The Breakdown - Congress Grills Gensler on Anti-Crypto Stance

Episode Date: April 20, 2023

Securities and Exchange Commission Chair Gary Gensler has positioned himself as crypto’s biggest opponent in Washington, D.C. Tuesday, however, a House oversight hearing took Gensler to task for his regulation by enforcement and his inability or unwillingness to provide the crypto industry with clarity. But was it all just political theater?    “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh.  Join the discussion at discord.gg/VrKRrfKCz8.

In the wake of one of the most tumultuous years in crypto history, the conversations happening at Consensus 2020 have never been more timely and important. This April, CoinDess is bringing together all sides of the crypto, blockchain, and Web3 community to find solutions to crypto's thornyest challenges, and finally deliver on the technology's transformative potential. Join developers, investors, founders, brands, policymakers, and more in Austin, Texas, April 26th to 28th for Consensus 2023. Listeners of The Breakdown can take 15% off registration with code breakdown. Register now at ConsenSys.com and join CoinDest at Consensus 2023.

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 produced and distributed by CoinDess. What's going on, guys? It is Wednesday, April 19th, and... Oh, do we have one for you today? We are discussing, of course, SEC Chair Gary Gensler getting grilled in front of Congress on his anti-crypto stance. A quick note before we dive in, you know the drill by now.

Last week we announced the Breakdown Network. That includes two new shows, Bitcoin Builders, which, by the way, go watch the Steve Lee interview. It's a really, really fun conversation about Lightning and Bitcoin development, as well as a daily AI breakdown, which is also available on YouTube and as a podcast. Now, as part of all that, this show will be leaving CoinDesk. Therefore, if you are listening to The Breakdown on the Coin Desk Podcast Network, Sunday, April 23rd is the last day you'll be able to hear it where you listen. Instead, you'll need to subscribe to the breakdown-only feed, which you can find on any podcast network where you want. So go subscribe and I'll see you there.

All right, friends, well, yesterday was, for so many of us, akin to the Super Bowl of crypto-regulatory action. It was the long-awaited verbal come-up in, for the industry's number one antagonist. Yes, yesterday, SEC Chair Gary Gensler sat in front of the House Financial Services Committee for a grueling four-and-a-half-hour oversight hearing. Now, Gensler last appeared before the House in 2021, although he did appear in the Senate for an oversight hearing in September of last year. Ahead of the hearing notable Republican committee members, including GOP WIPP Tom Emmer, and Representative Warren Davidson, expressed deep misgivings about how Gensler has been running the regulatory agency and foreshadowed a tough

interrogation. The hearing covered a broad range of regulatory changes that have been introduced during Gensler's tenure. This includes climate change disclosure requirements, proxy share ownership, and major market structure reforms, all of which were seen as regulatory overreach by House Republicans. Since Gensler came into office, he has used the agency's rulemaking power at an unprecedented level, introducing 53 new rules in the two years he's been in office. That's more than twice the amount introduced under each of the two previous SEC chairs. Of course, it seems odd, given that one of the key issues the crypto industry has with the SEC is ignoring proper process by avoiding the rulemaking procedure when making changes. But in broader financial markets,

Gensler is viewed as being far too prolific in changing the rules. He's seen as often speeding through the public comment process and increasing compliance costs for public companies with these plethora of new rules. Now, despite all of those issues being raised, the focus was undeniably on the SEC's recent rampage through the crypto industry. Republican Committee Chairman Patrick McHenry got right to the point in his opening comments, which criticized the SEC's approach to regulating digital assets. McHenry said, under your leadership,

the SEC has brought nearly 50 separate enforcement actions against digital asset firms. At the same time, you have refused to provide clarity on whether digital assets as part of an investment contract are subject to securities laws, and more importantly, how these firms should comply with those laws. You're punishing digital asset firms for, allegedly not adhering to the law when they don't know how it will apply to them. It's nonsensical. Regulation by enforcement is not sufficient nor sustainable. McHenry also warned that the SEC's approach

is driving the digital asset industry overseas and endangering U.S. competitiveness. He acknowledged that Congress needs to take the lead in making legislation for the industry, but said that he expects Gensler to, quote, play a constructive role in the process. Now, circling back to the underlying issues with using the SEC in the way that Gensler has, McHenry said, quote, it appears you have been so busy weaponizing the SEC to push your agenda that you've forgotten a key pillar of the commission's statutory mission, capital formation. In closing, McHenry delivered a devastating indictment of Gensler's attitude towards Congress. Your responses to congressional inquiries, McHenry said, have been unacceptable. You have a constitutional duty to conduct your business

in your agency, but we too have a constitutional duty to conduct oversight of your agency. If you continue to thwart this institution, by ignoring our requests and providing incomplete responses, we will be left with no choice but to pursue all avenues to compel the information or documents we need. So that's how we kicked it off with the Republican chair of the committee. Now, Democrat ranking member Maxine Waters, who was formerly the chairwoman of this committee, made her feelings known in her opening statement that this hearing was just a waste of time. She listed multiple financial issues she views as more pressing and noted that, quote, unfortunately today's hearing is not focused on addressing any of those looming crises.

