WHEN: Today, Wednesday, February 14, 2024
WHERE: CNBC’s “Squawk Box”
Following is the unofficial transcript of a CNBC interview with SEC Chair Gary Gensler on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Wednesday, February 14. Following is a link to video on CNBC.com: https://www.cnbc.com/video/2024/02/14/sec-chair-gensler-crypto-is-a-field-thats-been-rife-with-fraud-and-manipulation.html.
All references must be sourced to CNBC.
ANDREW ROSS SORKIN: It has now been just over a month since the SEC approved a slate of spot bitcoin ETFs open trading in cryptocurrency markets to a wider group of investors. Bitcoin itself has jumped in recent days. This morning, you can take a look right now. It’s over $50,000, sitting at just about $51,601. Joining us now on the set first time to talk about bitcoin and a lot more is SEC Chair Gary Gensler. Good morning.
GARY GENSLER: Good morning. Good to be with you.
SORKIN: So, it’s a month later, and I think we’re all curious about how you think this is going, not just in terms of what’s happened in the price, but in terms of what you think is happening inside this market and whether you think it’s, quote/unquote, working.
GENSLER: Well, look, we focus on investor protection and, of course, the issuers raising money. So, this product, we’ve had similar products in gold and silver, ETFs.
SORKIN: Right.
GENSLER: You call them, they’re technically exchange traded products. And we approved a group of about 11 at one time. This was not the first way you could buy or express a risk in bitcoin. But as we like to say, we’re merit neutral. This was not in any way like an approval of bitcoin. That existed. It’s just how to trade it in these exchange traded products.
SORKIN: We’ve had both futures based ether and bitcoin ETF, you know, before, and I’m curious sort of how you think this is going to impact the price of these things, given that — by the way, interesting, was it Pomp who was just on — Anthony Pompliano was just on earlier this week and was saying that so few bitcoins are actually moving, and what we should think of that.
JOE KERNEN: And merit neutral — I think it’s a little less than neutral, Mr. Chairman. I think it almost was, we called it grudgingly, when you finally got. From the court case, sort of forced in it. Is it really just neutral, or wasn’t there a little bit of a — we’re not sure about this thing, and buyer beware?
GENSLER: Joe, let me say it this way.
KERNEN: Yeah?
GENSLER: We’re merit neutral is somebody’s complying with the laws.
KERNEN: OK.
GENSLER: So, if they’re giving full, fair and truthful disclosures to the American public who gets to decide on their investments.
SORKIN: Right.
GENSLER: Okay?
KERNEN: You’re so smart. You’re at MIT and people listen to your — what you think about bitcoin. It’s troublesome to some — to me, if I — if I look at it, and I see all the merits of it, and someone that taught about it and understands it seems to have an opinion that maybe it’s — I don’t know — pet rock-ish or something.
GENSLER: All right. I got your — I get your words about pet rocks and so forth, but I think we also have an investor education responsibility at the SEC, particularly about those investments that are non-compliant with either the securities laws —
KERNEN: Or commodities.
GENSLER: — commodities laws and so forth. So, here we have an asset class, all of these 15,000, 20,000 crypto tokens.
KERNEN: Yeah.
GENSLER: Many of which, without prejudging any one, many of which were actually something called investment contracts or securities, and the platforms upon which you trade, the intermediaries. They’re not like in this building, Nasdaq, that’s — that has protections and, against fraud, and manipulation and the like.
KERNEN: Just seeing people lose their shirt with Nasdaq stocks, too.
GENSLER: You can lose because there’s risk. There’s risk in investments, but what we try do as a society take some of the fraud and manipulation risk out of the markets by regulation.
BECKY QUICK: Is that the problem, though? It’s not necessarily the bitcoin the underlying asset, but more the fraud and the potential for fraudsters to use it that is —
GENSLER: Well, this is a field, Becky, that’s been rife with fraud and manipulation. And look at all the bankruptcies. And you’ve had on this set —
KERNEN: Right.
GENSLER: — people talking about those various bankruptcies, and it’s not just one entity. It’s entity after entity after entity, and then investors are just lining up in the bankruptcy court.
SORKIN: What do you make of and this goes to the underlying piece of this. You’ve heard Jamie Dimon say that he would close it down, that basically bitcoin, you’ve seen the comments, right?
