The Breakdown - Congressional Republicans Lash Out At Gensler

Episode Date: September 29, 2023

There were some fireworks at the recent House Financial Services Committee oversight hearing. It's clear that Congressional Republicans have run out of patience for SEC Chair Gary Gensler and could begin using subpoena to compel more answers. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

And at the end of it all, after dealing with several more non-answers from Gensler, and exasperatedoggles closed the hearing with the call to, open up the floodgates, hit him with subpoenas, get the information we need. The obfuscation, the not answering questions, I'm sick and tired of it. Dude, you wear tap dancing shoes better than Fred Astaire, and enough is enough. It's time that questions are answered and that we have the information that we need. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture PowerShe.

shifts remaking our world. What's going on, guys? It is Thursday, September 28th, and today we are talking about Gensler's combative hearing. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit.ly slash breakdown pod. Well, friends, we had yesterday another hearing featuring SEC Chair Gary Gensler. This was a House Financial Services Committee Oversight Hearing, and what makes this one a little bit more interesting even than the Senate hearing that we heard last week is one, it had some interesting lead-in in the fact that a bipartisan group had just sent Gary Gensler

a letter encouraging him in the strongest possible language to approve a Bitcoin spot ETF, and two, it had the setup for some very interesting fireworks heading in. And indeed, that is exactly what we got. Community Chairman Patrick McHenry set the agenda from the beginning with his opening remarks. He addressed Gensler saying, Last time you were before the committee, I voiced my concerns regarding your reckless approach to rulemaking, lack of capital formation agenda, crusade against the digital asset ecosystem, and unresponsiveness to Congress. So many things change, so many things remain the same. Those are the same issues on the docket today.

McHenry went on to accuse Gensler of doing nothing over the past five months to, quote, remedy the legitimate and often bipartisan concern expressed by this committee, adding that, quote, this is disgraceful and that their patience was wearing thin. Now, the Republican critique of Gensler's rulemaking agenda is that a huge number of rules have been proposed during his term without an economic analysis being performed on their cumulative effect. Regarding the crypto crackdown, McHenry rebuffed Gensler's constant assertion that the law is clear. He stated, your actions have created more confusion and lasting damage. Indeed, he said that contrary to the SEC's role of consumer protection, that Gensler's actions had, quote,

pushed legitimate digital asset activities outside of regulated financial institutions where consumers are best protected. Keep in mind, this is all in the opening statements. McHenry went on, noting that the SEC's regulation by enforcement agenda has been ineffective and has been on a massive losing streak in the courts. Still, the main point, the main thrust of McHenry's opening was that it was unacceptable that the SEC had not engaged with Congress. Rapping it up, McHenry said, the SEC is not above the law, nor is it unique. I do not want to be the first chairman of this committee to issue a subpoena to the SEC, and you should not want to be the first SEC chair to receive a congressional subpoena. Either we find a path forward where the SEC recognizes Congress as a co-equal branch of government

and is responsive to our oversight duties, or my option is to issue that subpoena. It's time for you to consider the lasting consequences of your actions and what that means to the SEC's reputation long term. While your time in this role may be temporary, the repercussions for your actions may be permanent for the agency. It was a fierce opening that sent the signal right away of what we were in store for. Now, a couple other quick notes around other opening statements. Democrat ranking member Maxine Waters used her time to rail against MAGA Republicans for pushing the government into a shutdown, and effectively defended the SEC's agenda on all fronts, and asserted that their rulemaking agenda was moving, quote, thoughtfully and effectively.

Now, Gensler himself also got a chance to give an opening statement. And most of his time was spent on justifying the agency's regulatory agenda. He claimed overall that the rulemaking process had been measured with ample time and consideration given to public comment. Now, from there, we moved into the question section of the hearing. McHenry as committee chair got to go first and used his questions to focus on Bitcoin. He asked Gensler whether he stood by his previous comments that Bitcoin is not a security, which Gensler evaded by talking in circles never reaching a point. Notably frustrated by this process, McHenry snapped,

