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Agency chair focuses enforcement power on exchanges after earlier failures to subdue industry

WASHINGTON—Gary Gensler had seen enough.

In two years running the Securities and Exchange Commission, he said, he or his staff met dozens of times with cryptocurrency exchanges that were seeking special exemptions from the laws governing the rest of Wall Street. Those talks didn’t lead anywhere, and neither did Gensler’s efforts to cajole, prod and even threaten crypto into compliance.

Now the SEC is unleashing a barrage of enforcement actions against crypto’s biggest middlemen, in a fight that has existential stakes for the companies and could define Gensler’s legacy.

“I’ve been around finance for four decades,” Gensler said in an interview Tuesday. “I’ve never seen so much just noncompliance and hype masquerading as reality as I’ve seen in this field.”

The SEC this week sued Binance, the world’s largest crypto platform, and Coinbase, the biggest U.S. platform. It said they operated as securities exchanges without properly registering their business with the SEC. The agency hopes courts will order the firms to follow its rules for stock exchanges or stop trading crypto assets in the U.S.

The lawsuits, which the companies say are misguided, could take years to resolve. If the SEC lost either case, it would be a setback for the government’s ability to oversee the crypto market.

The enforcement actions mark the culmination of a strategic pivot by the SEC under Gensler. Before he took the agency’s helm, the SEC repeatedly sued individual cryptocurrencies—a potentially endless game of whack-a-mole in a market with thousands of assets. When Gensler took office in 2021, he urged enforcement staff to target the hubs that most investors use to buy and sell crypto.

Gensler says most crypto tokens have the hallmarks of securities: People buy them hoping to make a profit from the efforts of their creators and promoters. That means investors should get the same disclosures that public companies provide when they sell stock, Gensler says. Crypto-trading platforms should behave more like the New York Stock Exchange, he adds, and shed conflicts of interest and risky practices that haven’t been allowed on Wall Street since the 1930s.

Crypto exchanges say the SEC’s rules don’t make sense for their business models and that the tokens on their platforms aren’t securities. But calls to rein them in have increased since exchange FTX failed in November amid fraud claims.

Before the SEC sued Coinbase COIN 3.20%increase; green up pointing triangle, company representatives had more than 40 meetings with SEC officials dating to January 2018, according to legal records the company made available in April. In some meetings, the company shared why it thought it could safely list certain tokens, or explained how other products worked.

In late January, Coinbase said, the meetings abruptly stopped after the SEC enforcement division said a lawsuit would be forthcoming. The company asked for a meeting with Gensler. An aide to the chair didn’t reply.

“Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America,” Coinbase Chief Executive Brian Armstrong said on Twitter after the lawsuit was filed. “If we need to avail ourselves of the courts to get clarity, so be it.”

In the interview, Gensler criticized the industry’s arguments against regulation.

“They don’t really want to do the hard work to come into compliance—that’s what we’ve largely found,” said Gensler, 65 years old, a former Goldman Sachs partner. “They have to change their business model, and they might have to disclose things that they don’t find comfortable disclosing.”

Gensler’s tough stance on crypto reflects his hard-charging instincts, people who know him say. As the Commodity Futures Trading Commission chairman from 2009 to 2014, he was known for moving fast and making enemies. In a few years, he revamped regulation of the global swaps market, overcoming lawsuits from Wall Street firms in the process.

After the CFTC, Gensler assisted Hillary Clinton’s unsuccessful 2016 presidential bid, then taught a course on crypto and finance at the Massachusetts Institute of Technology. He was always fond of the university; as teenagers, Gensler said, he and his twin brother were involved in a study of “mathematically precocious youth.”

At MIT, Gensler sometimes praised bitcoin’s underlying technology, known as blockchain, and said cryptocurrencies could make payments cheaper. But he also expressed the same views that drive his strategy at the SEC: Most tokens are securities, and the trading platforms’ business models—combining exchange, broker and clearinghouse functions—involved inherent conflicts.

“We probably want these exchanges regulated,” he told a class of MIT students in 2018. He predicted—incorrectly—that the SEC would crack down on the trading platforms within a year or two.

Gensler’s close study of crypto earned the support of Sen. Cynthia Lummis (R., Wyo.), one of just three Republicans to back him in a tight confirmation vote to become SEC chair in 2021. Lummis’s state has tried to become a regulatory haven for crypto firms.

