Since former investment banker Gary Gensler took office, the US Securities and Exchange Commission (SEC) has pursued a crypto-hostile policy. Criticism of the current SEC chairman is now growing even within its own ranks, as clear guidelines for companies are being demanded.
Gary Gensler is a US official who has worked in both finance and public service and currently serves as chairman of the US Securities and Exchange Commission (SEC). Before joining the securities regulator, Gensler taught at MIT, including on blockchain technology. Nevertheless, since he took office in spring 2021, the SEC has been more aggressive towards crypto companiesthan ever before. According to colleague Hester Peirce, this is a missed opportunity for the US economy.
Regulation by enforcement
In the US, financial regulators divide the financial sector among themselves. While the SEC oversees the trading of securities, commodity trading falls under the jurisdiction of the Commodity Futures Trading Commission (CFTC). With no legal classification prevailing for digital assets, the two agencies have been vying for oversight of the sector for some time. Using the Howey Test introduced in 1933, Gensler argues that "virtually all" cryptocurrencies must be classified as securities. This stands in contrast to the CFTC's position, which regulates some digital assets as commodities.
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To avoid waiting for a legal precedent, for several months now the SEC has been using a strategy that industry representatives refer to as "regulation by enforcement." Instead of defining clear guidelines, the agency takes legal action against companies that it considers to be part of its jurisdiction. Victims of these enforcement actions have so far included some of the largest crypto companies in the US, with the SEC unable to prevent any of the multi-billion dollar bankruptcies of the past year.
- December 13, 2022: SEC charges FTX founder Sam Bankman-Fried. The collapse of the exchange occurred over a month earlier.
- January 12, 2023: SEC sues Genesis and Gemini for the Gemini Earn yield product. Customers of the program have not been able to withdraw their funds from the platform for two months.
- January 19, 2023: SEC lawsuit obliges crypto lending platform Nexo to pay $45 million in fines.
- February 9, 2023: SEC sues Kraken and forces the second-largest US crypto exchange to stop its staking services.
- February 16, 2023: SEC initiates fraud proceedings against Terraform Labs. The collapse of the $60 billion Terra ecosystem occurred in May 2022.
- February 27, 2023: Operator of leading mobile trading app Robinhood receives SEC subpoena over its crypto offerings.
- March 21, 2023: SEC sends subpoenas to decentralized exchange Sushiswap and other DeFi projects.
- March 22, 2023: SEC informs Coinbase of a forthcoming enforcement action with a Wells Notice. According to its own statements, the largest US crypto exchange had met with the SEC over 30 times and spent millions on legal fees in a repeated effort to register as a securities exchange.
- April 17, 2023: SEC charges crypto exchange Bittrex with operating an unregistered securities exchange.
Criticism of SEC Commissioner Hester Peirce
The harsh crypto policy of SEC Chairman Gary Gensler is not only facing opposition from industry representatives. In a detailed blog post, Hester Peirce, one of the five SEC commissioners, criticizes the agency for its aggressive expansion of its regulatory scope. The SEC is currently seeking to solve problems that simply do not exist. By applying outdated regulations to new technologies and interpreting these principles in a questionable way, the agency is stifling important innovations in the financial markets.
"Thank you, Mr. Chair. Stagnation, centralization, expatriation, and extinction are the watchwords of this release. Rather than embracing the promise of new technology as we have done in the past, here we propose to embrace stagnation, force centralization, urge expatriation, and welcome extinction of new technology. Accordingly, I dissent." - Hester Peirce, SEC Commissioner
Specifically, Peirce refers to the vague redefinition of certain terms that are intended to be used to apply existing exchange regulations to decentralized platforms. According to Peirce, the regulations formulate confusing and unenforceable standards for decentralized activities, participants in these activities, and providers of underlying technologies, including validators and miners. The agency has not even examined whether compliance with the regulations is possible at all. Peirce has been advocating for constructive crypto regulation for years, as she made clear in an interview with CVJ.CH.
Political divide in the U.S. Congress
During a congressional hearing this week, members of the US House Financial Services Committee questioned the SEC chairman regarding his regulatory policy, which was described as "disastrous" in a public statement from the committee's Republican side. In order to correct a long line of abuses, Congressman Warren Davidson wants to remove the SEC chairman from his position.
🚨I’m calling to restructure the @SECGov and the removal of Chair @GaryGensler.
Watch my closing remarks from today’s hearing where I lay out the abuse of power and failure to protect investors that has occurred. pic.twitter.com/SNXio9Zbej
— Warren Davidson 🇺🇸 (@WarrenDavidson) April 18, 2023
Additionally, Gensler repeatedly refused to classify the second-largest cryptocurrency by market capitalization - Ether (ETH). At the same time, the SEC chairman claimed that there are already adequate laws to regulate and define digital assets. According to Committee Chairman Patrick McHenry, this underlines Gensler's completely contradictory positions on crypto.
