This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.
At first glance, reports that President Joe Biden will appoint former Commodities Futures Trading Commission (CFTC) chairman Gary Gensler to head the Securities and Exchange Commission (SEC) might seem destined to send panic waves through the financial community in general, and the fintech world in particular. After all, Gensler is considered a Wall Street scourge, often labeled “a close ally of Elizabeth Warren,” and his record at CFTC was marked by heavy enforcement of the Dodd-Frank law that passed during his tenure.
But reality is at least a little more nuanced. Gensler is a highly informed insider on financial innovation; certainly no other top American financial regulator has taught a course on “Blockchain and Money” at MIT (here’s the reading list). His experience at CFTC will give him an advantage in helping to coordinate financial regulation across the Administration. And even some of the most diehard cryptocurrency bulls are predicting that Gensler will look kindly on their realm, by approving a Bitcoin ETF, for example, something the US government has consistently shot down. FIN is not endorsing that prediction, certainly not in the Administration’s first year, but the frame is compelling: “The outlook could evolve from ‘I don’t want anything bad to happen on my watch’ to ‘how can these be offered safely to American investors’”? It is nonetheless true, as Sarah Brennan—who heads the digital assets practice at the law firm Harter, Secrest & Emery—put it in a FIN interview: “Not everyone is going to be happy.”
For starters, it’s a certainty that Gensler’s SEC would seek to regulate many cryptocurrencies (though, significantly, not Bitcoin) as securities. In 2018, Gensler got a lot of attention saying that more than 1000 existing Initial Coin Offerings (ICOs) were fraudulent. Count on Gensler cracking down there; any remaining XRP boosters out there hoping that a change in SEC leadership would mean backing down from the agency’s jugular-seeking case against Ripple are going to be bitterly disappointed.
In a speech that year, Gensler memorably said:
Over 100 years ago, poet James Whitcomb Riley wrote: ‘When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck.’
When investing in any form of financing, whether an ICO, or in traditional forms, such as stocks or bonds, the public benefits from full and fair disclosure.
The investing public benefits from prohibitions against fraud and manipulation.
Such investor protections are embodied in US securities laws regardless of the form of investment….
Sounding like poet Riley, SEC Chairman [Jay] Clayton stated in February that ‘I believe every ICO I’ve seen is a security… You can call it a coin but if it functions as a security, it is a security.’
I agree with the Chairman, except if one were to consider CryptoKitties an ICO.
Brennan expects that Gensler will extend this line of thinking to pursue cases against not merely cryptocurrency creators, but also the exchanges where they trade. That would be a marked departure from current practice. Brennan also thinks Gensler and other Biden regulators will seek to replace the inefficient patchwork of state fintech regulation (New York’s she describes as “pretty onerous,” while Wyoming is bending over backwards to be crypto-friendly) with a single federal standard.
Another area to watch is “no-action relief,” instances in which the SEC agrees not to pursue cases where companies have submitted detailed descriptions of novel products or services. In recent years, “the noose is loosening,” Brennan said, and Gensler may increase the kinds of activity that the SEC allows.
One important factor is whether SEC commissioner Hester Peirce decides to keep her seat. Although her term is not formally up until 2025, Peirce—sometimes dubbed “Crypto Mom” for her digital currency advocacy—is a Republican whose policy stances are somewhat at odds with Gensler’s. Peirce was quoted this week saying she looked forward to working with Gensler to work out crypto policy, but it wouldn’t be a huge surprise for her to step down. This would only strengthen Biden’s (and presumably Gensler’s) influence over the SEC as a whole.
All this, of course, assumes that Biden *does* nominate Gensler (although any Biden SEC appointee will probably be directionally similar to Gensler) and that the Senate confirms the nomination. With Democrats controlling the Senate, the latter outcome seems guaranteed, although it’s interesting to note that what little Senate opposition Gensler faced in 2009 came from the left, not the right; in an overall 88-6 vote, five of the nay votes came from fairly liberal Democrats, the sixth from Bernie Sanders (I-VT). The Senate dynamic in 2021 seems likely to be dramatically different.
This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.
