Quis custodiet ipsos custodes? Who watches the guards?
The age-old question has become all the more relevant as the federal bureaucracy explodes in both budget and size.
But as the US government has grown, so has the influence of the fourth estate. Social media has empowered a new generation of citizen journalists to hold officeholders accountable by highlighting their past positions. And in recent weeks, that spotlight has been on Securities and Exchange Commission Chairman Gary Gensler.
As the SEC clings to digital assets, members of Congress have been pressuring Gensler about his changing stance on crypto over the years. Inconsistencies between Gensler’s past and present statements have cropped up on Twitter, thanks to the crowdsourced work of professional journalists and amateur detectives alike. Together, this decentralized community dutifully watches over the watchmen.
And what did they find? A remarkable evolution in Gensler’s views on crypto. Below is a timeline of its long arc from industry ally to apparent adversary.
Phase 1: The Ally (2018 to 2020)
While Gensler’s recent enforcement actions have portrayed him as an enemy of the industry, that wasn’t always the case. Many crypto leaders once considered him a forward-thinking regulator and a friend of the space — and for good reason. Before taking over at the SEC, Gensler spent three years in academia where he built a reputation as a public leader who saw the innovative potential of digital assets. Consider the events below:
- Gensler gives a presentation to a group of hedge fund managers on the policy implications of emerging cryptocurrencies. In his comments, he definitively states that bitcoin, ether, litecoin, and bitcoin cash are “not securities.” With these tokens making up the majority of crypto trading volume at the time, he says “three-quarters of this market is probably not securities.”
- In the same year, Gensler begins researching digital assets at the Massachusetts Institute of Technology, where he also teaches the university’s Blockchain and Money course. There he gives a lecture in which he publicly wrestles with the question: Is cryptocurrency a security or a commodity? His answer: “It’s both. I know this isn’t an answer that many people like, but that’s about where we are right now.
- Gensler speaks at a fintech conference in New York City, where he speaks highly of AlgorandALGO and its lead developer, Silvio Micali, Gensler’s colleague at MIT at the time. Gensler calls Algorand’s project “an amazing technology” and a blockchain so efficient “you could make UberUBER on top of it.”
- This same year, according to Binance lawyers, Gensler is offering to advise the crypto exchange, even meeting Binance CEO Changpeng Zhao for a special meeting in Japan. (To this day, Gensler has yet to refute the claim).
- Gensler is teaching his final Blockchain and Money course at MIT in the fall. His lectures, which are available online, lead many to believe that he will take a pro-innovation approach to crypto when he returns to public service. With President Joe Biden winning the election, speculation is growing that he will tap Gensler to head the SEC.
Phase 2: The Agnostic (2021-2022)
Indeed, President Biden appoints Gensler as SEC chairman. Given Gensler’s previous statements and praise for several crypto projects, many leaders in the digital asset community are applauding the announcement. Senator Cynthia Lummis, for example tweet“While the SEC has a reputation for being a black hole for innovators, Gary Gensler recognizes the potential of digital assets.”
Indeed, the mood on Capitol Hill with Gensler’s ascension is one of sunny optimism. But shortly after taking office, Gensler’s attitude to crypto begins to change.
- In both press statements and public comments about digital assets, Gensler’s tone shifts from openness to skepticism — and, in some cases, hostility.
- The SEC chairman is beginning to signal the need for more regulation, calling crypto a “Wild West” fraught with fraud and abuse. He continues by saying, “I believe we now have a crypto market where a lot of tokens may be unregistered securities.”
- Still, Gensler admits that digital tokens are suspended in a state of regulatory limbo. And he says Congressional legislation would be helpful in bringing more clarity to the industry, as “exchanges trading these cryptoassets have no regulatory framework, either with the SEC or our sister agency, the CFTC.”
- Gensler doubles down on the “Wild West” story and his tone hardens. “Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities,” Gensler said in a September speech to the entire agency. Just a month later, crypto exchange FTX goes bankrupt, justifying some of Gensler’s claims.
Phase 3: The Adversary (2023–present)
After the FTX debacle, the gloves come off as Gensler’s skepticism turns to opposition. His agency is growing tired of waiting for Congress to pass legislation, and is instead adopting a regulation-by-enforcement approach that will bring a series of Wells notices and lawsuits against high-profile crypto exchanges.
There’s just one problem: The new approach requires Gensler to swallow a lot of his previous statements about crypto.
- In a striking departure from his 2018 statements that several major cryptocurrencies are not securities and that many tokens have the characteristics of commodities, Gensler muses in an interview with New York magazine that “anything but bitcoin” is a security.
- Contrary to his own request in 2021 for Congress to pass legislation to bring greater clarity to the digital asset industry, Gensler says “cryptomarkets suffer from a lack of regulatory compliance, not a lack of clarity. ”
- While Gensler claimed in 2021 that digital assets do not have a clear regulatory framework with the SEC, he now states that “the law is clear,” and that all crypto exchanges must register with the agency.
- Although Gensler offered to serve as an advisor to crypto giant Binance in 2019, his agency is now suing the company for alleged market manipulation and misuse of client funds. The SEC is simultaneously suing Coinbase for listing what the agency considers “unregistered securities.”
- Speaking of unregistered securities, the SEC claims in a lawsuit that ALGO is just that. Please note that ALGO is Algorand’s original token – the same protocol that Gensler touted as a breakthrough technology in 2019.
Gensler’s anchor strategy
So what gives? Why Gensler’s sudden U-turn?
Chances are there is a cohesive strategy behind his conflicting statements.
As a seasoned bureaucrat, Gensler understands better than anyone how negotiations work in Washington. Effective policymakers use a negotiation technique called “anchoring,” where they move their initial offer far from the expected outcome. (Think Representative Alexandria Ocasio-Cortez’s Green New Deal or the original $3.5 trillion price tag on President Biden’s Build Back Better plan).
These initial proposals are often bizarre and have virtually no chance of becoming law. But they provide a reference point for negotiations and give the appearance of significant concessions by the proposing party as policy inevitably moves towards the middle.
This is likely the logic behind Gensler’s actions at the SEC. By taking the hard line that “everything but bitcoin” is a security, he has set the negotiating framework and almost forced Congress to take legislative action.
Enter ‘Digital Resources’
Congress’ answer to Gensler is the McHenry-Thompson Act, which (far from labeling anything but bitcoin a security) creates an entirely new asset class known as “digital commodities.” Many existing tokens meet the definition of digital commodities as outlined in this bill and therefore fall under the purview of the Commodity Futures Trading Commission, not the SEC.
The McHenry-Thompson bill is the most comprehensive crypto framework ever before Congress. It has strong support in the House, but could face significant opposition in the Senate, where Democrats have shown deference to Gensler in many questions related to digital assets. So if the legislation this congress (a big if), it would probably be in a diluted form.
The other option for the bill’s supporters is hoping for a more crypto-friendly Congress in 2025. But this assumes the industry can take another 18 months of heavy blows from the SEC. A rope-a-dope strategy is risky under any circumstances, but it’s even riskier against a fighter like the fearsome Gary Gensler.
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