Gensler's SEC Is the Same Old SEC

Exploring the transformation of value in the digital age

By Michael J. Casey, Chief Content Officer

August 6, 2021

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All crypto eyes were on Washington this week, as Gary Gensler drew a line in the sand on securities laws and a battle brewed over an infrastructure funding bill that would seek to tax cryptocurrency transactions. We take a look at the first of those stories in today's main column and the second in "The Conversation."

One remark the Securities and Exchange Commission chief made about a need for more international harmony and less "regulatory arbitrage" around crypto policymaking provides an interesting framing for this week's "Money Reimagined" podcast episode, which focuses on Ireland, its tax laws, and how policy differentiation can help smaller countries catalyze ecosystems of innovation.

We chatted with Michael O'Sullivan, the author of "The Levelling," which describes the post-globalization era, and with Lory Kehoe, director, Digital Assets & Blockchain at BNY Mellon and the founder of Blockchain Ireland.

Have a listen after reading the newsletter.

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Gensler Falls In Line With His Predecessor

Illustration: Rachel Sun/CoinDesk

The great disappointment that many in the crypto community felt from Gary Gensler's speech this week reflected, more than anything, how wishful thinking can trump facts. His letter-of-the-law message that most tokens are subject to securities laws was entirely predictable.

That doesn't mean people shouldn't be frustrated by the SEC chairman's online address to the Aspen Institute's Security Forum, described by crypto legal commentator Katherine Wu as the "the most aggressive and hostile stance re U.S. crypto regulation to date from the SEC." In fact, it should motivate them to do more to mollify increasingly hostile policymakers in Washington.

The reality is that in sharing his predecessor Jay Clayton's view that "every ICO I've seen is a security," the new SEC Chief made no substantive departure from what he'd expressed before. I know this because I worked with Gensler at MIT's Digital Currency Initiative, where he would frequently cite the "walks like a duck" test to argue that initial coin offerings seemed to meet the Howey Test for what constitutes a security.

When he was named to this position, Gensler's experience teaching blockchain classes at MIT fueled excessive hope that the industry would now enjoy a friendlier SEC. But Gensler's deep knowledge and interest in the technology – including an expressed belief that it holds potential to tackle unfair rent-seeking practices within the legacy financial system – never implied that this seasoned regulator would waiver from a strict interpretation of the facts before him.

You see, the professor-cum-SEC chair was right then, as he is now, that in terms of the SEC's worldview, token projects involving issuances to investors almost always have the features of a security. Look at them with a regulator's lens and you'll see the three unmistakable Howey Test features: an "investment of money" in a "common enterprise" with an "expectation of profit derived from the efforts of others."

I also believe he's (mostly) right in arguing – as he did on Tuesday and always did at MIT – that for a new, innovative technology to be impactful at scale it needs to be brought within scope of public policy.

A Need for Leniency

Where Gensler and I tended to disagree during our time together was on the extent to which regulatory agencies should give latitude to cryptocurrency and blockchain developers for that innovation to thrive. However clear securities laws may be, I believe it's important that financial innovators be given some time-bound degree of freedom from regulatory risk if they are to have the chance to disrupt the incumbents of the existing financial system.

So, I was especially disappointed on Tuesday that his speech gave zero hints of any compromise on this issue. Gensler made no mention, for example, of SEC Commissioner Hester Peirce's proposal for a "safe harbor" provision that would give crypto startups a three-year grace period to build and launch their projects before they have to worry about federal securities laws.

Instead, the spirit of his message was punitive, focused predominantly on the risks posed by cryptocurrencies, both to investors and national security, and tapping broad, negative stereotypes to describe those risks. While he alluded to his belief in cryptocurrencies' potential, Gensler seemed more intently focused on their dangers.

I believe he was motivated by a desire to set the legal record straight. Many startups were given flawed advice that their projects would be exempt from SEC filing requirements. Gensler's speech brought home that point and made it harder for fee-seeking lawyers to opportunistically tell idealistic founders what they want to hear.

The bigger problem, though, is the second-round political effects of his tough-on-crypto stance. Generalizations without context – such as this one: "to the extent that [crypto] is used as [a medium of exchange], it's often to skirt our laws with respect to anti-money laundering, sanctions, and tax collection" – pump oxygen into the crypto skepticism growing in Washington.

Gensler's opinion carries weight in the U.S. capital. He held senior positions in the Treasury Department during the Clinton Administration and as the chairman of the Commodities and Futures Trading Commission under President Obama he oversaw some vital post-financial crisis reforms. His stance will empower the likes of Senators Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio), who are calling for draconian limits on the industry.

Letting Bankers Freeride

Some might argue that Gensler's statements on ICOs don't matter. Clayton's pronouncements and early SEC lawsuits were already instrumental in killing off the hype-filled ICO boom in 2018, which was mostly a good thing. And exchanges have put restrictions in place to prevent U.S. investors from buying many tokens that were deemed in breach.

But Gensler appeared to have a wider focus than those past ICOs. In citing a need to regulate decentralized exchanges, he made it clear the SEC has its sights on decentralized finance (DeFi) and on the various governance tokens that drive it. Whether they are described as "ICOs" or not is irrelevant. That could do a lot of harm to the sprawling, expanding DeFi ecosystem.

A crypto skeptic would say, "Why care about making it harder for crypto developers to get rich?" The answer: because this unique field of permissionless, breakneck innovation offers the greatest opportunity yet to reform an outdated, rent-seeking financial system that excludes billions from the chance to make something of their money. A crackdown on DeFi could kill off one of the most promising areas of financial innovation seen for decades.

