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What’s Really Behind SEC Chairman Gary Gensler’s Crypto Speech

Crypto Twitter cannot decide the impact of Gensler’s comments, while others still push to focus on the infrastructure bill.

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Published on: Aug 4, 2021

Crypto Twitter cannot decide the impact of Gensler’s comments, while others still push to focus on the infrastructure bill.

This episode is sponsored by NYDIG.

SEC Chairman Gary Gensler’s speech at the Aspen Security Conference has Crypto Twitter in a frenzy. On this episode, NLW covers the latest in regulatory action, including:

  • Infrastructure bill update
  • Overall take of Gensler’s speech: hostile or bullish?
  • More concerning crypto opposition

Crypto Twitter has not reached an agreement on the tone of Gensler’s comments. While some claim this is as a catalyst for incoming regulation and the most aggressive stance to date, others saw it as a run-of-the-mill conservative, consumer protection-focused take.

Aside from securities definitions discussion, Gensler’s comments did point to a Bitcoin bias and an admiration for some of the ideals behind crypto. This outlook contrasts with the negative perception of crypto from Senator Elizabeth Warren, who is attempting to shift to a more negative narrative and from Congressman Don Beyer, who recently dropped a surprise comprehensive crypto bill.

Who will be the biggest adversary to crypto with securities, stablecoins and ‘systemic risk’ on the minds of so many regulators?

See also: SEC Chair Gary Gensler Signals Pathway to Bitcoin ETF With Tough Rules, Bitcoin Stuck Below $40K; What’s Next?

The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Razor Red” by Sam Barsh. Image credit: Melissa Lyttle/Bloomberg/Getty Images, modified by CoinDesk.


What's going on guys? It is Wednesday, August 4, and today we are picking up where we left off yesterday and asking what's really behind SEC chair Gary Gensler's crypto speech. So on yesterday's show, I gave the full debrief about the state of the infrastructure bill. For those playing catch up, at the 11th hour last week, a provision was put into the $550 billion infrastructure bill that would change tax reporting requirements around crypto, the authors claim that it would generate $28 billion in unpaid crypto taxes. And the mechanism for that was changing the definition of broker to include effectively anyone involved in facilitating crypto transactions. The problem is that while custodial facilitation is what actual brokers do in traditional financial systems, in blockchain systems, many actors, including miners, validators, etc., could be considered facilitators, especially when you remove, as this definition did, the custodial requirement. And that's the problem. These actors are noncustodial and don't even have access to the information this new definition of broker would require them to collect and share with the IRS. Meaning, if this new broker definition were applied, ipso facto, most actors in crypto ecosystems would be operating illegally. 

So, the crypto industry went to work on this. Yesterday's show was largely about how seemingly effective the nascent crypto lobby has been, and how we're seeing allies on both sides of the aisle line up to change the language in this bill. We made a little progress in the bill's specific language over the weekend, but are now trying to get the rest of the way there via amendment. As this happens, the designer of the provision, Ohio's Rob Portman, keeps saying that it's totally not about miners and validators and wallet developers and that we should all effectively chill out because of course, it's not for them. Opponents of the provision keep saying 'cool than just say that in the bill, not just in tweets and speeches.' In fact, he again defended it in tweets yesterday, calling it a "common sense provision" and not really addressing this specific criticism at all. 

Meanwhile, Senator Cynthia Lummis, a Republican, and Senator Ron Wyden, a Democrat and Senate Finance chair, are teaming up to offer an amendment to change the language. Last night, Senator Lummis wrote, "More to come, but we're proud of the work we've been able to do with Senator Ron Wyden to responsibly address digital assets in the BIF. Stay tuned for more on our amendment." Republican Senator Pat Toomey also said yesterday that he might offer his own amendment. 

So, that's the update there but back now to another dimension of regulatory intrigue. On yesterday's show, I commented on an interview SEC Chair Gary Gensler gave with Bloomberg. I said that in that interview, basically, nothing really surprised me. However, just as I was finishing, the full text of Gensler's remarks at the Aspen Security Forum were shared, and they hit this industry like a bomb. When I opened Twitter, it was all anyone was talking about. Here are a few of the variety of categories of takes that I saw. One was that this was a phase shift, a new turn and particularly aggressive from Katherine Wu, former VC, former Messari founding team, she writes, "Gensler really went live today to give us all a huge f**k you. In all seriousness, though, this is the most aggressive and hostile stance regarding U.S. crypto regulation to date from the SEC, magnitudes more than anything before. 

I also saw a lot of folks, specifically crypto lawyers, who had effectively the opposite take. Preston Byrne wrote: "Gensler's speech today was straight down the middle and entirely consistent with what more conservative legal advice in the space has been for years. The guy at the top 100% understands crypto. I think this is actually bullish for prospects for a Bitcoin ETF." Byrne's partner at Anderson Kill, Stephen Palley agreed, saying: "Agree with this and find the hand wringing in certain circles puzzling, Gensler didn't say anything I found surprising or unexpected."