But pressure has been building from other corners for Gensler to crack down on crypto’s biggest players. A string of bankruptcies by crypto firms last year vaporized nearly $2 trillion of market value. The SEC was investigating FTX before its collapse last year.

“This is long overdue,” Rep. Brad Sherman (D., Calif.), a critic of the crypto industry, said of Gensler’s latest enforcement push. “There shouldn’t be any negotiation as to whether these exchanges follow the law.”

The SEC’s action comes at a critical time for crypto. Coinbase has posted five consecutive quarters of losses, the market has lost nearly two-thirds of its value since November 2021, and FTX’s demise hurt the industry’s credibility in Washington.

Trying to harness the industry through litigation is a long-term approach, though. Crypto entities have built war chests they now say they will spend fighting the SEC. Binance earned at least $11.6 billion from 2018 to 2021, according to the SEC’s lawsuit.

The commission has already spent three years trying to prove that just one major cryptocurrency, XRP, is a security. XRP was the world’s third-largest digital coin when the SEC sued its issuer, Ripple Labs, in December 2020.

Ripple says it expects to spend more than $200 million fighting the SEC’s claims. A judge could rule on Ripple’s case, deciding whether XRP is a security or not, as soon as this summer. Ripple says it will appeal if it loses.

When Gensler took over the SEC in 2021, the agency had brought dozens of enforcement actions against crypto firms and developers, but many of the targets were fairly minor. It had settled one case related to an exchange, which netted a $375,000 fine. Meanwhile, crypto firms found new ways to issue digital assets and list them on exchanges.

At the SEC, Gensler has taken a negative tone about the industry. He also doubled the size of the enforcement division’s special crypto unit, authorizing more trial lawyers to support a surge in litigation.

Gensler prodded the lawyers to look closer at exchanges and other middlemen. “That was a pivot,” he said this week.

He continued to meet with crypto advocates but often disappointed them. Six months into his tenure, he spoke by video with senior executives of Andreessen Horowitz, the top venture-capital firm investing in cryptocurrencies. He took a tough tone from the start, saying he thought almost all cryptocurrencies were securities and couldn’t be persuaded otherwise, according to people familiar with the matter.

After FTX’s fall, Gensler said on CNBC that crypto exchanges were running out of time to comply. At a conference in December, Gensler’s crypto enforcement chief, David Hirsch, said: “Enforcement is ready to stand up.”

Gensler’s aggressive approach at the SEC has created tension with the Commodity Futures Trading Commission, the agency he once led. He has given indications that he views the second-largest cryptocurrency, ether, as a security. The CFTC had already allowed exchanges it regulates to list futures on ether, saying it was a commodity like bitcoin.

Some CFTC officials were irked in July 2022 when the SEC filed an insider-trading case against a former manager at Coinbase, according to people familiar with the matter. CFTC officials thought some of the tokens named in the SEC’s lawsuit weren’t securities, the people said.

Two months ago, the CFTC filed its own enforcement lawsuit against Binance. The claims were similar to the SEC’s, though they focused on the sale of crypto derivatives.

If the SEC ultimately wins in court, it could restrict how Americans buy and sell digital assets beyond bitcoin and a limited number of others that courts say are commodities. So-called decentralized platforms are growing, but they aren’t as easy to use as the exchanges.

“If you’re just a retail user, if the big exchanges shut down, I don’t know what you do,” said Stephen Palley, a lawyer who co-chairs the crypto practice at Brown Rudnick.

On the other hand, a major court loss could call into question the SEC’s theory for regulating crypto—and deal a blow to Gensler’s legacy.

Gensler said the SEC would consider appealing any losses. But the SEC has forced many crypto firms to settle and hasn’t lost any trials to date against crypto defendants, he said.

“If you’re winning all your cases,” Gensler said, “you’re not bringing enough cases.”

Shantanu Narayen says blocking deals such as its proposed Figma takeover will lead to less investment in start-ups

Adobe’s chief executive has argued that a regulatory environment that prevents tech acquisitions will lead to less investment in start-ups, in a stark warning to competition authorities investigating the company’s proposed $20bn takeover of design software company Figma.