GENSLER: I have heard him say that.
SORKIN: It’s not just that he closed it down. He would say it’s, you know, used by drug dealers and used by folks doing all sorts of illicit and terrible things. There’s very few things that trade today that people talk about like that. Now, there are obviously frauds and things that happen, but maybe not like this.
KERNEN: Like the dollar, is like 100 times more.
SORKIN: That’s your perspective. I’m curious how you think about that.
KERNEN: That’s true, though. This is how much has been money laundered with bitcoin. This is how much — this is bitcoin. This is —
SORKIN: No, no. Yes, Joe, but, look, here’s the Jamie Dimon quote: the only true use case for it is for criminals, drug traffickers, money laundering and tax avoidance.
KERNEN: That’s his opinion.
SORKIN: I know that —
KERNEN: That’s his opinion.
SORKIN: We have a guest, Joe. What is your opinion? And what is your opinion that we have something trading on in the exchange for the public that has this type of use case at least as described by the president of one of the largest financial institutions in the country?
GENSLER: It is — it’s the leading market share — it’s the leading market share in ransomware, and that’s publicly known.
KERNEN: Right.
GENSLER: You know, it’s the — it’s the token of choice for ransomware. Joe, if I can say, the U.S. dollar, the euro or the yen, you have the whole society using it as a medium of exchange. We buy our cups of coffee, as I see here.
SORKIN: Right.
GENSLER: We get paid in dollars or yen or euro. And you have a whole central bank, and support for one currency generally per economic region.
KERNEN: Right.
GENSLER: That we don’t have here. So there is a very real economic difference.
KERNEN: Which is the part of the attractions, since it’s decentralized and you can’t have — you can’t have a profligate central bank.
GENSLER: It’s not that decentralized, Joe.
KERNEN: I know you’re saying because of the ETFs. But –
GENSLER: Not decentralized because look how finance tends toward centralization since antiquity.
KERNEN: Right.
GENSLER: So, what do we have? We have a handful of three to six core so-called crypto —
KERNEN: I understand. The asset itself, the way that —
GENSLER: That’s how the accounting ledger.
KERNEN: Right. That’s how the ledger —
GENSLER: How many times are people on this show that say, I don’t want to invest in something because how the books and records are kept? I mean, Joe, really? It’s just an accounting ledger. A clever —
KERNEN: It’s in a ledger that everyone has. That everyone has and can’t be double counted. It’s almost immutable and that’s why people think it has an inherit value.
GENSLER: So, do you trust it more than an Oracle database or you trust it more —
KERNEN: I trust it more than a lot of — the bitcoin bulls say they trust it a lot more than the central bank that enables the fiscal authorities to spend money to the tune of $33 trillion.
GENSLER: That’s everybody’s investment choice, but —
KERNEN: And then I think about how many things can be used in a deleterious way. Of course, but that doesn’t — it has nothing do with the underlying thing that you’re using itself. I mean, I can go run a car into a parade and then run over — that doesn’t mean we shouldn’t have cars. Does it?
GENSLER: No. You should have cars.
KERNEN: I didn’t want to use guns because, God, I don’t want to trigger, so to speak, anyone on the set, but —
GENSLER: When the use case of a particular thing that you’re buying and selling as an investment, it’s just speculative investment.
KERNEN: How many of the 90 percent of the people that own bitcoin use it for ransomware? For — there must be —
GENSLER: I don’t have —
KERNEN: — well, there’s another use case that makes it so attractive that so many people —
GENSLER: Speculative investing.
SORKIN: Right. Speculative investing — that’s what — okay. Let me ask a separate question, which is just to pivot this because I think the next sort of order event question is what happens to Ethereum? For those in the crypto world, they all want to know how you’re thinking about that. And really, if Ethereum is a security, you know, how does that analysis differ from how you would think about bitcoin?
GENSLER: I — what we did in January was cabin to one set of filings. We have other filings. You’re absolutely right, in front of us, but I’m not going to prejudge it for you or the audience. That’s something a five-member commission discusses and —
SORKIN: Right.
GENSLER: — reviews.