I'm asking you to answer my question now. This is not supposed to be hard. Unable to get a straight answer, McHenry moved on to his point that there is currently no regulator with authority over Bitcoin's spot markets. He asked whether Gensler believed legislation should be passed to close that regulatory gap. To the surprise of no one, Gensler continued in his non-committal manner, acknowledging the existence of said gap, but failing to engage with the need for legislation. After that, McHenry left the crypto topic to press Gensler about when he can expect a response to document requests. Becoming ever more frustrated with Gensler's mealy-mouthed

dancers, McHenry said, this should not be the hard work of a chairman. You have 30 major rulemakings, but you won't even provide basic documents to us. Your unresponsiveness is noncompliance and will have to take action if you're not willing to comply. Now Maxine Waters again as ranking minority member got to speak next. She too continued on the crypto theme, although she used her time to accuse the industry writ large of, quote, gross violations of the law that end in investors getting ripped off. She asked Gensler what the SEC has done to, quote, shut down crypto firms, and whether, quote, crypto firms are getting the message. This, of course, mainly served to set up Gensler's usual soundbites. This is a field, he said, that's rife with fraud manipulation and scams,

and the American public is still getting hurt by the noncompliance in this field. Waters also used this chance to castigate Republicans who, quote, too often protect crypto firms. Now, it was very clear listening to Waters that she wants the public to see the crypto industry as just Luna and FTX, to extrapolate them to everything and effectively shut the industry down. Now, moving into the rest of the questioning, much of the substantive discussion centered on SEC Staff Accounting Bulletin 121. Better known as SAB 121, this measure requires financial institutions to place intangible assets on their own balance sheet rather than in segregated customer accounts. The rule has been widely criticized for making crypto custody essentially unworkable

for banks. Disatisfaction was expressed from numerous representatives, including one of Gensler's usual allies, Brad Sherman. Sherman noted that the rule lumps all intangible assets together from real estate to crypto. He suggested that specifically designed rules for vastly different asset classes would be more appropriate. The most robust questioning on this topic, however, came from Republican Mike Flood. Flood put to Gensler that his staff did not consult with prudential regulators on SAB 121, which Gensler acknowledged. After stating that he had personally looked into this issue, Flood noted that the accounting standards board had not published any guidance around crypto custody. This contradicted Gensler's comments from a previous

hearing when he stated that the SEC was simply applying existing accounting rules. Flood said, quote, with regard to SAB 121's potential effects on a bank's balance sheet, it's fair to say that the fact pattern we have is that the SEC is not just going out of its lane, but it failed to comprehend the existence of any conflict with prudential rules. He suggested that there are only two explanations for this action. Either the SEC knew there was no justification for SAB-121 and chose to do it anyway, or that there were fairly obvious mistakes made during that process. Flood concluded saying, quote,

The case of SAB-1211 raises the question of whether the SEC is compromised. Now, as you might expect, Minority Whip Tom Emmer lined up to take his shot, with a series of rapid fire yes or no questions. The main thrust of his questioning was around whether Gensler's history as a partner at Goldman Sachs had colored his agenda at the SEC. To get a sense of Emmer's opinion on this, just look at his tweet from yesterday where he said, Fact, Gary Gensler is not an impartial regulator, and his answers to my questions today prove just that. He's made a career of being relentlessly loyal to the largest institutions in America at the clear expense of innovation, competition, and everyday Americans. One example, Emmer presented

Gensler with a quote he previously gave about bank executives being concerned about depositors moving money into crypto. Emmer asked, can you assure this committee that your style of regulation by harassment towards digital asset innovation is to the benefit of every American and not driven by your desire to protect industry incumbents? At another point, Emmer asked whether Gensler believed that all crypto tokens were securities, which was once again avoided with a rambling non-committal answer, and all of this built up to the big finale in which Emmer said, Mr. Gensler, despite your years of rhetoric, I'm convinced you are not an impartial regulator. Instead, it's clear you are working to consolidate your own power, even though it means

crushing opportunities for everyday Americans and, frankly, the financial future of this country. Even the federal courts are highlighting the damage you, sir, are doing to our constituents, and they are telling you you don't have the legal authority to accomplish your goal of squashing competition in the financial markets. Now, while this was extremely satisfying to watch, if you happen to agree with Emmer, in general, I find that this type of interaction is exactly why these hearings are so much about politics and not really about productive anything. This was a chance to articulate the Republican position against Gary Gensler. There's no real place for listening. It's about laying out a narrative. Now, in this case, I happen to agree with Emmer's narrative, but it still doesn't

