What signal does the SEC chairman's warning about virtual stocks on the blockchain send?

Gensler pledged to use all of the SEC’s enforcement resources to pursue those who may be offering such assets without registration.

SEC Chairman Gary Gensler has issued a warning about stock tokens emerging on the blockchain: Companies that sell tokens to U.S. investors may eventually face scrutiny from regulators.

In his speech on Wednesday, Gensler made it clear that tokens reflecting the performance of well-known companies such as Amazon and Tesla may still be regulated by U.S. securities laws, and he also promised to use all of the SEC’s enforcement resources to hold accountable those who may offer such assets without registration.

Gensler previously stated: “Whether it is equity tokens, security-backed stable value tokens, or other virtual products that provide synthetic exposure to underlying securities, these platforms, whether in decentralized or centralized finance, are subject to securities laws and must operate within our securities regime.”

Gensler specifically mentioned DeFi, a fast-growing corner of the cryptocurrency market where tokens that track the performance of large companies are quietly gaining ground.

Wall Street’s institutional players have been trying to move the stock market to the blockchain for years, but have not made substantial progress. In the fast-growing world of decentralized finance, DeFi innovators have successfully created synthetic versions of stocks that track some of the world’s largest companies.

Essentially, this is a crude model of the anti-establishment ethos of the cryptocurrency world being applied to the stock market.

Over the past year, Mirror Protocol and Synthetix have created synthetic versions of Tesla Inc, Apple, Amazon and other big stocks, and even some popular exchange-traded funds. These tokens, and the programs that allow them to trade, are designed to mirror the prices of the securities they track without actually buying or selling the real stocks and ETFs involved.

So far, synthetic stock trading volumes on DeFi are a fraction of those on regulated exchanges. But for cryptocurrency enthusiasts, the potential upside is huge.

Synthetic shares join a strange new world of assets, such as digital artworks now traded on blockchains, yet unlike modern art, these instruments raise questions about how they will fit into a global stock market and brokerage industry governed by thousands of pages of rules in dozens of countries. For now, it’s a case of innovation far ahead of regulation.

But some in the industry are pulling out after it sparked regulatory scrutiny, with cryptocurrency exchange Binance Holdings announcing last week that it would phase out support for tokens pegged to stocks.

In this regard, Gensler has repeatedly stated that cryptocurrencies need more supervision. In fact, as early as May of this year, he said: "I look forward to working with Congress and other regulators to fill gaps in investor protection. The time is ripe for digital token exchanges to develop additional rules, and lawmakers need to be urged to pass legislation to give the SEC the power to regulate trading venues."