SORKIN: Let me ask you a different question which has to do with indexing. So much of our market is focused on indexes. And you focus historically, or at least the SEC is historically focused on individual securities, right, individual companies and the like. I’m curious whether you think that the system as it is today actually is working in the right way? Meaning a lot of the valuations today you could ascribe to the fact — to the fact that certain securities are in certain indexes? It relates to what’s happening to bitcoin, by the way.
GENSLER: So it’s a great innovation going back decades ago, Jack Vogel and —
SORKIN: Right.
GENSLER: — as you know. You probably interviewed him when he was still alive.
SORKIN: Yes, uh-huh.
GENSLER: Invented this idea that you can democratize finance, that rather than buying individual stocks, you can buy the basket. Why buy the needle when you can buy the haystack he would say. And so, it was very cost efficient and it’s the way the American public can really participate in the stock market at very low cost. It’s also led to some concentration, some centralization in finance, because when you look at the large index providers, if you’re in the index or not in the index, it can be very costly.
SORKIN: In this case, it’s a handful — but the other piece of it is, in these cases, it’s a handful of stocks which often represent a majority of the entire index.
GENSLER: — individual value.
KERNEN: The reason you’re looking for needle in the haystack is to find the needle. Get rid of all the hay. Who wants the haystack? That makes no sense.
GENSLER: But actually, an economist, Joe, you know this and studied it.
KERNEN: But I thought about it. It’s like —
GENSLER: No, but they’ve studied it, that you get the benefit of diversity.
KERNEN: And Vanguard does not —
QUICK: Five hundred guesses.
KERNEN: Vanguard doesn’t have a bitcoin, right? That’s — they don’t —
SORKIN: Vanguard is not doing it yet. Only ones — they only have the biggies that didn’t do it, correct?
KERNEN: Yeah. I don’t think Vanguard has —
GENSLER: Well, they’re not — they were not — they did not submit an application.
KERNEN: Right, exactly.
SORKIN: Do you expect — if we’re all sitting here at this table together in a year from now — that this dozen or so approved ETFs, that there’s only two or three even more concentrated or do you think that there’s going to be, you know, dozens of these things?
GENSLER: That’s really up to the market to decide, but what you saw when this happened is, fees came down dramatically. There was a bit of an investors’ benefit because there was a bit of a competition there. Investors also benefited from better disclosure. They have to do things called registering with Securities and Exchange Commission on those products. And investors got the benefit of any surveillance by the various stock exchanges. But, again, these are highly speculative, risky assets in which to invest
SORKIN: Let me pivot again to a big head headline happened last night. We just talked to the CEO of the company, I don’t know if you’re watching, CEO of Lyft just moments ago. That stock popped in this remarkable way in part in the press release, they had an extra zero on their margin for the quarter. What is the SEC think about something like that? Is that something where you’d fine a company for that kind of mistake? Is that something where you say, that’s part of the business? Obviously, investors who bought on that — it might have been algorithm trading? I want to actually talk about the impact of that as well.
GENSLER: Look, I think it’s the responsibility of companies to ensure that they put out information to the public that’s accurate. And I don’t — I can’t speak to that one matter. I don’t even — you’re telling me something I learned about a half an hour ago. But in general, companies are supposed to put out accurate information to the public.
SORKIN: But when they don’t —
QUICK: If it’s an accident.
SORKIN: Let’s say it’s an accident. Let’s say correction happens immediately. We can take Lyft out of this and say that the Sorkin-Quick-Kernen and Co., we accidentally put out a —
GENSLER: Kernen especially.
SORKIN: Kernen especially put a press release accidentally with some misinformation. We corrected it within ten minutes. It was clearly not intentional on our behalf or on our part. Is somebody from the SEC calling us today and saying, hey, guys, we got a problem, we’re going to have to send you a fine… How does the SEC think about these things?
GENSLER: Let me see if I can generalize and pivot to artificial intelligence. I gave a talk yesterday up at Yale about it, and so, it’s sort of like, what is the liability or responsibility of somebody using an A.I. model and the A.I. model might hallucinate. And look, we really don’t want our advisers hallucinating on mushrooms and you don’t really want your advisers to hallucinate with A.I. There’s still a responsibility to ensure that you have accurate information that you’re putting out, and with the use of A.I., that you have certain guardrails in place, especially if you knowingly know that it might hallucinate or know that it might front run in a market.
