The Breakdown - Bitcoin ETF Time? What SEC Chairman Jay Clayton Stepping Down Means for Markets

Episode Date: November 22, 2020

On this week’s Long Reads Sunday, NLW reads Joe Nocera’s recent Op-Ed “Clayton’s Exit at SEC Opens Door to Protect Investors” from Bloomberg.  NLW expands upon the piece, discussing Clayton’s legacy in crypto and how a Biden economic team might impact the space.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com and nexo.io and produced and distributed by CoinDest. What's going on, guys? It is Sunday, November 22nd, and that means it's time for long reads Sunday. Today we're doing something a little bit different. This is a tight little opinion piece about Jay Clayton's exit from the SEC and what it means for an SEC under a Biden administration. Now, I'm sharing this piece not necessarily because I agree with everything in it, but because I think there is a rising conversation trying to figure out what a Biden administration would mean

for markets. I think this is going to be one of the key themes of discussion between now and probably inauguration day, if not a little bit longer. And this one is particularly interesting for those of us in crypto because unlike a lot of people, we pay a ton of attention to the SEC. It's one of the major regulators that has a stake in what we can and can't do, and certainly a lot of people have not necessarily felt the best about Jay Clayton's SEC regime, at least as it relates to crypto. So first what we're going to do is we're going to read this piece that's not really about crypto per se. It's more about a broader sense of what Clayton's departure means for the markets and the balance of power between individuals and firms, and then we'll talk a little bit

at the end about crypto specifically. So the piece is by Joe Nossera on Bloomberg Opinion, and it's called Clayton's Exit at SEC, opens door to protect investors. The agency has had its thumb on the scale for companies in Wall Street. It's time to shift the balance back towards shareholders. As a presidential candidate and now as president-elect, Joe Biden hasn't said much about his plans for regulating U.S. financial institutions. But in setting up his transition team, he sent an unmistakable signal about his intentions. He put Gary Gensler in charge of his financial policy transition team. During the Obama administration, Gensler was a fearsome and fearless regulator, a Goldman Sachs alum and a treasury official during Bill Clinton's presidency. Gensler was put in

charge of the Commodities Futures Trading Commission, a small agency that Congress had just handed enormous new responsibilities. It was responsible for regulating the directs of the derivatives market, those, quote, financial weapons of mass destruction that had come so close to bringing down the world's financial system during the 2008 crisis. The industry pushed back hard against the CFTC's tough new rules, but Gensler held firm and won. During his tenure, the agency also broke the LIBOR scandal. When he left the post in 2013, I wrote that he may have been Obama's single best appointment. President Donald Trump, of course, has spent the last four years upending Obama's policies wherever possible, and that includes the financial industry regulations

that were adopted in 2010 with the passage of Dodd-Frank. The Consumer Financial Protection Bureau, which Dodd-Frank created, was defanged. Regulations were eased on all but the largest banks, regulators watered down the Volker rule, which had outlined proprietary trading by the big banks, and so on. And then there's the Security and Exchange Commission, which has been led by Jay Clayton, a former lawyer with the white shoe firm of Sullivan and Cromwell for almost the entirety of the Trump presidency. Earlier this week, Clayton announced that he would step down at the end of the year and issued a statement that included a long list of what he described as the agency's accomplishments on his watch. According to Clayton, during his tenure, the SEC fined wrongdoers some $14 billion, a record amount.

It, quote, modernized and improved regulations that had not been reviewed and updated in decades, while also modernizing the shareholder engagement process, and it improved the standard of conduct required for broker dealers when dealing with retail customers. In truth, almost everything Clayton's SEC did was, aimed at making life easier for companies and harder for shareholders and investors. Consider, for instance, Clayton's claim to have modernized the shareholder engagement process. What the SEC actually did was pass a rule set to take effect after January 2022, making it much more expensive for stockholders to offer a proposal for a shareholder vote during the annual proxy period. Previously, an investor

had to own $2,000 worth of stock for a year to be able to offer a shareholder resolution. That will become $25,000. If the stock has been held for two years, then the shareholder can offer a resolution while holding $15,000 worth of stock. Only after holding stock for three years can a shareholder offer a proposal with $2,000 worth of stock. Moreover, the agency made it tougher to resubmit failed proposals. Previously, they needed to receive 3% of support to be put on the ballot again, and then 6% and 10% in following years. The new hurdles would be 5%, 15% and 25%. The final vote on the rule, which took place just two months ago was three to two. One SEC Commissioner, Alison Heron Lee, wrote a dissent in which she said, quote, these actions collectively put a thumb on the scale for management and the balance

of power between companies and their owners. Many investor groups were equally angered, arguing that the new rules hurt the ability of shareholders to put forth resolutions regarding environmental, social, and governance issues. Quote, it will definitely make it harder to get traction on ESG issues on proxies, says Heather Slavin-Corzo, the director of capital markets policy at the AFL-CIO. Again and again, that's how the Clayton SEC acted. Rulemaking took on an Orwellian quality, passing nice-sounding regulations that reduce transparency or put investor interest behind that of Wall Street or companies. The SEC approved a rule that broker-dealers had to look out for the best interest of their customers after backing away from a tougher fiduciary standard.