It's infuriating that advocates of stricter rules for cryptocurrencies often argue that startups in this space are "freeriding" because the banks and other institutions they compete with are already complying with strict laws. I say that not because I'm dead against crypto regulation – I subscribe to Gensler's view that good policy can help the technology grow – but because the comparison grossly misrepresents the different starting positions that financial incumbents and their startup challengers occupy.

The reality is that because compliance is so expensive – many bankers now complain that it's the biggest burden they face in providing affordable capital to non-high-net-worth clients – it functions as a "moat," a barrier to entry that prevents smaller players that can't afford it from taking on the bigger players that can. How is a fresh-out-of-college team of brilliant crypto developers going to come up with a less-onerous lending model, for example, if they can't come up with the tens of millions of dollars needed to make their project compliant?

All hope is not lost. Much could be done at the legislative level to make it easier for crypto innovators to thrive while still imposing a regulatory framework that appropriately protects investors and maintains financial security. Among the multiple cryptocurrency bills in front of lawmakers right now, some make a decent stab at that.

Now that Gensler has made clear his thinking on the applicability of existing laws to this sector, maybe legislators can create carve outs from those laws that better achieve that innovation-versus-regulation balance.

Or maybe that, too, is wishful thinking.

Off the Charts

Bitcoin Volumes Surge. Why?

Well, that's odd.

On-chain data show a huge surge in the dollar value of transactions over the Bitcoin network last Sunday, so much that the daily tally – coming in at a noteworthy $69.69 billion – was second only to May 28 of this year.

Credit: Shuai Hao/CoinDesk

As Bitcoin Market Journal's Mati Greenspan wrote in his newsletter on Monday, what's strange is that these high on-chain volumes were out of sync with relatively thin summer trading on crypto exchanges, where most transactions take place, and with a "completely empty" mempool, which reflects outstanding bitcoin transactions awaiting confirmation. What's more, the total number of on-chain transactions "was well below average, and the number of unique addresses used was the lowest it's been since 2016!," Greenspan wrote.

As Greenspan noted, there were clearly some bitcoin whales moving large amounts of funds around. Why? We don't know. The question is whether it's a precursor for greater volume in the market.

The Conversation

Crypto Arrives in D.C.

Illustration: Rachel Sun/CoinDesk

You know cryptocurrencies have arrived as a topic of national interest when Senate debates get caught up in minutia differentiating a crypto "broker" and a miner. That was the case this week as legislators considered a $28 billion crypto tax collection provision added to the Biden Administration's infrastructure bill.

As concerns grew that the provision lacked nuance and would stifle crypto innovation (sweeping up anyone who touches crypto), a bipartisan trio of senators moved to create an amendment that would narrow the definition of entities covered and limit the bill's surveillance capacity: Senators Ron Wyden (D-Ore.), Cynthia Lummis (R-Wyo.) and Pat Toomey (R-Pa.).

As word spread about the amendment, it began to attract more bipartisan support.

You had former Democratic congressman and now governor of Colorado in favor:

But also a Republican congressman from North Carolina:

They were up against the Treasury Department, which as the Washington Post reported, came out to argue the Wyden-Toomey-Lummis amendment would massively reduce revenue.

But as pro-privacy activists warned of the surveillance implications of not accepting the amendment...

… a crack started to appear among supporters of the original tax provision, including even its author, Sen. Rob Portman (R-Ohio). Whereas Portman had previously touted the provision as a way to "make it easier for folks to determine and pay their tax bill, on Wednesday he had this to say:

Later that evening, Portman had put his name to a competing, more modest amendment, along with Sen. Mark Warner (D-Va.), which the White House got behind. It had fewer exemptions than the Wyden-Toomey-Lummis amendment, but did exclude certain miners and other actors from the definition of "broker" for reporting requirements.

Whichever of the two amendments succeeds, it's clear the grassroots organizing efforts of Jerry Brito and his team at crypto lobbying outfit Coin Center played a key role in shifting the debate:

A message from Coindesk

#CryptoState2021: Middle East

Even though many countries in the Middle East restrict or outright ban activities related to blockchain technology, the region is having its crypto moment. From Dubai's first-of-its-kind Bitcoin Fund listing to the Bank of Israel's trial of a digital shekel, interest is picking up in the region as crypto companies work closely with regulators in the Middle East and North Africa (MENA) to gain some clarity about oversight of digital currencies.

Join us as we jet-set through the Middle East on our #CryptoState2021 virtual tour and explore how different markets are thinking about crypto, their roadblocks and challenges, and crypto's impact on the region.

Register for the Crypto State: Middle East virtual tour on Aug. 11.

Relevant Reads

London Forks

Big news in Ethereum land this week was the successful "London" upgrade to the protocol. It has various features aimed, among other things, at reducing fee volatility, allowing for greater block size variance and, critically, controlling the supply of ether by applying part of the transaction fees that miners receive from users pay to "burning" pre-issued ether tokens.

Once the upgrade was officially "live," Edward Oosterbaan had a piece out that broke down its various components.
Lyllah Ledesma surveyed a slew of analysts about it. The prevailing view was this move would set ether up to become a deflationary asset, with a scarcity profile that should support its price.
In their market wrap Thursday, Damanick Dantes and Frances Yue report on how the market took very favorably to the successful upgrade.
By Friday, Omkar Godbole was reporting that the ether options market came alive on the news, with some speculators even placing bets on the prospect of ETH hitting $50,000, which would be a 18-fold increase from current levels.

A message from CoinDesk

The CoinDesk DeFi Index (DFX), measuring the investable DeFi market, is now available for investors watching decentralized finance.

It is the latest index by CoinDesk Indexes, the market standard for crypto assets since 2014. The DFX provides a market-cap-weighted index for a representative basket of DeFi-sector cryptocurrencies that is designed to be investable and replicable for professional investors.

Find out more at coindesk.com/indexes/dfx, or email indexes@coindesk.com.