Crypto insiders lauded Gary Gensler’s nomination to chair the Securities and Exchange Commission (SEC) last February. They thought the Massachusetts Institute of Technology professor who had taught blockchain classes would bring an enlightened approach to crypto compared with the scattershot, perplexed style of his predecessor, Jay Clayton.
But a year in, the professor gets an F in crypto guidance and leadership. He has encouraged the worst bureaucratic instincts of the federal government, deepened regulatory confusion and thwarted any hope of progress during his tenure – all while claiming the mantle of little-guy defender and public-interest protector.
Paul H. Jossey is an adjunct fellow at the Competitive Enterprise Institute and founder of thecrowdfundinglawyers.com. Follow him on Twitter @thecrowdfundlaw.
Not everyone agrees with this assessment. The powerful, entrenched interests in Washington and beyond that oppose everything crypto are likely pleased with Gensler’s anti-crypto posture. These include certain Democratic senators, well-placed financial regulators and global central banking authorities.
Gensler compares his regulator role to that of football referees. “Imagine a football game without referees. Without fear of penalties, teams start to break rules. The game isn’t fair and maybe after a few minutes, it isn’t fun to watch,” he said. In reality, the referees are the only ones who know the rules. They won’t tell the teams what the rules are but still call a penalty on every play – the players discovering ex post facto the play was verboten.
Former acting Comptroller of the Currency Brian Brooks described the scene recently in congressional testimony: “What happens in the United States is you have a new crypto project and you walk into the SEC and you describe it in great detail and you ask for guidance and they say we can’t tell you and you list it at your own peril.”
This is particularly disheartening when the teams have plays the fans want to see. Although Gensler couches crypto edicts as protecting people against scams, many high-profile cases the SEC has prosecuted during his, and his predecessor’s, tenure had active, happy user bases. Kik, Telegram and ongoing cases against LBRY and XRP/Ripple alleged selling “unregistered” securities via a security type (investment contract) absent in the federal code and defined through a three-part test by the Supreme Court a year after World War II ended.
Lawyer James Burnham speculates the Supreme Court would likely strike down similar securities rules today, perhaps if a challenge was brought before it by a crypto company, without a congressional mandate. But even if a lawsuit reaches the high court, an agency reprimand would already have required a company to spend gargantuan legal fees and endure years of litigation before even the chance to argue the case.
This is a bet most are unwilling to make. The SEC is not unaware of its ability to bleed defiant companies dry and force settlements before they obtain meaningful judicial review. As it stated in its 2018 budget request: “[T]he SEC’s litigation efforts also help the SEC obtain strong settlements in other cases by providing a credible trial threat and making it clear that the SEC will go deep into litigation and to trial, if necessary, in order to obtain appropriate relief.”
See also: Gary Gensler's Insane Crypto Policy |Opinion
For his part, Gensler has directed the SEC Enforcement Division to discourage meetings with companies under investigation and eliminate “unnecessary process.”
Thus, the status quo is the worst of all worlds: rules that leave seasoned securities lawyers guessing, an agency that refuses any guidance besides lawsuits or threats thereof and an agency chairman requesting scores more enforcement attorneys and “plenary” authority to protect people who in many cases do not want it.
Does any of this serve the public interest?
Commissioner Hester Peirce described a previous era of “broken windows” theory compliance, where all alleged violations are prosecuted – no matter how negligible – at the SEC. She’s right, you might as well call it the “Sanctions and Enforcement” Commission.
Under Gensler, the SEC has declared a permanent crypto war. It has refused to approve any bitcoin spot exchange-traded products despite myriad applications, new projects are refused guidance and told to take their chances, and the chairman recently gave a speech one commentator called the “the most aggressive and hostile stance re U.S. crypto regulation to date from the SEC.”
An SEC this stroppy to crypto innovation may serve entrenched interests in Washington and other global financial destinations. Cynics suspect entrenched interests comprise Gensler’s real audience because they might help him ascend to Treasury Secretary or beyond. But an SEC antagonistic to crypto does nothing for the American public waiting to bet on new teams without the referees becoming the story.