check processing, but also in sophisticated ways of called sentiment analysis, and the like. If this if this call is being—this meeting that we’re having here might be being picked up, for your words, Mike, not mine. So I think there’s a there, there. When I went to MIT, I actually got involved in the intersection of technology and finance, what a better place to do it but where I was. It’s crazy. And it was AI. And it was these digital currencies. And so I sort of wrote and even taught on that there as well. And I think it’s very real.

Now, you then turn to the SEC. I think that artificial intelligence already has changed some of what’s happening in the robo-advisor space, the broker-dealer space. It’s going to be more extensive in the latter 2020s than it is now, but you can narrowcast to each of us. You can micromarket and sort of sculpt a product, a pricing, and a message to each of us based upon all sorts of data about us. It could be how we drive our car. It could be how our air conditioning unit in our home is running, which might be connected to the internet. I don’t know what it will predict about my air conditioning use, but I’m just saying, you know, it’s all there.

From—our point of view is we think of it in a number of ways.

One, we put out a proposal with regard to conflicts of interest. Investment advisors and broker-dealers, if they’re using a covered technology in terms of their interaction with investors, are they putting their interests ahead of the investor’s or, as what is appropriate under the various laws, put the investor’s interests ahead of the platform? So that’s one area. We got a lot of comments. We’ll sort through those comments.

Two is the use of artificial intelligence potentially to defraud the markets—you know, deepfakes and the like. There was a moment this past summer—and we’ll bring it back to C, crypto—when somebody put out there that I had resigned. It was a chatbot that just—it was a fake. I hadn’t. Scott Snyder over here called me up and he said, you’d let me know if you resigned, right? And I go, no, and had to deny it, and Fox went with a story, and the New York Post went with stories, and everything. But for a moment crypto popped, and then crypto came back down. (Laughter.)

FROMAN: How much value is your resignation worth? (Laughter.)

GENSLER: I don’t know. I don’t know.

FROMAN: You didn’t calculate?

GENSLER: No, no.

But I would say this: There’s still a human behind the algorithm. And fraud is fraud, and fraudsters will try to use new tools.

But I think the hardest issue is I think that a financial stability measure of the future is going to be around AI. I think that there’s—again back to this concept of network effects and network economics, if we have one dominant data source for, let’s say, mortgage data, or we have one or two or three dominant base models, this—you know, the large language models, which will actually quickly turn to large video models too, there’s powerful network effects. We really only have three cloud providers, big cloud providers, in the U.S. Just imagine if it’s—AI is a service on top of it and they’ll have significant—I think it’ll be a financial stability event in the future and we’ll say, oh my God, I didn’t know we were all relying on the same models. But it’s what happens in finance. When you have monocultures, you tend towards a herding of one area.

What’s interesting is in China they might not have two or three or four models; they might end up with one centralized, you know, sort of official sector model. So it might actually lead to more fragility in their system.

FROMAN: We’re going to take the last two questions, one from the Zoom audience and then this gentleman here. And then we’ll give Gary the last word.

OPERATOR: We’ll take our next question from Andrew Gundlach.

Q: Good morning. Can you hear me?

FROMAN: Yeah.

GENSLER: Yes, Andrew. Please.

Q: Greetings.

Gary, I’d like to hear your thoughts on the exemptions to the advisor rules. Specifically after the Archegos blowup, which caused financial problems broadly across the financial system internationally, I’m curious, is the SEC’s view today that these are product issues—i.e., the securities swaps and leverage issues inside of the banks that could have been done better—or are there updates to the exemptions going back to the 2011 law that brought these in that, in a perfect world according to you, you’d like to have put into place to bring those regulations up to date? I’m just curious as to your thinking at this time about the exemptions.

GENSLER: Andrew, if I might ask, what—I’m not sure which exemptions. Are you talking about the whole private funds?

Q: Oh, sorry. No, the family—the single family office exemptions. Sorry. Sorry for being less than clear.

GENSLER: Oh. Just for the listener’s background, Congress decided in 2010 to make sure that many private funds—not all private funds—would register with the SEC: hedge funds, private equity, and the like. But there were some exceptions to that for family offices and venture capital, as well as some smaller funds below a certain threshold, and I think Andrew’s question is about that.

Look, I think that there’s a lot we learned through these experiences. You mentioned one where—one set of circumstances where I can’t speak to because of ongoing enforcement matters where we brought—we brought actions and we alleged in a complaint that’s public about—that we think that that actor, Archegos, had misled their counterparties.

But if I can zoom out a little bit, I do think that there’s risk in our system. Banks provide a significant amount of funding to hedge funds and family offices and sophisticated players. This is international banks as well as U.S. banks. And in that relationship—that’s often called the prime brokerage relationship—the banks compete with each other to get more of that prime brokerage relationship. And we’ve had a bit of an ebullient time, a frothy time in a sense, that the banks’ risk management maybe has led to an area where there’s a lot of hedge funds and private actors that are getting pretty liberal advancement of credit.

And we saw some of this breakdown even when the London metals problems happened about a—when the Ukraine war broke out. London’s metal market was in the same sort of relationship between the banks and the nonbanks.

FROMAN: Last one.

Q: Thanks very much and thanks for being here, Chairman Gensler. My name is Tomicah Tillemann. I work in venture capital and previously spent a long time in government. I’d like to do two questions quickly—one foreign, one domestic.

Geostrategically, the United States has a pretty poor track record in recent years of taking technologies that at the time seemed peripheral or unfashionable—like 5G, like a number of other—semiconductors, for example—and pushing those technologies offshore, and allowing those technologies to evolve to a point where they became immensely strategically important, and we then face a lot of very expensive consequences as we try to reshore that technology into the United States. Particularly given the challenges of centralization that you just spoke about very eloquently that we’re seeing in a variety of other fields, why are we taking the one technology that at an architectural level can bring decentralization into tech and taking steps that are resulting in moving it offshore or strangling it, which are the two likely outcomes of the SEC’s current efforts?

The other question that goes along with that just—

FROMAN: Let him just answer that one since we’re over time, OK?

Q: OK.

FROMAN: Thank you.

GENSLER: Yeah. So I guess I don’t accept your premise. I think that if you want to use blockchain technology, it’s—use it. Use it. It’s a tool. It’s a way that you can store digitally on a distributed ledger data, and you could—you can have a confirmed record on it.

If you want to raise money on the backs of that or you want to promote an investment contract, then give the public full, fair, and truthful disclosure. If you want to have an intermediary in the middle of this, an exchange or a broker-dealer, then properly get suited up and register to make sure that you protect the public.

We don’t give up the public policy initiatives that Congress has debated and that we as a nation pull together and think through in the face of a new, frankly, in this case accounting ledger to—what’s on top of it, these crypto assets? If it’s a stablecoin, it’s basically dollar-backed; then let’s make sure that—is it—it is acting like a money market fund? We have $6 trillion in money market funds and they seem to thrive here in the U.S., but they do have oversight and regulation.

So that’s my thoughts on that.

FROMAN: Chairman Gensler, thank you so much for sharing your thoughts with us, for coming back. We’ll see you in another thirteen years, if not earlier.

GENSLER: Oh, maybe earlier, Mike.

FROMAN: And please join me in thanking Chairman Gensler for being here. (Applause.) Great fun. (Applause.)

GENSLER: Thank you.

FROMAN: Great seeing you.

(END)

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