Instead, we are here this morning because last Congress, Republicans threatened to do a big number on the SEC and Chair Gensler, and today is the start of them making good on that promise. Waters defended the rulemaking process under Gensler and advocated for the regulator to be allowed to get on with what she views as important work. Making her position on crypto enforcement painfully clear, Waters said, I would like to applaud Chair Gensler and his staff for the forceful actions the SEC has taken to go after crypto criminals. This is a stark difference to the hands-off approach that the Republican SEC chair took to mask, in crypto. Now we'll talk a little bit more about the partisanship on display here, but the

TLDR is that for the Dems, this whole hearing was a cynical attack, while for the Republicans, the Democrats' response was just another example of their trust-the-experts' view of technocratic rule that has absolutely pervaded. The Democrats really seem to put forward the position that oversight of unelected bureaucrats is a waste of time rather than something that should happen as a matter of course. Next up in the hearing, the ranking members of the subcommittee on capital markets likewise reinforce these hardening political positions. Republican Anne Wagner talked about the weight of too much rulemaking, saying, quote, these dramatic changes you're proposing will cause death by a thousand cuts to U.S. capital formation, while ranking Democrat Brad Sherman took his time to thank

Gensler for bringing the securities acts of 33 and 34 up to date for the 21st century. Thank you, Sherman said, for standing up to the crypto bro billionaires, an area where the multi-billion dollar frauds are just the beginning of the societal harm. After these opening, statements, it was Gensler's turn to present his prepared testimony. Gensur presented an overall view about the importance of the integrity in markets and the protection of consumers to maximize the desirability of U.S. capital markets as a place to invest. Genser was dismissive of the crypto industry, suggesting that the, quote, most transformative technology of our time is artificial intelligence and not crypto, but he also acknowledged that most of the hearing today

would be about the crypto industry. Gensar held firm to his view that investors in the crypto market should benefit from the compliance with the same laws as other markets. It's the law, he said. It's really not a choice. Now, his testimony had been shared in advance as is customary, and Kristen Smith, the CEO for the blockchain association, said, quote, Chair Gensler's testimony perfectly reflects the SEC's approach to the crypto economy. Confusing, unclear, opaque, and ultimately blind to the harm its regulation by enforcement strategy is doing to lawful companies in this country. Now let's discuss some of the big, hot topics that came up as part of this four-hour-plus hearing. And we'll start with one of the big debates,

is Ether a security? McHenry wasted no time getting straight to this point. He referenced the disagreement between the CFTC and the SEC on the matter and asked Gensler directly, is Ethereum a security? Genzer responded in a typically rambling fashion, discussing the principles of the 1930 Securities Act, rather than engaging with the direct question. McHenry clearly pushing for that clear response, cut Gensler off and press the point. I'm asking you, sitting in your chair now, to make an assessment under the laws that exist, is ether a security or a commodity? Gensler continued with his prepared response about entrepreneurs in the middle and the anticipation of profit being contributing factors of how a security is defined. McHenry cut him off again.

I'm asking you a specific question, Chair Gensler. I said this in private. This should be no shock to you that I'm asking this question. The back and forth continued in this manner with neither person willing to back down. Ultimately, McHenry said, do you think it serves the market for an object to be viewed by the commodities regulator as a commodity, and by the securities regulator as a security? Do you think that provides safety and soundness for the product? Do you think it provides consumer protection? Do you think it serves the value of innovation? I think no should be a very simple answer for you here. Now, after watching all of this non-answering, Laura Shin wrote crypto lawyers, why didn't he just say ether is a security? He's implied exactly that multiple times,

saying all crypto assets but Bitcoin are securities. I don't get why he's hemming and hawing. That question got a ton of responses, including this one from Adam Cochran, where he wrote, position is not legally defensible. He's aware of it and doesn't want it on the record under oath. David Barrero writes, because a legislative committee is not the place for the SEC chair to make a specific judgment about a token that's likely under investigation. Lawyer Collins-Belton wrote, not 100%, but a few theories. One wants to avoid need to recuse in future actions. Two, wants to avoid creating arguments that could be used against the SEC EGC ripple. Three, wants to continue using ambiguity as a cudgel. Four, doesn't want a gal to gallows.

