The Breakdown - Defeated-Seeming Gensler Takes Congressional Shellacking

Episode Date: September 26, 2024

At the SEC's annual oversight hearing with the House Financial Services Committee, it was pretty much the "tell Gary Gensler what a terrible job he's done" show. And this time, it was coming from both sides of the aisle. 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

Welcome back to The Breakdown with me, LW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Wednesday, September 25th, and today we are talking about an extraordinarily contentious SEC hearing. Before we get into that, however, if you enjoy the breakdown, please go subscribe to it, give it a rate and give it a review, or if you want to dive deeper into the conversation, join us on Breakers' Discord. You can find a link in the show notes or go to bit.L.Y slash breakdown pod. All right, friends, a quick note as we get into this show. I think it is safe to say at this point that all of us in crypto are desperately, desperately sick of dealing with the SEC and talking about Gary Gensler.

Not to say my agony is worse, but as someone who covers this industry every single day, let's just say I feel the pain of this being the thing that we have to talk about very acutely. And indeed, this is what's so pernicious and frustrating and just ultimately awful about the SEC strategy over the past few years. It is one big, massive, annoying distraction from building, from creating, from getting people interacting with these tools, with these new platforms, with these assets. Clearly, as you'll see from this, we have rounded a corner in terms of the fedness spilling over from just us to a much wider set of people. There is light on the horizon that we may not have to burn Gensler and effigy for much longer. However, for the time being, the type of hearing that we're going

to cover today remains the big event. And so cover it, we shall. SEC Chairman Gary Gensler came under fire during an oversight hearing before the House Financial Services Committee yesterday. Lawmakers on both sides of the aisle erred out their frustration with the way his agency has handled crypto policy over the past three years. These annual hearings are routine, but have become increasingly hostile as Gensler's term has worn on. For the first time since 2019, all five SEC commissioners were present to give testimony. Republican commissioners, Hester Perce, and Arcueda were vocal about their disagreements on how the Gensler SEC has operated in general, but especially when it comes to digital assets.

Chairman Patrick Henry did mince words. He opened a hearing by stating, a lot has changed since 2019 in our markets, the broader economy and the SEC itself. Unfortunately, not for the better. Under Chair Gensler, the SEC has become a rogue agency. It routinely exploits its authority to the detriment of our capital markets, innovation, and the American people. A wide array of federal judges appointed by presidents of both parties have noted the lawless nature of Chair Gensler's tenure by overturned rulemakings and enforcement

actions. McHenry then rattled off a string of examples dealing with all aspects of capital markets. For crypto, he highlighted the SEC's losses in the grayscale ripple and debt box cases. And this set the ton for an overarching focus of the hearing, which was Gensler's aggressive rulemaking agenda. Outside of crypto, where basically no rulemaking has been conducted, the Gensler SEC has been one of the most prolific, minting new rules at a record pace. McHenry commented, what stands out in this massive rulemaking agenda is the fact that Chair Gensler has failed to pass a single rule focused exclusively on facilitating capital formation, a key pillar of the commission's statutory mission. The fact that so many of these rules have been overturned by the courts is a black arc against the agency,

particularly since 2022, when it has often worked at cross-purposes to the Republican-controlled house. McHenry warned that the days where the SEC can, quote, unilaterally expands it to 30, are coming to end due to recent Supreme Court rulings. He summed up, it's clear Chair Gensler's legacy will be defined by turning a one, one's proud institution of the SEC into a rogue agency. Flip over to Democrat-ranking member Maxine Waters, she made news early by publicly calling for a bipartisan effort to sign Stablecoin legislation into law by the end of the year.

She said, I was to strike a grand bargain on Stable Coins and other long-overdue bills. Since 2022, we've been working for hours on end to reach an agreement and have each made concessions. I strongly believe we can reach a deal that prioritizes strong protections for nation's consumers and strong federal oversight. The longest runic sticking point at this point for Stable Coin legislation are disagreements over whether state regulators would be allowed to approve stablecoins.

