Gary Gensler Failed the U.S. Crypto Industry, and So Has Congress

The Securities and Exchange Commission chair is a rational actor. U.S. lawmakers have been derelict in their duties.

AccessTimeIconJun 28, 2023 at 5:46 p.m. UTC
Updated Jun 29, 2023 at 5:22 p.m. UTC
AccessTimeIconJun 28, 2023 at 5:46 p.m. UTCUpdated Jun 29, 2023 at 5:22 p.m. UTC
AccessTimeIconJun 28, 2023 at 5:46 p.m. UTCUpdated Jun 29, 2023 at 5:22 p.m. UTC

We are entering the summer of the U.S. Securities and Exchange Commission (SEC). The agency's latest actions against the world's foremost exchanges, Coinbase and Binance, have the crypto sector reeling.

Major players are making moves – quickly. Crypto.com announced it will wind down its U.S. institutional business due to “limited demand.” Robinhood testified last week in a House crypto hearing about the complete lack of help it received from the SEC in registering as a digital assets broker.

Dr. Paolo Tasca is a professor and economist at University College London, the founder of the DLT Science Foundation (DSF) and member of the blockchain technologies committee at the International Organization for Standardization. He advises several organizations and companies including Ripple, Hedera and INATBA.

This isn’t a full accounting of the SEC’s recent activities or crypto’s response – there is far more to explore. But the ringleader of the chaos is Gary Gensler, the current chairperson of the U.S. Securities and Exchange Commission.

Robinhood, eToro and other major brokers have began delisting tokens from some of the most prominent blockchain projects in the space. Many of those projects happen to use proof-of-stake (PoS) algorithms, which guarantee high levels of network security, but have been called into question by SEC Chair Gary Gensler.

Suffice it to say, scrutiny is increasing.

The crypto sector has reason to wonder why Gensler is taking a hard stance on the cryptocurrency industry, especially compared to his predecessors. It is true, there are several problems in the crypto space. The Federal Trade Commission (FTC) reported victims lost more than $1 billion in cryptocurrency scams between January 2021 and March 2022. However, this statistic is nine times less than the losses incurred from security frauds in 2022, overall.

Gensler's focus leads me to believe he's following the "nine over one" rule – i.e., spending 90% of his time policing the crypto industry, a sector that accounts for just 10% of scams across the financial industry.

What kind of evidence and information is Gensler using to make his decisions? What can we expect from future SEC actions? Why has he changed his mind so much? And why is it that a government official is employing social media in a manner akin to a social media influencer, predominantly sharing content related to crypto while displaying personal satisfaction and emotional investment?

I was shocked when I recently rewatched an interview between Gensler and CoinDesk Managing Editor for Global Policy and Regulation Nikilesh De. He abruptly interrupted De, emphatically claiming three times in a row that all cryptocurrencies are securities. Shouldn't any government official, particularly the SEC chair, maintain impartiality, emotional detachment and fairness in carrying out their duties?

As speculation continues to rise, conspiracy theories about the SEC's true motives have also emerged on Twitter, Reddit and beyond. There are questions about Gensler's relationship with Sam Bankman-Fried. And reports that he was turned down for advisory roles at Binance. He doesn't have to be collaborating with SBF or operating out of spite to question the soundness of Gensler's thinking.

The latest brouhaha (that is not really a brouhaha) is that the SEC is clearing the way for Prometheum and a handful of other firms, founded by regulatory insiders, to be the primary dealer for digital assets. Prometheum has a license to operate as an alternative trading system (ATS) that plans to list "digital asset securities" – but it's unlikely any cryptocurrencies will ever fit that regulatory designation.

Regulatory reality

Accusations that Gensler is a "deep state" agent hellbent on banning crypto, a criminal collaborator with SBF or an insider trading favors are fun to entertain, but they miss the point.

Gensler is not an irrational player. His actions make complete sense when you come to terms with the fact that he’s a long-term thinker who thinks he understands and, therefore, should be allowed to restrict an entire sector. He’s the worst kind of rational player: one who knows the rules (and where there are gaps). He’s used them to navigate himself into a powerful position on the board.

Lawmakers should show concern that Gensler is practically creating his own "fourth" branch of government by introducing a new bill for crypto regulation, bypassing the usual law-making process and standards like the Administrative Procedures Act. Whether legal or no, it is having an outsized effect.

Venture capital, founders and companies are fleeing the U.S. because of Gensler's actions. This will cost the U.S. economy billions of dollars. Until lawmakers decide which agency should oversee the crypto sector, there will continue to be hyper-rational players working on setting their precedent. For what motives, only time will tell.

It is beyond clear that the traditional regulatory frameworks do not fit Web3, blockchain and crypto and likely need to be updated. As a sector, we must continue to demand revolutionary approaches for effective regulation in these rapidly evolving markets. And as new bills are proposed, we must provide vocal commentary in whatever route is available.

We need to speak out against the assertion that all cryptocurrencies should be classified under securities. This is a simplistic interpretation, akin to saying an airplane is an automobile because they both go from "point A to point B." Although there are points of comparison that need to be determined, treating a cryptocurrency like security assets such as stocks or bonds in a new wrapper makes as much sense as calling an airplane a car with two wings and aptly encapsulates the flaws in our present classification system.

We require a comprehensive, well-structured taxonomy that aligns with these technological advancements and a modernized regulatory body proficient in handling the intricacies of these nascent markets. Perhaps, in response to the increasing technologization of the markets, a new fintech regulator should be established to better navigate the complexities of emerging digital technologies when it comes to financial consumers’ protection.

The blame can’t be laid just at Gensler’s feet, however. The issue fundamentally stems from a failure to recognize the transformative impact of blockchain technology on finance. Falling to come to consensus and pass legal frameworks that could have fostered a vibrant industry (and prevented many failures) will go down in history as a massive abnegation of duty.

It is encouraging that House Financial Services Chair Patrick McHenry (R-NC), Agriculture Committee Chair Glenn Thomspon (R-PA), and Senators Cynthia Lummis (R-WY) and Kristen Gillibrand (D-NY) are now introducing a crypto regulation bill.

But crypto has been here for nearly 15 years. Even Europe only introduced the regulation MiCA in 2020. So while yes, Gensler is out to make this summer one to remember for crypto firms, his power to do so is a failure of elected representatives over the years to recognize crypto is here to stay.


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Paolo Tasca

Dr. Paolo Tasca is a professor and economist at the University College London, where he founded the UCL Centre for Blockchain.