I saw a lot of folks say that it was good for Bitcoin and bad for everyone else. log scale tweeted: "What Gary Gensler said today continues to signal that a crackdown is coming from most cryptos, but that Bitcoin will be spared as it is a store of value, incredible to see an SEC Chairman speak admiringly about Satoshi Nakamoto." Brady from Swan says "Gensler has made clear that Bitcoin is here to stay, and that the U.S. government should embrace it. The same time, he made clear that so many of the thousands of s**tcoins may violate SEC laws as unregistered securities. Bitcoin is the only real player on the global monetary stage."

A variation of that take I saw many who specifically honed in on comments about DeFi. Corey Hoffstein wrote: "So you're telling me that Gary doesn't approve of lending platforms, powered by unverified smart contracts, written by anonymous devs where investors can pledge highly volatile collateral to borrow unimpeded? I'm shocked. Now excuse me, I have to check my eighth health factor." I saw some argue that it was a territorial play and was about setting a frame for Washington, not necessarily for us. New dad, Rory Murray tweeted: "The Gensler speech read more to me like someone remarking their territory post a heavy handed intrusion from Treasury this week, via the infra bill, than anything immediately overtly hostile. They've been doing years of work and don't want to lose that to some midnight provision." Crypto Cobain wrote: "Gensler's audience is not us crypto folks. His audience is whoever deals with giving the SEC a budget. It's a great funding pitch."

I also saw at least one person beg to keep our eyes on that infrastructure bill. Jake Chervinsky tweeted, "We'll have plenty of time to discuss Chairman Gensler's important remarks on crypto securities regulation after we resolve the infrastructure bill issue. I'm optimistic that we can address the issues he's raised. There's no need to demonize him or catastrophize what he said. stay focused." But ultimately what all agreed or, what many agreed it seems, was that it felt significant. Nic Carter tweeted "We'll look back at this speech as more catalytic than either the DAO report or the Hinman speech, significant show of intent from Gensler." Spartan Black tweeted: "while the market frets about what the latest SEC comments hold for crypto, there is more at stake than just token prices. The rules that Gensler implements in the coming months will literally determine who wins the technology war of the next two to three decades. 

So, clearly a lot going on. But what did Gensler actually say? And what's my take? I'll link to the speech in the show notes so you can read it, but let's just share a few of the sections. First, it's clear that he's an admirer of Satoshi and Bitcoin. I'm gonna read a small sample from the beginning of the speech. He says: "It was Halloween night 2008, in the middle of the financial crisis, when Satoshi Nakamoto published an eight-page paper on a cypherpunk mailing list that’d been run by cryptographers since 1992.  Nakamoto — we still don’t know who she, he, or they were — wrote, “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”  Nakamoto had solved two riddles that had dogged these cryptographers and other technology experts for a couple of decades: first, how to move something of value on the internet without a central intermediary; and relatedly, how to prevent the “double-spending” of that valuable digital token. Subsequently, his innovation spurred the development of crypto assets and the underlying blockchain technology.  Based upon Nakamoto’s innovation, about a dozen years later, the crypto asset class has ballooned. As of Monday, this asset class purportedly is worth about $1.6 trillion, with 77 tokens worth at least $1 billion each and 1,600 with at least a $1 million market capitalization. Before starting at the SEC, I had the honor of researching, writing, and teaching about the intersection of finance and technology at the Massachusetts Institute of Technology. This included courses on crypto finance, blockchain technology, and money. In that work, I came to believe that, though there was a lot of hype masquerading as reality in the crypto field, Nakamoto’s innovation is real. Further, it has been and could continue to be a catalyst for change in the fields of finance and money." 

So, it's clear that this is a guy who understands the roots of this space, what makes it different, why it's valuable, how it fits into the internet ecosystem and the historical nature of this innovation. This is not a Johnny come lately, political opponent and shouldn't be treated as such. But my second take is that I do think that the thorny issues of what's security and what's not are back to the forefront here. In his speech, Gensler says effectively that he believes most tokens are securities. Quote, "I think former SEC Chairman Jay Clayton said it well when he testified in 2018. To the extent that digital assets, like initial coin offerings of ICOs are securities, and I believe every ICO I have seen is a security, we have jurisdiction, and our federal securities laws apply. I find myself agreeing with Chairman Clayton, you see, generally folks buying these tokens are anticipating profits and there's a small group of entrepreneurs and technologists standing up and nurturing the projects, I believe we have a crypto market now where many tokens may be unregistered securities without required disclosures or market oversight."

In many ways, this is the set of statements that I saw the biggest dividing line around: the crypto lawyers who said this was totally to be expected, we're effectively saying he's literally agreeing with what his predecessor said, the people who are frustrated are those who have said that public statements like that of Clayton do not have a regulatory framework make and that an inordinate amount of time has gone into asking SEC lawyers to help crypto project lawyers, who are representing very different types of organizational structures than traditional corporations, to shape a real framework for figuring out what's a crypto security and what's not. Lending credibility to that point is the fact that we've had all of these various heuristics come up over the years and speeches, the phrase sufficient decentralization comes to mind, which serve more to obfuscate and confuse and effectively leave crypto companies to guess. Many have pointed out that the SEC's way of regulating has effectively been through enforcement rather than providing upfront guidance. 