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and more. Marcus Stanley, the policy director for Americans for Financial Reform, wrote in a recent letter to Congress. Most of these new rules will not be easy to overturn. They will require the full gamut of regulatory proceedings, including long comment periods and, no doubt, court battles. But Clayton's decision to resign at the end of the year, he could have stayed through the end of June 2021, makes things a little easier. A Democratic chairman will shift the balance of power at the SEC right from the start of the incoming Biden administration. The problem is that reforming the SEC will require much more than overturning some Trump-era rules. Remember, this is the government agency that missed the Bernie-Madoff Ponzi scheme. It has consistently let companies off with meaningless

fines, allowed them to neither admit nor deny their culpability. It is understaffed and its lawyers are underpaid relative to what they could make in the private sector, all of which Gary Gensler understands. He and his team will need to recommend that the incoming president pick an SEC chairman who is savvy about how to use the levers of power in government, who is intimately familiar with the country's financial regulatory apparatus, who is open to new ideas like regulating cryptocurrency, who will take no prisoners when it comes to enforcing the law, and who will take seriously the SEC's mission to protect investors. I can think of one obvious candidate, Gary Gensler. So as I mentioned, guys, not everything I agree with, but I think it's an important part of the

conversation that's rising right now. I also think that crypto is really fascinating to me for the reason that it just totally breaks apart the normal political boundary lines that have been drawn recently. On the one hand, you have the idea of the right as somehow kind of more business friendly, and certainly they are historically more about self-regulation, about industry being able to do what it wants to do and kind of proceed on its own, then the left is. At the same time, however, crypto is fundamentally a democratizing technology. It is a people-centric technology more than it is a technology for big institutional capture. And in fact, the fact of the crypto industry's history is constantly a story of individuals and decentralized networks of individuals pushing back

against centralized power. So it really just blows apart the easy Republican-Democrat distinctions in a way that is hugely refreshing. Gary Gensler, for example, obviously he's being talked about in this lauded terms by someone who is clearly coming from a left perspective and is excited about the potential for the SEC to take a stronger hand in regulating finance and markets again. But Gensler is also someone who has taught courses at MIT about Bitcoin. He's intimately familiar with these technologies. So he's not going to fit into an easy mold of right versus left, again, even in the context of something like crypto. But let's talk specifically now for a second about Clayton and crypto. Many people haven't been pleased with his SEC run pointing to the fact that he wouldn't

approve a Bitcoin ETF. I wonder if in the long run the narrative won't shift a little. The dominant crypto interaction that Clayton's SEC had with this industry was around the ICO boom, and specifically cleaning up after the offering of unregistered securities. There was clearly a difference of opinion within the SEC around this issue. Commissioner Pierce, Hester Pierce, Cryptomomom as she's known, wants safe harbors that allow for companies to experiment with novel forms of fundraising, with a period to reach or achieve some sufficient decentralization, Basically, she wants to incentivize companies to continue to experiment without fear of later reprisal rather than being worried about doing something wrong and not actually trying out new things. And it has seemed that Clayton has been less keen on that. However, he also certainly didn't go after Bitcoin as aggressively as he could have.

You could have had an SEC commissioner that tried to make the case very strongly that Bitcoin was a security and that they should have more power to regulate it. In closing, I want to listen to a clip from Clayton talking with Andrew Ross Sorkin on CNBC on Thursday that gets at some of these issues. We did not regulate Bitcoin as a security. When people use crypto assets as securities to raise capital for a venture,

the SEC regulates that. And what was happening in the ICO craze was people were using ICOs and essentially making public offerings of securities without registering them with the SEC. We determined that Bitcoin was not a security. It was much more payment mechanism and store of value, but the government does regulate payments.

And what we are seeing is that our current payment mechanisms, domestically and internationally, have inefficiencies. Those inefficiencies are the things that are driving the rise of Bitcoin and other stable, I won't say stable in the case of Bitcoin, but driving these types of digital assets. And we're going to see more of that. And we're going to see, I think we're going to see this mature. And we're going to see more regulation around the payment space. I have to be honest, guys, listening to that clip,

I wouldn't be surprised to see Clayton changing the way that he speaks about crypto and even ending up on the payroll of some big crypto firm within a few years. What do you think? Let me know on Twitter. let me know on YouTube. I appreciate you listening. I hope you're having a great weekend. And until tomorrow, be safe and take care of each other. Peace.