make for the most effective governance. Another notable line of questioning came from Democrat Richie Torres. Torres used his time to dig into the issue of whether crypto should be governed by securities law. He said, I worry that the term investment contract has become so infinitely malleable and manipulable that it means whatever you unileged. I'd laterally think it ought to mean. I worry that when it comes to crypto, your interpretation of the term investment contract has no limiting principle and therefore could invite arbitrary and capricious enforcement action. Torres referenced in August report from six law professors which examined the history of the Howey test. That report had noted that no Supreme Court ruling has ever

determined the existence of an investment contract scheme without recognizing one or more contracts underlying that scheme. When pushed to provide a case that contradicts this research, Genzer was unable to do so. When Genzer began to waffle, Torres cut him off. stating that, this is a question to which you should know the answer because the definition of an investment contract is the central issue. That's what determines the extent of your authority. That's what determines the applicability of federal securities law to crypto transactions. Your inability to answer that question is baffling to me. Switching tactics, Torres asked whether purchasing a Pokemon card would constitute a securities transaction. Gensler, as always,

was unable to give a straight answer, stating that he would need to know what the context was, although generally he acknowledged that it would not be. Torres followed up by asking whether purchasing a tokenized Pokemon card would be considered a securities transaction. He asked Gensler if, quote, for you, the process of tokenization is what transforms a non-securities transaction into a securities transaction? Gensler, of course, did not get to a real answer and just fell back on restating the elements of the Howey test. One other topic that you might be wondering if it came up was the Prometheum question. Prometheum was, of course, the first crypto firm to obtain SEC registration as a crypto brokerage. Despite the fact that that license

seems to give them no ability to actually offer digital asset trading. Prometheum is also minority-owned by a prominent Chinese firm. After Gensler failed to express any serious concern with the Prometheum situation, Congressman Ralph Norman noted that the SEC had taken 10 weeks to respond to a letter on the issue. He said, this is just a non-response, it's just words. What's concerning to me is that if someone in your role is just shuffling paper, it's dangerous to this country. Ten weeks to get this? To get this letter? It's really an insult. Andy Ogles brought the four-hour hearing full circle, saying, I want to echo the chairman in saying that I think we've come to this crossroads where subpoenas may be necessary. It seems that compliance with requests for information and documentation have been a shortcoming.

And at the end of it all, after dealing with several more non-answers from Gensler, and exasperated ogles closed the hearing with the call to, open up the floodgates, hit him with subpoenas, get the information we need. The obfuscation, the not answering questions, I'm sick and tired of it. Dude, you wear tap dancing shoes better than Fred Astaire, and enough is enough. It's time that questions are answered and that we have the information that we need. So what can be drawn from this hearing, if anything? Well, Gensler appears to be stubbornly sticking to his plan to evade document requests and oversight from Republican representatives.

Over the four-hour hearing, there were few, if any, answers from Gensler that produced any new information, or even frankly attempted good faith engagement with the questions. Throughout the hearing, Gensler acted as if he knew there would be no serious repercussions, and he could continue to treat congressional oversight as a joke. Republicans, for their part, are clearly fed up and ready to act. McHenry began and ended the hearing with a threat to subpoenaed the SEC and Gensler to compel a response to the numerous document requests that have gone unanswered. The threat seemed to carry little weight for Gensler, who seemed more than willing to allow that controversial action to play out. Now on the flip side,

establishment Democrats appear entirely disengaged with the legislative process and committed to the current strategy of naming failed crypto projects and demanding that the SEC continue its rampage throughout the industry. No senior Democrats appear at all concerned that the SEC is losing in court, as long as that litigation remains a roadblock for the industry. Representative Torres remained a bright spot and one of the few Democrats breaking with his senior colleagues. His questions showed a deep understanding of the legal issues surrounding token lawsuits and the need for additional clarity and crypto regulation. Overall, the hearing really just confirmed what we already knew about Gensler and his leadership of the SEC, which is, of course, that it seems

very unlikely that anything will change. However, Republicans have now clearly reached the end of their rope and are ready to play hardball by using subpoena power. As Bill Hizenga put it to Gensler, what's your plan? Because we've got a plan. Until next time, guys, be safe and take care of each other. Peace.