Shantanu Narayen told the Financial Times antitrust watchdogs should “worry about” how their decisions on dealmaking “enable innovation”.

“I’m a big believer that if companies don’t have exit strategies — and sometimes the exit strategy is within a larger company, and sometimes it is the IPO market — that will be a significant disincentive for people to invest in new start-ups,” he said.

The warning comes as the UK’s Competition and Markets Authority opened a probe into Adobe’s $20bn offer for Figma, which values the company at 50 times its annual recurring revenue. The regulator is expected to announce whether it will launch a full investigation this month, with similar action expected in the US and the EU.

Narayen is the latest leading tech executive who has gone public about the growing tendency by regulators to block takeover deals in recent years.

Last month, after the CMA blocked Microsoft’s $75bn acquisition of Activision Blizzard, both companies heavily criticised the UK for being unattractive to tech businesses and investment.

The CMA declined to comment on ongoing proceedings, but its chief executive Sarah Cardell told the UK government’s business and trade committee last month that: “Competition is a keystone and an absolutely foundational block of UK competitiveness. We want to have strong competition in markets. That promotes growth and innovation.”

Narayen said Adobe was engaging with all of the global regulators and was committed to working with them. Fostering a space for start-ups to grow to compete with the biggest players while still allowing tech mergers were “not mutually exclusive”, he argued.

“Whether you are the CMA, whether you’re the EU, whether you’re the US, or frankly, whether you’re an authority in any country on the planet right now, you should be saying: How can I create new venture?” said Narayen.

“If you don’t allow technology companies to invest, and if those technology companies don’t have global aspirations, they’re going to artificially limit what they can do.”

Adobe is aspiring to be the leader in generative AI, creating products that can quickly manipulate imagery. As excitement has grown over its use of the technology, Adobe’s shares have risen more than 25 per cent over the past six months.

On Thursday, the $192bn company expanded its AI offering, called Firefly, to business users. The system is able to generate images with the technology through text prompts and allows users to experiment with AI imagery overlaid on text. Firefly will be available through Google’s AI text chatbot Bard in the coming months.

The technology behind Firefly is trained on pictures in Adobe Stock, its library of stock images, as well as openly licensed content and public domain content where the copyright has expired. “Unlike other companies, [we] designed this to be commercially safe,” Narayen said.

Adobe’s move to limit the images used to train its AI system is designed to avoid copyright battles that have engulfed some AI companies and content rights holders.

Getty Images has filed two lawsuits against Stability AI, claiming that it misused its photos to train the Stable Diffusion AI image-generation system. The company is facing a class-action lawsuit in California from artists who claim its text-to-image generator misuses copyrighted works. Stability declined to comment.

- Note repurchases may be made from time to time through December 31, 2023 in privately negotiated transactions. Repurchases by the Company are subject to available liquidity, general market and economic conditions, alternate uses for the capital, and other factors, and there is no minimum principal amount of 2026 Notes that the Company is obligated to repurchase.

Weather expected to keep pushing smoke south into U.S.

Swaths of the eastern U.S. face another day of hazardous air conditions, with millions of Americans being advised to stay indoors as the smoke from Canadian wildfires continues to drift south.

Officials from multiple states extended health advisories until at least midnight Thursday, and residents from Massachusetts to North Carolina were advised to limit outdoor activities and mask up.

Dense smoke blanketed populous areas of the eastern U.S., turning the skies above New York City a hazy orange, disrupting air travel and altering school schedules.

Possible rain showers developing later Thursday and Friday in the Northeast and New England could help reduce the pollution, forecasters said, but air quality is expected to stay at unhealthy levels for several days.

“As long as these fires remain active, large and uncontained, there’s going to be continued smoke lofted into the atmosphere,” said Zack Taylor, a meteorologist with the National Weather Service in College Park, Md.

Several U.S. meteorologists said the weather and wind pattern responsible for pushing the wildfire smoke south from Canada is unlikely to change for the next several days.

Lee Hendricks, a meteorologist for the National Weather Service in Pittsburgh, said a high-pressure system in the West was helping to push smoke south into the U.S. Until the current weather pattern shifts, he said, “nothing is going to significantly improve.”

