By John E. Deaton, Founder and Host, CryptoLaw.
Today’s confirmation hearing before the U.S. Senate Banking Committee for Gary Gensler to be the new chairman of the Securities and Exchange Commission was the first chance to pose direct questions about the future of crypto regulations in the United States. Three senators posed questions of interest to digital asset holders, and this was a step forward, but Gensler’s answers didn’t provide the kind of clarity we have been demanding.
In short, Gensler heralded the innovations of crypto technology, but always completed the point with stressing “investor protection” – and never explained exactly what that protection meant in regulatory terms. There are currently no clear rules about how to regulate digital assets – nothing about use cases or token taxonomy or anything at all – so the jurisdiction of the SEC to “protect” us can be stretch so far as to destroy our holdings without even consulting us, like in the Ripple case.
- When asked by Senator Mike Rounds (R-SD) about the “outdated crypto regulatory regime” and what Congress and the SEC could do to create a “forward thinking regulatory environment for innovators in this space”, Gensler responded with a talking point he’d repeat during the hearing: blockchain and cryptocurrencies “have been a catalyst for change.” He said the cryptocurrencies “have brought new thinking to payments and financial inclusion” but also “issues of investor protection that we still need to attend to.” Gensler added he would “work with other commissioners to both promote the new innovation but also, at the core, ensure for investor protection.” He then simplified it to a kind of slogan: “Promote technology but stay true to our core values on investor protection and capital formation.” He appeared to be reading from notes as he answered Rounds, and talking of “at its core” and “core values” seemed to hint at a vague notion of “protection” over innovation. It’s not a surprise, given the SEC’s role, but defining what “protection” means is ultimately the question we crypto holders need to be answered.
- Senator Cynthia Lummis (R-WY) went slightly deeper, asking how “consumer protections” for digital asset holders could be provided in a way “that doesn’t hamper innovators.” Gensler was, in turn, slightly more specific. He linked “consumer and investor protection” with the custody of digital asset holders’ funds, “ensuring” that the use of private keys “works”, but added that the markets must be “free of fraud and manipulation” – which he called “a greater challenge” because some markets – “usually operating overseas” – have been “rife with fraud and scams”. This was slightly more encouraging, as no one would argue with that. However, without clear rules that define what is “fraud” or “manipulation” in the selling of digital currency, or building a network, or distributing a utility token, the SEC has unlimited power to harm investors instead of protecting them.
- Lummis later asked Gensler to expand on comments he’d made in 2018 about how blockchain can “promote financial inclusion, reduce risk and create new markets”. He repeated his “catalyst for change” talking point, and noted that central bank digital currencies (CBDCs) are getting more attention from fiat issuers seeking to “provide more inclusive payment structures.” He added that “other payment system providers” (we can assume he means private companies and developers) are working on offering “payment systems that operate 24 hours a day, seven days a week and at a lower cost, both cross-border and domestically.” So, Gensler was extolling the very business model being developed by companies like Ripple, when it started distributing the cryptocurrency XRP in 2013 to build a network for such payment systems to be possible.
- Senator Steve Daines (R-MT) inadvertently asked a question that goes to the heart of what digital asset holders want to know, particularly XRP holders who were unfairly harmed by the SEC’s lawsuit against Ripple. He asked how the SEC Enforcement Division should decide when it should swing its hammer and when new rulemaking would be more appropriate. Frustratingly, Gensler didn’t really answer. He said his “philosophy” around enforcement was about “following the facts and the law where they take you” – which is hard when there is no law pertaining to cryptocurrencies nor specific rules on how they are treated – and that such actions are about “using limited resources to effectuate where there are the greatest problems in the market”, i.e. setting enough examples to make other players change their behavior. He didn’t answer the question about when rulemaking is needed. But it does raise a useful question – was the Ripple lawsuit a good use of limited SEC resources to effectively address a widespread problem in the crypto markets?
Ultimately, there was not enough detail in the few discussions around our concerns to know much. But there rarely is during a confirmation hearing. What we can say is there are better questions arising from this hearing that Gensler needs to answer:
- What does “investor protection” mean for XRP holders who were harmed by the SEC decision to file the lawsuit against Ripple and two of its executives?
- What does “promote the technology” mean in real terms for the SEC? Will it allow payment system providers to build networks and distribute currencies? What guarantees will it offer them in the form of clear rules?
- Was the decision to file the Ripple lawsuit the best use of the SEC’s limited resources to “effectuate” where there is a greater problem in the market?
One final observation: ultimately, I was disappointed in Gensler’s testimony. Some will say that I shouldn’t be because his goal, as a nominee, should be to do no harm and get through the confirmation hearing unscathed. I reject that thesis. His confirmation hearing was a formality. Gary Gensler is going to be confirmed as Chairman of the SEC. There is no doubt. He had the opportunity to make the bold statement that the SEC would be different under his leadership. He had an opportunity to embrace technological innovation. Instead, he said the SEC would be technology-neutral. He made it clear that the SEC would not be anti-tech, but I ask you, is being technology-neutral enough in 2021, when the U.S. is losing its leadership role to China, among others?
Gary Gensler is a very intelligent man. He taught blockchain technology at MIT. But today he sounded like a career politician who stuck to his talking points regardless of what was asked.
If Mr. Gensler’s goal was to do no harm to his confirmation today, he succeeded. But the SEC has inflicted catastrophic harm to individual investors and U.S. innovation. He said nothing today that gives me great hope that he intends to fix that or even try. I’d be pleased to be proven wrong after his confirmation.