Biden's SEC Nominee Promises to Review GameStop Frenzy, Cryptocurrency

Cryptocurrencies like Bitcoin have seen increased attention due to recent events involving the Internet and markets (Flickr)

Gary Gensler, President Joe Biden’s nominee to head the Securities and Exchange Commission (SEC), testified in front of the Senate Banking Committee on March 2 that he would look into regulation regarding the GameStop trading issues and cryptocurrency. These topics have received great scrutiny after markets have recently seen volatile trading in GameStop, AMC, and other stocks. 

In January of this year, online retail investors created tremendous volatility in the equity market when they utilized social media platforms—notably Reddit—to pool ideas and invest in certain stocks like GameStop and AMC, which were heavily shorted by Wall Street hedge funds. This has raised concerns about the regulation of online collusion in these so-called “pump-and-dump” schemes, where investors agree to artificially inflate stock prices by buying and selling at a higher price in order to make a profit. 

During his testimony, Gensler alluded to his willingness to examine the “gamification” of stocks and analyze whether regulation is necessary. Gensler also noted the issues that can arise with the current structure of payment for order flow, which is a common practice where trading companies such as Citadel Securities pay online brokers such as Robinhood to send them their orders for execution. 

“We will look at market structure in the equity markets around payment for order flow when frankly just a couple – a handful – of financial firms are buying most of the retail flow in America,” Gensler said. Regulation in this area would likely seek to more clearly define and possibly limit online trading collaboration in hopes of reducing the risk of volatility. 

Gensler signaled a potential problem with a few major firms like Citadel Securities dominating the processing of orders for retail investors, saying, “What if a company ... concentrates and dominates a field? One firm now has 40 percent to 50 percent of the retail flow and so what does that do to pricing of capital in this country?” 

Additionally, the SEC nominee also expressed his concerns with the rise of cryptocurrencies. “Bitcoin and other cryptocurrencies brought new thinking to payments but raised new issues of investor protection we still need to attend to,” Gensler told lawmakers, describing them as “catalysts for change.”

The SEC has yet to adopt clear guidelines surrounding how people and companies should treat cryptocurrencies. Because it is a decentralized asset created by non-government bodies, Bitcoin is likely exempt from securities laws. However, Gensler has argued in the past that there is a “strong case” that digital currencies created and issued by companies have likely violated securities law. Regulation could impact the landscape of Bitcoin and other cryptocurrencies, which have generally hit record-high valuations to start 2021.