The flip side is, of course, to lend credibility to the conservative interpretation, whether we like it or not Gensler is being super clear on his take. Many, if not most, tokens are securities and hence under their jurisdiction. However, don't expect that take just to be abided, though. I asked Commissioner Hester Peirce to comment on Twitter and she wrote: "Nice to see Gary Gensler addressing crypto issues. But, the existing securities laws don't work well for certain aspects of crypto, and people's freedom to interact using new technology has produced the innovation at the core of our prosperity. Looking forward to working together." That is a very pleasantly put, hell of a statement. Commissioner Peirce has continued to advance proposals for token safe harbors, for good faith teams to interact with the SEC. So, if you want some hopium, maybe just maybe there's a little bit of good cop, bad cop where Gary is saying how tough they're going to be so he can also have more credibility to open some more room through something like Commissioner Peirce's safe harbor proposals later. 

There was also this fiery tweet from CFTC Commissioner Brian Quintenz, who wrote: "Just so we're all clear here, the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil or crypto assets." With all of this, I tend to agree personally with some of the comments I read before that there is clearly at least a bit of territorial assertion here. Obviously, folks in the SEC and the CFTC are reacting. But there's another whole side of this that I think may be more of a silver lining or a bright side than initially it appears. Let's go back to what Rory Murray said, he tweeted: "The Gensler speech read more to me like someone remarking on their territory post, a heavy-handed intrusion from Treasury this week via the infrastructure bill, than anything immediately overtly hostile. They've been doing years of work and don't want to lose that to some midnight provision." 

So, what might Rory be referring to? Well, there's a bunch of things. First, what he mentioned, this last minute provision in the infrastructure bill, which is just clearly not the right way to regulate crypto. Second, don't forget that seemingly out of nowhere, Congressman Don Beyer, who had never seemed to care at all about crypto, dropped this massive, comprehensive legislation that super focuses on authorizing a central bank digital currency, and making stablecoins legal only subject to the Department of the Treasury, that had Representative Tom Emmer, someone who has spent years focused on blockchain issues, up on CoinDesk TV yesterday, speculating that the Treasury Department effectively put Beyer up to it. And then of course, you have Elizabeth Warren, who is totally trying to shift the narrative. 

As I mentioned yesterday, Gensler is coming from a standpoint of investor protections. He doesn't want uninformed investors to lose their shirts on volatile bullsh**t. Even if we disagree with him about one, what rights investors should have to lose their shirts, and two, what constitutes volatile bulls**t, there's no part of his assessment that says this whole thing is a net negative and we shouldn't have it exist. Refer back to his comments on Satoshi or if you will, look at what he says about a Bitcoin ETF. He effectively says that an ETF would help address issues of consumer protections. And so there are many who interpret this as at some point we're likely to get a Bitcoin ETF as a way to pull everything into this larger regulatory framework. And indeed, I think when I look at all of the things that he's chosen to highlight in his tweets about this speech, he's effectively saying that for technology to go mainstream, it needs to fit within a public policy framework. And that's what he wants to do. We're focusing and reacting more to the fitting into the public policy framework, then to the fact that he's talking about it going mainstream. 

Contrast this now with the tone of people like Elizabeth Warren and others like her who are saying, this is all just a phony populist movement. It's just a new set of plutocrats who are taking the place of banks. They're restoring the just for criminals line. They're arguing that it is a systemic risk to the overall financial system. That is a wildly different battle, and one that is much more problematic than disagreements about what gets designated a security. That's what I brought up yesterday upon first blush. And now, 24 hours later, that continues to be my take. We can't weigh all fights equally, or at least if we do, we do it at our detriment. I'm not saying that we shouldn't push back on certain things that we disagree within this proposal, for example, I think that some of his thinking around stablecoins seems really underdeveloped. There's clearly a larger stablecoin fight in the works and it feels to me like Gensler's argument that they might be securities is again back to that claiming territory for himself and for his office. I also think that trading venues are probably going to want to hire a few more lawyers after this, but that the smart ones probably will have already hired those lawyers expecting this to be the case. 

And finally, I think we can officially view the era of regulatory scrutiny around DeFi as having commenced, as we're seeing with the infrastructure bill, this could present some of the most complex issues with the greatest need for engagement. But overall, and blame this on my macro brain, if you will. But to me, the biggest dividing line among politicians who have questions about crypto is whether those questions are about things like investor protections, but they remain enthusiastic about possibilities, or whether those politicians only see systemic risk and an enemy that must be fought. I, at this point, am willing to engage with just about anyone who falls into that first category, because the second category is where the real existential battles lie. Anyways, guys, I'm super interested in your take. Hit me up @NLW on Twitter. I appreciate you listening and until tomorrow, be safe, take care of each other. Peace!