Waters' position has been that allowing a state pathway without oversight of the Fed is deeply problematic. Waters seemed to be doing the negotiating in public, though, adding, our bill can have several paths for stable coins to be created. But like nearly every other country that has a stable coin framework, the several bank played a dominant role in overseeing this market. And importantly, stable can only be truly stable if they are backed by safe and liquid reserves like short-term treasury bills. She concluded, I'll be honest, with less than three months left in this cost,

we're running out of time to pass this. I know we can get this done if we focus, so let's get this done. Turning and pointing at McHenry with a rise, she added, I've made a public statement to you about bipartisanship. Let's see what you do with it. McKenry seemed amused by the situation. He said he was hopeful that Congress can pass a stablecoin bill and, quote, provide a little clarity when it comes to digital assets generally.

However, he said that when it comes down to exactly how that should be done, the votes get a little tougher to gather. McHenry thanked orders for the public outreach, which he noted was confirmation of something she has privately told me in no uncertain terms. There was clearly some type of powerplay going on in this exchange, with McHenry stating with a chuckle, Don't get cornered by Maxine Waters. Getting into the substance of the hearing, McHenry led off with a question about the SEC's terminology. He listed six for ways the SEC has referred to crypto tokens, including the most notorious

crypto asset securities. Gensler responded that the precise terminology doesn't matter. The real issue is the facts and circumstances of each case, adding, the labels matter less than what the economics are. McHenry impressed upon Gensler that words have meaning, and the SEC's lack of precision has led to a lack of clarity for the industry. He referenced an updated complaint in the Binance case, which was filed last week. Buried in the footnotes was an admission to the court that the use of the term digital asset

securities was misleading. The SEC claim they ever meant it to employ that tokens themselves are securities. At this stage, Gensler diverged into a response about his belief that all clarity in the world has been supplied by securities law and the Howie Test. This is a tactic McHenry has seen time and time again at these hearings, where Gensler rarely addresses criticism head-on and often refuses to engage with the actual question being put to him. McHenry fired back. are clear, but what we're seeing from the SEC is a lack of clarity.

The direct question was about the different terms. Instead of answering that question, you answered a separate question. Kudos to you. This was the first instance where we saw the benefit of having the entire commission present. With Gensler off on his own journey, McHenry turned to Puce, and asked whether multiple terms were being used because of the lack of clarity within the SEC itself. She responded, I think what's happened is that we're trying to be ambiguous because the legal precision carries with it real implications.

And this is why people have been coming to us in saying we need clarity. Is the token itself a security, or is it being sold together with an investment contract? If it is, what is that investment contract? And how long does it track along with the token? By using precise language, we've been able to suggest that the token itself is a security apart from the investment contract, which has wide implications for secondary sales. We've fallen down our duty as a regulator by not being precise. Tucking into a footnote that, yes, we admit that the token itself is not a security. That's something we should have admitted long ago and wrestled with the difficult questions.

Perhaps the highlight of the hearing came from House-Mority-Wipped M. Who unleashed an absolute tirade on Gensler. He began by establishing that hiring decisions within the SEC have been made through a political lens, putting to the chairman that, quote, the way you hire and the culture you require encourages your staff to have loyalty to you, above the law and above the mission of the SEC. Ever then referred to the debt box case, where SEC lawyers were found to have misled the court. He added,

Your attorneys who no doubt heard your anti-crypto rhetoric, which is based in law, went out and deliberately lied to a court in order to effectuate the commence from their prosecute crypto companies. Do you know any other time in history where the SEC has been sectioned by the court for material misrepresentation? The answer, of course, to this question is none that this has never been under any other SEC chairman. Continuing to lay into Gensler, and queried, does the fact that we're talking about this today even slightly embarrass you? Gensler shrugged that off, agreeing that the matter was not handled well. And asserted, the debt box case should absolutely be embarrassing to you, sir. The SEC had to

pay with taxpayer dollars, nearly $2 million in legal fees for this material mispresentation, for this lie. And established that none of the recent senior departures at the SEC related to this scandal and highlighted, the SEC broke the law. Your attorneys lied to the court, and no one in your leadership has been held accountable. Sounds like business as usual here in Washington. Plowing ahead, Emmer discussed the recent pivot from the Harris' at a weekend fundraiser, he said she would encourage innovative industries like Koto and offer consistent transparent rules of the road. Amher suggested this was a rebuke of Genzer's approach over the past three years. Gensler could only manage a canned response to that, stating that he's just forcing the laws in a widely non-compliant industry.