and I's action or provide standing. Generally, there was a ton of commentary around Gensler's inconsistency, of saying on the one hand that there is regulatory clarity, but on the other hand, not having an answer on this. Masari's Ryan Selkiss wrote, Chair Patrick McHenry is putting on a masterclass of an opener regarding whether ETH is a security. There is no greater expose of Gensler's double-speak in gaslighting

than his refusal to answer this. 53 enforcement actions but can't answer a simple yes or no question. James Murphy at Meta Lawman writes, Gensler ridiculously claims that there is clarity about which cryptos qualify as securities, but he can't say whether Eith is one. My opinion, this performance by Gensler will make it very difficult for the SEC to ever win a case claiming that ETH is a security. Bill Morgan writes nine years on for Ethereum and with a trading volume over $9 billion per day and the chair of the SEC will not publicly answer Congress whether Ethereum is a security, but repeatedly says there is clarity. You have to pinch yourself to know it's happening and not a bad dream. Now, even for those who want to buy into Gensler's line of regulatory clarity, it still doesn't

justify the SEC's overall approach. Haley Lennon, a partner at Brown Rudnick, writes, let's even give Gensler the benefit of the doubt and say there is regulatory clarity about what is and isn't a security, i.e. every token needs to register as a security, and every exchange that lists those tokens needs to register as a broker-dealer or something else. Even then, the SEC needs to make the path to registration, disclosures, quarterly reporting clear. meaning there is still lack of regulatory clarity. Morrison Cohen's Jason Gottlieb responded saying,

Haley Lennon, you're totally right here. Is token X's security is the 101 class? Let's say for the sake of argument they're all securities. How do the securities regulations account for the trading of the embedded commodity? Disclosures required for dormant projects, holder lists, etc. Spoiler alert, you can't. It's basically impossible under current regulations. So the choices are, make new law regulations,

allow for experiments and don't enforce against good actors trying hard, Or just say no, enforcement actions for all. SEC choosing the latter path. Sigh. Gensler also got grilled on FTX. Republicans have recently demanded information about the timing of the SEC's investigation, which they haven't gotten.

They didn't really get any more information during this hearing either, but they certainly brought it up. Republican Bill Posey asked whether Gensler had any concerns about FTX prior to its collapse. Gensler responded, quote, Since I've been in this job, I've had a general concern about the field,

and about the noncompliance of this co-mingling of very various functions. Still, despite direct questions around whether he had specific concerns about FTX ahead of its collapse, Gensler had no substantive answer other than to point to charges filed in December. Republican Bill Huizenga took issue with the manner in which the SEC has been responding to request for information from Congress, asserting that the agency has only been providing publicly available information and failing to engage properly with the notion of oversight and accountability. Huizenga said it's insufficient and frankly unacceptable what has been going on. One of Huizenga's main concerns was that lawmakers have been

unable to get to the bottom of timing around charges brought against SBF. Gensler answered that he is required to keep investigations confidential, to which Ruzanga responded, don't hide behind the DOJ. Masari Selkis again wrote, If Chair Gensler was a fireman, he'd show up with a garden hose the day after the fire was already out. It's not that he's mean, it's that he's weak and ineffective, big talk, zero results. It's FTX, Block 5, Voyager, and others after they're already dead. Is that success in D.C.? Now, one of the most anticipated testimonies came from GOP-WIP Tom Emmer. Emmer came in hot, asking Gensler to restrict himself to yes or no answers to make the best use of available time. Emmer steamrolled through a string of questions designed to evoke the idea

that coordinated government actions had restricted the ability of the crypto industry to access financial services and operate in the U.S. Reaching a crescendo, Emmer asked whether Gensler was in charge of the SEC when FTX collapsed and when Luna collapsed, attempting to paint the picture that his agency has been asleep at the wheel. Emmer's real point was that there is a lack of clarity in regulations for the industry, saying, I must remind you, your public statements are not regulations. It's not responsible to expect the American people to assume your statements are a substitute for rules. Emmer asked whether Gensler is concerned that his, quote, approach is actually driving the industry

out of the United States. Gensler responded that he is simply trying to, quote, drive it to compliance. Tying it all up, Emmer noted that both Binance and FTX were domiciled abroad, as well as the fact that there appears to be a major push by Hong Kong to welcome crypto firms, taking advantage of the hostile regulatory environment in the U.S. You can't really think, Emmer said, that pushing this industry abroad is going to protect American consumers when it hasn't several times in the past on your watch. You say the crypto market is rife with noncompliance.