QUICK: I mean, that’s an interesting idea. This morning, I was looking at it, and it was algorithmic trading that bought into this. Most humans didn’t react fastly enough or quickly — wouldn’t have reacted quickly enough. If you had a human eye checking it over, you might not have thought it was rational, about a 500-basis point increase in projections for your margins.
GENSLER: And, Becky, I think and, again, stepping aside from that one event last night. I really just learned about it, but whether it’s a mistake or whether it’s intentional, because also you could have people trying to defraud the market by putting out fake news releases.
SORKIN: Right.
QUICK: Sure.
GENSLER: And so bad actors have a new tool to try to defraud the market.
SORKIN: Right.
GENSLER: And that is to protect the public from that.
QUICK: How much empathy do you have or sympathy do you have for algorithmic trading though? I mean, if it’s —
GENSLER: Well, it’s a tool. It’s existed — algorithmic trading has existed for decades. It’s getting faster, less latency, and it’s also getting more sophisticated. The math is getting more sophisticated. And so, if you’re deploying a model, you want to make sure that the model has certain guardrails, really to protect your bottom line and to protect the market.
SORKIN: Let me ask you about another big topic that we’ve been talking about for the past week and a half now, which is the ruling in the Tesla case around governance and the compensation that Elon Musk was paid. And I’m curious about it, because part of the ruling goes at the idea that the board of Tesla was, quote/unquote, not independent. Even though these, quote/unquote, independent director were supposedly independent, but they weren’t, and they therefore did not negotiate in good faith and that when they then endorsed this compensation agreement, the shareholders effectively, I think the judge would say — I don’t know if I should use this word — were effectively defrauded and, therefore, voted with misinformation. What say you? Because I — well, I think part of it is, all of these companies are trying to comply with the rules around independent directors, et cetera, and where’s the SEC play in this?
GENSLER: So, the matter you talked about I’m not going to speak about, but generally, those matters are a matter of state law and state corporate governance. The SEC has some role with regard to corporate governance about the disclosures around executive compensation —
SORKIN: Right.
GENSLER: — the disclosures about the controls of the company, and the like. But those matters that you’re speaking about really are generally a matter of state law.
SORKIN: But to a large degree, that case was about defrauding investors, shareholders that I assume come under the purview of the SEC and whether they’re being provided with the right information, because underneath this entire case is the idea these directors are telling the public they’re independent but in fact they’re not. And is the SEC supposed to step in, in those roles, and say, you know, here’s the problem here?
GENSLER: Again, I hope the viewing public understands that as the chair of a law enforcement agency, I’m not going to speak of any one circumstance, one company, and certainly other people’s cases and state courts.
SORKIN: Right.
GENSLER: But, yes, you’re right. A Securities and Exchange Commission is a disclosure-based regulatory agency, and it’s about ensuring that the information is accurate, material information.
SORKIN: Right.
GENSLER: There’s not omissions and then we protect the public against fraud, manipulation, whether it’s in these securities or in, yes, Joe, crypto securities.
SORKIN: Right. I’ve got a more complicated one for you, and I don’t know the truth of the matter, but there have been lots of reports, mostly in “The Wall Street Journal”, suggesting that Elon Musk is taking illicit drugs. I don’t know if this is right, wrong or otherwise. The question I have, though, is the SEC supposed to look at this? Is somebody supposed to look at this? Someone not supposed to look? Is the board supposed to look? How would you think about this? No, I’m serious. You run this governing body over investors, and I think there are some investors who are trying to understand what they’re supposed to think of these articles.
GENSLER: Look, again, I understand you have a role to play as a very talented on-air financial journalist. I’ve got a role to play. It’s also chairing a law enforcement agency. So with respect, I’m not going to be pulled into that. But we are disclosure-based, that companies discuss their material risks, that investors get to decide based on those material risks whether they want to invest in that company or sell the stock.
SORKIN: Should companies that have CEOs that use illicit drugs, include this in a, some kind of warning?
KERNEN: Do you know how many drunk CEOs there are that get up first thing in the morning?
SORKIN: I’m not here — I’m not sure the stories are even —
KERNEN: All of Silicon Valley is experimenting with hallucinogens.