Reaching his crescendo, Emma launched into a monologue, stating, It's very interesting that you view your performance that way because there's a litany of court cases, extraordinary confusion in the marketplace and millions of Americans pining for clarity from you. You've abused the agency's enforcement tools, and you've even bated companies eager to comply with you, only to hit them with enforcement actions. You've retaliated against businesses and people who have come before this committee to talk about the next generation of American finance. And some, worst of all, you made up the crypto asset security. This is nowhere to be found in statute you made it up.

You never provided any interpretive guidance on how crypto asset security might be defined within the walls of your SEC, yet you made the broad proclamation that you believe the majority of tokens are cryptoasset securities. You did this and you deliberately use this made-up term as the basis for your entire enforcement crusade over the past three years, only for your lawyers to retract it in a footnote to a court just last week. Your inconsistencies on this issue have set this country back. We could not have had a more historically destructive or lawless chairman of the SEC. Hello, friends. Before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives,

and the reason it's so important this year is that despite regulators' best attempts to push industry, founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turned. Policymakers have pivoted from fighting crypto to embracing it. Literally now we are in a major political party's platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. permissionless is the conference for those use and building on-chain products. It's home to the power users, the devs, and the builders.

And perhaps more importantly, I will be there. The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.com. There will be links to register for the conference, and again, you can use Code Breakdown 10 to get 10% off. While that really was the crescendo, there were still other notable conversations as well.

Republican Warren Davidson took full advantage of having the full commission isn't, using his time to dig into how Gensler's SEC operates. He asked whether their rulemaking and enforcement agenda reflects the priorities of all commissioners or if the SEC has become an extension of Chairman Gensler's agenda. Pers simply confirmed that the agenda is the chairman's agenda. Davidson quipped that he wasn't surprised. He added that for one of the Democrat commissioners. It seems like it's the first time he's ever been asked for his opinion on anything.

Davidson and Persons sometimes discussing the merits of the special purpose broker-dealer license. This licensing path for crypto exchanges was established in 2020. So far, only two licenses have been issued, and neither from has launched a platform with any meaningful adoption. First said, at the time it came out, I said it could be a baby step, but that was four years ago and the baby's not walking at, so I'm not as optimistic as I was then. Davidson said he was also concerned, especially as the pathway opens up a separate path, where, quote, Chairman Gensler's friends and allies could get special permission and the rest of the

could be excluded. He went down the panel to ask if any of the commissioners had been pressured to withhold licensing. First clarified that the commissioners are not involved with individual licensing decisions, but added, The issue is that there's a clear message from the SEC that we're not trying to move the crypto industry forward. Democrat Wiley Niple made the criticism of Genser's work bipartisan. He said, Your open hostility towards digital assets is setting the U.S. behind the rest of the world.

It's also hurting the Biden-Harris administration. You've single-handedly underlined the administration on Web3 issues with your war on digital assets. There's a very strong progressive case for digital assets in blockchain technology, a technology that is bringing cost down for my constituents. Nicol is not contesting his seat in North Carolina in this election after a redistricting shift his constituency to the right. However, he has been outspoken about the need for the Harris campaign to engage with the crypto community to avoid forfeiting their vote.

Nichol suggested that the Harris pivot, mild as it was, served as a rebuke of censor's approach to digital assets. In a telling moment, Nicol went down the panel to ask each question whether they agreed with Harris's statement that the government should support innovation while protecting investors. This was an easy and simple yes from everyone, Barr Gensler. When the question got to the chimpin, he gave the mealy-mouthed response. Protecting the investors, I agree with that for sure. Promoting innovation, yes, but protecting investors.