However, existing SEC rules make no sense for blockchain-based companies, and following them would actually kill these businesses. Your regulatory style lacks flexibility and nuance. As a result, you've been an incompetent cop on the beat, doing nothing to protect everyday Americans and pushing American firms into the hands of the CCP. Your intention to work against the SEC mission and put America. American investors in harm's way has been made very apparent, sir. Another anticipated firebrand was Republican Warren Davidson, who has gone so far as to actually

introduce a bill to remove the position of chairman and replace it with an executive director who would report to a board with ultimate responsibility. Now, Warren made a lot of the same points that others had about the contrast between Gensler not being willing to say whether Ethereum was a security while also saying there's clarity, but he also dropped perhaps the most soundbite of soundbites of the entire setting. Walgis writes, wow, Warren Davidson asks directly, did you coordinate with Elizabeth Warren on acceptable answers for this hearing? Gensler refuses to answer but is visibly shaken by the follow-up. Friends, if politics is theater, this was friggin Shakespeare. Now, maybe the most

commented on thing of the whole hearing was Gensler's admission that he'd never owned or used any crypto. When he was asked if he or senior staff had digital wallets and owned crypto, he noted that the ethics rules prevent it, but also responded that he had never owned any Bitcoin or other crypto assets. This truly gobsmacked crypto Twitter, because remember, this isn't just a career bureaucrat. This is a guy who taught about Bitcoin and digital assets at MIT. Justin Slaughter, the policy director at Paradigmund writes, Chair Gensler just testified that he taught multiple courses on crypto, but has never owned or used it. How can you teach a course about something you've never owned or used? Much of Chair Gensler's pitch to other policymakers is that he understands

crypto because he taught a course on it. But how is he competent to teach a course about something he's never actually touched? Scott Melker made it even more simple. We cheered Gensler when he became SEC chairman because he taught about Bitcoin and blockchain at MIT. Turns out, he's never even owned it. This guy is a sham. Now closing it out, freshman Republican Congressman Brian Donald's questioned the authority of the SEC to make rules in a range of areas including crypto. Indeed, he made maybe the most salient point of the entire hearing. To Gensler, he said, you are making a determination and a definition without congressional authority. We're not giving you authority. You're just taking it. Still, as William Moggiar pointed out in a tweet,

Mr. Donald's is right, but Congress needs to hurry and give the SEC some direction. Otherwise, they will keep taking it and making it as they see fit. So as we wrap up, let's try to summarize. One big theme was the utter contempt a major regulator has for an entire industry that was just palpable this entire time. Bankless host Ryan Sean Adams wrote, how in the world is it okay for our regulators to hate an entire asset class? Aren't they supposed to be neutral? Let the markets decide. Yet we have regulators in the U.S. who are openly anti-crypto, and somehow that's okay. I think a second theme was that this is all just politics. Bill Hughes, a lawyer at consensus writes, honestly, if Gary Gensler wanted crypto companies to exit the country, the SEC would say,

we won't sue you if you leave, but they aren't doing that. The fight is the point. He knows they capitulate, or it's finished well after he's gone. This is good press, until it's not. And indeed, even from the standpoint of the good guys who we agree with, it was definitely politics. The Davidson line about Elizabeth Warren was masterful political theater. It's going to get him donations, probably for me. What it's not likely to do is actually change things. And there is a huge outstanding question of the value of even having these hearings. A third big theme was that partisanship is finally here. For those of you who have been listening for years, you've probably heard me comment about how resilient to the political maw and crushing partisanship in the U.S. Bitcoin and Crypto have been.

It's increasingly hard to see that as true, though. Felix Hartman tweeted, crypto was nonpartisan for around 12 years. I remember sometime in 2020, 2021, where Warren and Cruz emerged picking sides and it's been politicized since. The opening statements between McHenry and Waters could not have been more stark. From warning of a removal to applauding. You can sift through a decade of my tweets and not find a single political party mentioned most likely. But today, if you work in crypto and vote Democrat, you are likely voting for your own eventual

incarceration. Democrats have chosen to persecute while we have real defenders like McHenry, Lumice and Davidson fighting for a crypto future. Unfortunately, I agree with Felix much more than I'd like. But for those who are progressive Democrats, or who simply believe that Bitcoin is too big for one political party, I would suggest that the bright spot is that age lines matter as much or more. as party lines. Democrat Richie Torres, for example, is 35 and a hell of a lot more crypto-savvy than even some much older Republicans. Like the Republicans, he had many questions for Gensler, around things like why he targeted relatively compliant firms like Coinbase and Paxos, rather than going after more risky offshore firms. Torres said it seems like your enforcement priorities ignored

the lessons learned from the FTX failure. So where do we go from here? Well, I will say that this was richly satisfying to see this level of grilling of Gensler after all of his silly little videos and meming targeting the industry. But what we need is not hearings, it's laws. We need Congress to step up and actually set the rules of the road for this industry. Or else, as others have said, the SEC will just keep doing whatever the hell it wants to. There is luckily some progress on that front. We've got the House Stablecoin bill. But ultimately, that's really where the rubber will meet the road. Anyways, guys, that's it for today. There is another hearing going on right now, one that I hope will be even more productive. So look for more information about that tomorrow. And until then, be safe and take care of each other. Peace.