More than 40 million people live in areas that had air quality rated unhealthy or worse, according to AirNow, a government tracking site. The air-quality reading for the New York City area at one point Wednesday surpassed 400—well into the “hazardous” range that calls for all people to stay inside and reduce physical activity, AirNow said. An air-quality level above 300 is considered hazardous.

The smoky skies and thick air rattled parts of the country unaccustomed to dealing with the lingering effects of widespread wildfires. Officials reported a flood of 911 calls in Pennsylvania and an uptick in emergency-room visits in some parts of New York.

Canada’s wildfire season is off to a blistering start this year, with more than 8.1 million acres of land already burned by early June, according to the country’s natural-resources department. In a typical fire season, about 600,000 acres would have been burned by this point.

Air pollution can be particularly dangerous to children and those with underlying health conditions such as asthma and heart disease.

“We’re experiencing a pretty serious health threat from air pollution across really a wide swath of the U.S.,” said Paul Billings, national senior vice president of public policy at the American Lung Association. “I think the important thing for people to do during this crisis is to take extra care to protect themselves.”

Short-term exposure—a timeline of days to weeks—is associated with increased risk of exacerbating pre-existing respiratory conditions such as asthma, according to the Environmental Protection Agency.

Such exposure can also lead to coughing and difficulty breathing, as well as reduced lung function, heart attack, stroke and increased risk of emergency-room visits and hospital admissions, the EPA said.

The Kingdom’s efforts to gain a foothold in soccer and other sports, long laughed off, have gained powerful momentum with its dramatic entry into U.S. golf

Move will allow clients of world’s largest money manager to tap into venture debt sector

BlackRock is buying one of Europe’s biggest providers of loans to start-ups and technology companies, as the firm continues to expand its $45bn private credit business.

The world’s largest money manager is buying London-based Kreos Capital and taking on its 45 employees, BlackRock senior executive Stephan Caron said in an interview with the Financial Times, without disclosing the value of the transaction.

The move will allow BlackRock’s clients to tap into the growing venture debt sector — which involves providing loans to start-ups rather than taking equity stakes — at time when appetite for private debt is booming.

Since being founded in 1998, Kreos has lent more than €5.2bn to fast-growing start-ups in areas across tech and healthcare including food delivery company Delivery Hero and Israeli taxi-hailing app Gett.

The move by BlackRock is part of a general shift towards private credit which has grown rapidly into a $1.4tn market, helped by tougher capital requirements imposed after the global financial crisis that made it harder for banks to engage in speculative lending.

Many large investors are expanding further into the asset class as rising interest rates make floating rate loans more attractive.

Traditional asset manager such as Fidelity International and Deutsche Bank’s DWS have both signalled they are seeking to grow their lending businesses, while firms including US investment managers Nuveen and PGIM both recently struck large deals. 

“A lot of clients are looking to increase their allocations to private debt,” said Caron, BlackRock’s head of private debt for Europe, the Mideast and Africa.

“Venture debt is obviously a growing component of the private debt segment,” he added. “Europe is still very much under-penetrated, we still feel there is a great opportunity to grow the business organically.”

A report published in March by GP Bullhound, a tech investment and advisory firm, found that debt issuance to European tech companies doubled to €30.5bn last year compared with 2021.

Debt was around 30 per cent of all venture capital raised in European tech in 2022, according to figures from Dealroom, compared with around 16 per cent in the previous six years.

Falling prices for technology companies have prompted start-ups to increasingly turn to debt providers to extend their cash lifelines without diluting their shareholders or accepting a reduced valuation.

The collapse of Silicon Valley Bank, formerly a top lender to start-ups, has only increased demand for Kreos’s offering, according to its co-founder and general partner Mårten Vading.

BlackRock has been steadily building its so-called alternatives business — which largely comprises infrastructure, credit and private equity — over the past decade as investors flocked to the asset classes in the hunt for yield.

However, the business still only constitutes a tiny proportion of its overall assets under management and remains far smaller in the sector than market leaders including Blackstone.

BlackRock bought US credit firm Tennenbaum Capital Partners in 2018 to boost its lending business in the US. Last year, it also studied a bid for US investment giant Carlyle Group, the FT previously reported.

Kreos has targeted a net internal rate of return in the low teens. The investors in its funds include sovereign wealth funds, pensions and insurers.

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