SORKIN: They may be.
KERNEN: You should have maybe at some point.
SORKIN: I probably should have.
KERNEN: I’m not kidding. You get to know yourself a little bit.
SORKIN: It might help my ability to do the show.
KERNEN: Introspection, yeah.
GENSLER: You mentioned hallucination. Let me come back to artificial intelligence, it makes it easier. But, like, if a company is using artificial intelligence in a material way, it’s really about bottom line, their prospects and the like.
SORKIN: Right.
GENSLER: And in that program has a tendency to hallucinate, they have to consider those rinks and if it’s a material risk to investors.
QUICK: Can I just say, the last time I heard you kind of come back to an issue that you were very centrally focused on was crypto. So, this sounds to me like you are issuing a message, the reason you’re here to talk about this is you want to issue a message to any company that is going to engage with artificial intelligence that they will be held responsible for any problems with that A.I.
SORKIN: Yes.
GENSLER: Well, in two ways, Becky. If you’re an investment advisor giving advice to the public or you’re a broker dealer using it, to remember you still have a responsibility to put your investors ahead of the advisor, or the broker dealer. So, that’s a conflict issue. But also, if you’re using it, that you still have responsibilities not to defraud the public, and so that’s about sort of having guardrails to make sure you don’t front run. Meaning take an investor’s choice to buy or sell a stock and try to get ahead of ’em — put your interest ahead of them and so forth. So, yes, I do think that that’s important, because regardless of the tool you use, whether you use the hammer, whether you use a little algebra or you use artificial intelligence.
QUICK: But it’s not okay to blame a dumb A.I. program that did something we weren’t anticipating?
GENSLER: That’s right. You don’t blame a dumb hammer if you’re using that to defraud somebody. I’m just trying to say, A.I. is a tool, but when you use that tool to do bad things —
KERNEN: Oh, my God. It’s okay for A.I. but not bitcoin?
GENSLER: Well, how do you see them —
KERNEN: No, just saying, it’s a tool but if you use it to do nefarious things, but then you say it’s not A.I.’s fault. Well, it’s the same case — you just made the same case for bitcoin.
GENSLER: Also, with bitcoins, a non-security but if —
KERNEN: Now you’re splitting hairs again.
GENSLER: No, no, I’m not, Joe.
KERNEN: And for every Jamie Dimon, I can raise you one Paul Tudor Jones — hold on — one Larry Frink, one Sam Druckenmiller. One —
SORKIN: OK.
KERNEN: I raised you all — Peter Thiel, Marc Andreessen —
SORKIN: They don’t run the SEC.
GENSLER: I think we’ve established that Joe is not merit neutral.
SORKIN: Gary Gensler, they’re playing the music, but I do have to ask you one other question which has to do with ESG. There’s been a remarkable backlash on it — even a backlash around disclosures, around climate and some of these other metrics that you’ve been talking about. And I’m curious how you think about that because you’re seeing it from different states, and investors, pension funds and the like, and it’s become political.
GENSLER: Andrew, if you look at top 1,000 companies, sort of the Russell 1000, about 90 percent of them are already talking about climate risks somewhere in their annual filings. A little over half of already disclosing something around their emissions, greenhouse gas emissions. I think therein lies a role for the SEC to help bring consistency, comparability in that decision usefulness. But we are not a climate regulator.
SORKIN: Right.
GENSLER: We are not a climate risk regulator. We’re a securities regulator.
SORKIN: Right. But there are some companies now that are scared to disclose some of their pledges or other things because if they do, which you would say they should —
GENSLER: No, no, no. I do not. We just say —
SORKIN: Then they’re saying that certain states, Texas, Florida and others are going to say, you can’t do business in our state or we’re not going to invest in you or what-have-you.
GENSLER: Andrew, there are many companies already making these disclosures and if they’re material, you have to make sure they’re accurate and they’re not misleading. That’s same role as whether it’s about the executives and it’s the same thing if — about these risks if they’re material.
SORKIN: OK. This has been fabulous. Come on back to the table again. It’s great to see you in person.
GENSLER: Alright. Good to be with you, and Becky, Joe.
SORKIN: Thank you very much. Chair Gensler, thank you. “Squawk Box” coming right back.
