Last week’s appearance by Securities and Exchange Commission Chair Gary Gensler before the House Financial Services Committee was his first in more than a year, and his first since the current Congress took over. The political shift in the House of Representatives to Republican control rapidly became glaringly obvious as the tone was markedly hostile. The agency’s approach to digital assets was a key point of contention.
As with most congressional hearings, the event was largely about making political points and grandstanding for the cameras. But it felt significant in that it revealed the scale of Republican dissatisfaction with Gensler’s administration, suggested several points that are likely to become campaign platforms, and publicly weakened the SEC chair’s credibility. That, in turn, could prompt some modifications to the agency’s approach.
Normally the public doesn’t care too much about financial regulation. But the rhetoric witnessed last week indicates that politicians could start to make sure they do. No longer is it just about financial disclosures and settlement rules: It is rapidly becoming about individual freedom and U.S. pride.
Noelle Acheson is the former head of research at CoinDesk and Genesis Trading. This article is excerpted from her Crypto Is Macro Now newsletter, which focuses on the overlap between the shifting crypto and macro landscapes. These opinions are hers, and nothing she writes should be taken as investment advice.
The full video makes for compelling although occasionally frustrating viewing. Here are some of the key highlights:
- Ahead of the hearing, around 30 elected representatives signed a letter “blasting” (their word) Gensler for misrepresenting the digital asset platform registration process. This is something the crypto community has been complaining about for some time, but the tone of the message and the public offices of the signatories signal a notable escalation.
- This became even more apparent as the hearing kicked off with House Financial Services Committee Chairman Rep. Patrick McHenry (R-N.C.) coming out swinging. McHenry highlighted, among other things, the inconsistency with which Gensler throws out crypto enforcement actions, asks for extra budget funding and yet refuses to give clarity as to the application of securities laws to digital assets and their service providers.
- McHenry pointedly asked Gensler several times if ether (ETH) was a security, and each time Gensler attempted to trot out the standard Howey definition without answering the question.
- McHenry also attempted to get Gensler to acknowledge that the rules are not clear. Gensler continued to insist they were plenty clear (that sound you hear is lawyers guffawing), but that he couldn’t say anything about any specific asset.
- Gensler endured a fierce takedown by House Majority Whip Tom Emmer (R-Minn.) who highlighted the SEC’s inconsistency in both its reach (Gensler has often said the rules cover the industry adequately; he has also said he needs additional congressional authority to be able to cover the industry) and its approach (all firms need to do is register, but there is no applicable registration process).
- Rep. Warren Davidson (R-Ohio) pointed out that Gensler’s SEC approved the pre-initial public offering (IPO) documents of the Coinbase crypto exchange, which described in detail its staking procedures and other operations, allowing retail investors to purchase shares. Two years later, the SEC sent a Wells Notice to the company, implying concerns about the legality of some unspecified listed digital assets, the staking service, the crypto wallet and other areas of the business.
- After reciting a litany of failures, Davidson introduced a bill to remove Gensler from office.
To be fair, the hearing wasn’t all about perceived SEC failures and shortcomings. Some committee members praised Gensler for his bold approach in reforming securities clearing and for “standing up to crypto bro billionaires” (did he, though?). And many of the Republican critiques were not about the agency’s crypto approach but about its move into policing the environmental impact of listed companies and other initiatives that would add to the compliance burden of smaller businesses.
The political nature of the questions was quite clear, however, with Republicans against and Democrats supportive of the current SEC leadership. Davidson’s bill proposing the firing of Gensler is unlikely to progress, but it loudly trumpets that the battle is getting more intense. It’s a curious battle to pick, given the broad range of hot issues likely to dominate the rapidly approaching 2024 presidential election campaign. In any political competition the opposition finds a weakness and attempts to escalate it to the public consciousness in order to score points and shift perception of the incumbents. That digital assets are a key protagonist of the current positioning is a strong message for the Republicans to send.
What’s more, they’re not pulling their punches. This isn’t just about financial oversight or administrative inefficiency. Nor is it just about the functioning of capital markets. Most voters don’t care too much about that. Some of the statements made clear that this was about much bigger issues.
One is patriotism. Emmer was not the only one to remind Gensler that his actions are encouraging U.S. businesses to change jurisdiction, but he went as far as accusing the SEC chair of “pushing American firms into the hands of the CCP,” referring to the Chinese Communist Party. Some hot buttons are being pushed there, especially when Gensler did not have a memorable rebuttal to any of the allegations.
Another is individual freedom. Emmer and others brought up the politicization of capital formation, but the mic drop belongs to Davidson with the following quote that we are likely to hear again:
“You can’t just exclude retail investors from markets and claim it’s for their own good.”
There is still quite a while between now and the U.S. election in November 2024, and a lot can happen in the interim. It’s unclear to what extent the current administration will dig in and back Gensler in his digital asset approach. A recent report on the crypto ecosystem from the White House Council of Economic Advisers was not exactly encouraging, and President Joe Biden’s team may be loath to give the Republicans what could look like a win. Or, it could be that Gensler’s bosses decide that this is not a hill to die on, especially as the noise of high-profile suits involving the SEC gets louder and especially if the regulator starts losing.
Either way, digital assets are likely to increasingly form part of the political discourse. This will broaden awareness as observers choose their sides, either sticking to party lines or perhaps switching sides as the ideological divide widens.
A bigger takeaway, though, is that the digital asset ecosystem is moving from market niche to political platform. Last week, crypto entrepreneur Ryan Selkis announced the launch of a $100 million multi-entity pro-crypto political campaign, and the industry has many influential protagonists who will either join or form similar initiatives.
Uncertainty is never comfortable, but we can take a moment to appreciate the attention, even if it’s not the type of attention the industry had hoped for. You know what they say: The only thing worse than people saying bad things about you is people not talking about you at all. While I’m not sure I believe that, it does shed light on the importance of where the ecosystem is on this journey.
To see it take up so much of politicians’ time, whatever the stance, is a sign that the industry has a seat at an ever-bigger table. Politics changes, and regulators come and go. Meanwhile, crypto keeps on building.