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Lawmakers grill SEC Chairman Gensler during Senate hearing on crypto

Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), speaks during a hearing of the Senate Banking Committee in Washington, D.C., the United States, on Tuesday, July 30, 2013.

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Legislators, frustrated with the lack of obvious progress, will criticize Securities and Exchange Commission chairman Gary Gensler over the regulator's plans to regulate cryptocurrency markets.

Gensler, who is due to appear before the Senate Banking Committee on Tuesday at 10 a.m. ET, is expected to answer several questions about Bitcoin, stablecoins and other digital assets from Senators on both sides of the political aisle.

Prior to the hearing, Wall Street's top regulator said parts of the crypto market operate outside of the SEC's regulatory framework, protecting investors and customers from illegal activity.

"We just don't have enough investor protection in crypto financing, issuance, trading or lending," Gensler said in prepared remarks. "In all fairness, it's more like the Wild West or the old world of 'Buyer Beware' that existed before the securities laws were enacted right now. This asset class is rife with scams, fraud and abuse in certain applications."

He added that the SEC is keen to expand the existing agencies and, with the approval of Congress, broaden their jurisdiction to fill the loopholes in overseeing the crypto market.

In his remarks, Gensler said that the SEC would like legislative help to stop the offering and sale of crypto tokens, crypto trading and credit platforms, stablecoins, investment vehicles that enable exposure to digital assets or crypto derivatives, as well as in the custody of virtual assets.

It's unclear whether this will be enough to reassure Republicans on the committee who have been calling for months on the SEC to step up its efforts to sanction the crypto markets and illustrate the benefits they offer investors.

Ranking member Pat Toomey, R-Pa., Will resent Gensler about why it took so long to support these markets and explain why the SEC appears reluctant to approve various crypto assets, according to a Republican adviser.

The consultant spoke to CNBC on condition of anonymity in order to speak freely about the party leadership's private thoughts in front of public statements.

Crypto regulation is relatively new to the SEC. Gensler has repeatedly said that Congress needs to pass a bill to increase the power of the commission to effectively manage a $ 2 trillion market for bitcoin and other digital currencies.

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"We want to provide some basic safeguards against fraud and manipulation. The trading platforms they are on are not currently subject to any regulatory regime that protects them as if they were trading on the New York Stock Exchange," Gensler told CNBC in August.

At the time, Gensler said he hoped Congress can give the SEC enough powers to force trading platforms to register officially, but some defied his initial demands.

In a move that has frustrated crypto advocates, the SEC again postponed its decision last week to approve a Chicago Board of Exchange application to list and trade shares in VanEck's Bitcoin Trust.

The regulator spent months reviewing the application and is considered a guideline for a number of similar funds. This angered those who had hoped Gensler's arrival at the helm of the SEC would mean faster digital asset decisions.

While Republicans tended to want faster decisions from Gensler in order to harness the speed and efficiency of digital assets, Democrats have emphasized the need for accountability and oversight in what Gensler calls the digital "Wild West".

Democrats like Senator Sherrod Brown of Ohio, the chairman of the committee, and Senator Elizabeth Warren of Massachusetts have recognized that digital assets may have compelling uses, but they have also emphasized the need for caution.

"In the past year and a half, the gap between the stock market and the lives of most Americans has never been so painfully clear," Brown said in an opening speech released prior to the hearing. "Huge profits in the stock market and crypto assets have drawn millions to start investing."

"Chairman Gensler, it is your job to ensure that efficient markets are in harmony with strong enforcement that protects Americans from the worst greed and careless risks on Wall Street," Brown added, "even if challenging Practices or shady investment products means the previous chairmen were being ignored. "

Tuesday's hearing will also be the committee's first hearing with Gensler since the SEC approved new Nasdaq rules that require companies listed on their stock exchanges to meet certain race and gender goals.

Nasdaq regulations ensure corporate boards of directors meet gender and racial diversity requirements or require companies to provide written explanations of why they have not done so. The move angered the committee's Republicans, who say the explicit focus on race and gender could come at a heavy price.

The Democrats took the opposite view.

"Corporate America must do more to increase diversity in the boardroom," said Chairman Brown in August following the SEC's decision. "I applaud the SEC and Nasdaq for recognizing the benefits of a more inclusive and equitable economy for businesses and shareholders."

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