Trying again, Nick will ask for a yes or no response. Gensler said, yes, protect the investors. That's what we're doing. And this was maybe the key theme of the hearing, with lawmakers on both sides criticize Gensler for ignoring his mandate to support capital formation. Republicans largely referred to the crypto industry, but Democrats also noted that Gensler's SEC has done nothing for small businesses and underserved communities. In terms of other highlights, there were, of course, as you would imagine, several discussions of Staffacang Bulletin 121, which effectively prevented banks for off for crypto custody. The rule has been in the news recently what

the SEC revealed to be holding confidential meetings with the largest custody banks to provide individual relief. Both Nicol and Mike Flood addressed how inappropriate this approach was, especially after Congress had voted to repeal the rule. They argued that their tensions were clear to spite of presidential veto and that the SEC should have rescinded their rule on their own accord. Gensler insisted that the rule was simply intended to reflect decisions that had been made in bankruptcy court where customer assets were recognized as liabilities of bankrupt custodians. If this really was the intention, then it implies that Gensler's SEC accidentally banned banks from providing custody by fail to recognize the implications of the rule. During his time, Flood was furious that the

SEC had failed to recognize the will of Chris, stating, the situation we're in today is indicative of a failure of your organization to recognize just how problematic SB 121 has been. At the end of the day the SEC needs to read the room. This is not a good look for the SEC. This should go away. This is bad policy. Ultimately, it appears that the question is one of culture. Throughout her testimony, Hesterhurst made oblique references to SEC culture. However, she was always careful to frame her statements in terms of a difference of opinions on how the work of the regulator should be prioritized. Toward the end of the hearing, she said, I think this is the problem with our approach to crypto assets, which is we leave people to read the tea leaves of our enforcement actions. Unfortunately, when looking at what we do,

it's very difficult for people to read those tea leaves, because we've been pretty inconsistent in how we treat things. So there's little for people to rest on, and that's not a good way to regulate. It's not serving anyone. It's not even serving ourselves, because we're spending so much on enforcement in crypto that we could be saving by just writing rules and enforcing them against bad actors. While Pursz was careful to remain diplomatic, Mark Ueda was much more direct when discussing cultural issues within the Gensler-S.E For Context, Ueda is a long-term SEC staff having served with the agency since 2006. Most of the other commissioners came to the agency from other political roles. Most notably, Gensler, who has rotated through various departments since 1997.

You Ada spoke to the impact on staff morale after losing court case after court case under Gensler. He said, these losses to the agency are devastating. In the late 2000s, we lost a series of challenges in court to the commission's rulemaking. Following that, the mantra was never again. We need to be the gold standard in administrative rulemaking. Unfortunately, we've regressed. It is now, do what you need to do, which is the minimum required by law. That's like say a D-grade is a passing grade.

I served with six chairman. Unfortunately, our condition today in rulemaking is below the average. And while there was a certain catharsis to seeing Tom and rip Gensler apart for the umpteenth time, for most people, it was UADA's testimony that really hit home. He instantly suggested practical solutions, like holding roundtables and engaging in more outreach. He made it clear that he has been watching a crypto issue go and resolved for his entire time at the SEC. Crypto lawyer Gabriel Shapiro picked up on this commentary, saying, Youada fully thrown Gensler under the bus with detailed facts and comparisons to past SEC practice is a thing of beauty.

As some who's dealt with the SEC on and off for 14 years, I have often said the SEC is now a rogue agency. Granted, they were always a bit overreaching, but they used to be professional. This testimony seemed to leave a lasting impression on the lawmakers as well. Republican Andy Ogles closed the hearing by stating, What consists is the idea of the gold standard is gone. Under the current leadership, we've seen an agency go rogue, that has overstepped its authority, that has made policies that have been overturned by the courts.

We've seen the investor pay the price for activist regulation. Enough is enough. When he asked Yuato what he would do if he was placed in, and Jueta responded, what we need to do is go back to our core values, which is maintaining fair, orderly, and efficient kits, protect investors, and facilitating capital formation. Those are all three equally important parts. I think to a certain extent we've been a bit out of balance. Now, of course, the question is, what happens? Well, what happens next is going to be largely dictated by what happens in the elections,

but as I said at the beginning, it does feel like we are coming to ahead with this issue, that we have turned the corner from the frustration just being on the part of the industry, and there are consequences to that. Gensler is, to some extent, more boxed than he was before. Anyways, that is the story from this week's here. Let me know what you think of in in the comments. And of course, thanks, as always for listening. Until next time, be safe and take care of each other. Peace.