The Breakdown - Gary Gensler's Terrible, Horrible, No Good Very Bad Month

Episode Date: July 20, 2023

SEC Chair Gensler is being assailed on all sides from Democrats and Republicans alike -- and not just about his crypto policies! NLW breaks down the news and asks what it means as we move into election season. Today's Episode Sponsored By: In Wolf's Clothing -- The first startup accelerator exclusively for Bitcoin and Lightning startups -- Applications for Cohort 3 open NOW -- https://wolfnyc.com/apply ** Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto 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, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, July 20th, and today we are talking about Gary Gensler's terrible, horrible, no good, very bad month. Before we dive 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 in the show notes or go to bit.ly slash breakdown pod. Hello friends, welcome back to the breakdown. Just briefly before we dive into today's topic, I want to tell you about our sponsor. Today's episode is sponsored by In Wolf's Clothing.

Wolf is the first startup accelerator that is 100%, and I mean 100% focused on Bitcoin and Lightning companies. If you've listened to Bitcoin Builders at all, you've heard about some of the really cool companies that have gone through their first cohorts. And right now, they have just opened up applications. for their third program, which will take place in New York City this fall. Companies that participate will get access to mentorship, a guaranteed $250,000, and the chance to raise more money as well. If you have a Bitcoin startup and you're interested in that, go to

Wolfnoyc.com to learn more about the program. Thanks again to Wolf for sponsoring the breakdown. Now, it has been a bit of a rough stretch for everyone's favorite SEC chair, Gary Gensler. It started in many ways with the self-inflicted wound of having Prometheum testifying before Congress on June 13th. Nominally, the point of that was to show off how a firm could be registered with the SEC, thus nullifying all the complaints of the crypto industry. However, when push came to shove, it seemed pretty clear that all was not what it seemed. First of all, Prometheum admitted that they couldn't really list digital assets like Bitcoin and Ethereum based on the terms of their registration.

and second of all, major questions came up about who the heck this company was in the first place. The followout subsequent to that has been pretty aggressive. Senator Tommy Tuberville published an op-ed where he wrote, Lying to Congress is a crime. Providing misleading information to investors in SEC filing constitute securities fraud. If Prometheum ended its tech buildout with its China-based partners in December 2019, as Mr. Kaplan led Congress to believe that development should have been reflected in the company's SEC filings. Instead, Prometheum continued to tout its China-tainted tech partnership to regulators and potential investors for nearly two more years.

That op-ed led to a request for the SEC to actually investigate. Then a couple days after that, the call to investigate around Prometheum wasn't just for the company itself, but actually was targeted at the SEC. Writing to the Inspector General on July 13th, Congressman Ritchie Torres said, I am writing to request an independent investigation into the unusual circumstances surrounding the SEC's decision to grant a a special purpose broker-dealer license to Prometheum, a trading digital assets platform that does not trade digital assets. Prometheum appears to be nothing more than a Potemkin platform, operating as a timely talking point for crypto critics, rather than a true trading platform for crypto customers. Congressman Torres goes on. The dubious decision to license a deceptive

digital assets platform reflects the latest attempt by Chair Gary Gensler to politicize the registration process to an extent seldom seen in the SEC's history. When it comes to trading platforms that operate in the real world, the SEC's path to registration remains a bridge to nowhere. Clarity is the cornerstone of compliance. Yet the SEC refuses to bring even the barest amount of clarity to the application of securities law to digital assets. Its preferred means of communicating is nearly rule nor guidance, but enforcement. It regulates by enforcement not because it must, but because it can. The SEC is like an overzealous traffic cop who arbitrarily tick its drivers for speeding while keeping everyone endlessly guessing about the speeding limit. So inside the span of a week, you have

both Democrats and Republicans going after Gensler and the SEC. And then, of course, the day after that letter came out, Judge Annalisa Torres in the Southern District of New York handed the SEC a painful decision as related to their case against Ripple. Once again, Congressman Torres, a few days later, was there to sum up what had happened. This time the letter was directed at Chair Gensler himself and it said, I'm writing to inquire if the SEC intends to come to terms with the folly of the Commission's crusade against crypto assets, in light of the latest decision by Judge Annalisa Torres of the Southern District of New York. Needless to say, regulation by enforcement had a dreadful day in court. In a landmark legal opinion, Judge Torres resoundingly rejected the

regulatory overreach of the SEC, which has been indiscriminately declaring all crypto assets, except Bitcoin to be securities. By emphasizing the need to prove the presence of an investment contract, Judge Torres' reasoning represents a return to a rigorous application of the Howey test, which has been applied sloppily by the SEC. Now, Congressman Torres then goes on to say that this decision should bear the name of Judge Torres, and that the Torres doctrine should be summed up, that tokens are not inherently securities but can be part of securities transactions if they are sold in an investment contract. The letter concludes, I hope that the SEC will find itself so chastened by the court's decision that it will concentrate the commission's enforcement energies

where it belongs, on the bona fide bad actors who perpetrate serious transgressions like fraud, market manipulation, and the misappropriation of customer funds. Now, I wonder who Torres was talking about there. Now, somehow, Despite all of this, this is not even close to the only letter from elected officials that Gensler has recently received. Another recently came from House Republicans, who penned him a very terse letter urging the agency to provide, quote, productive engagement on crypto legislation. This letter from French Hill and Dusty Johnson asserted that, quote, legislation would do far more to prevent future collapses of digital asset firms than enforcement actions. The pair of digital asset

subcommittee chairs wrote that, quote, a statutory framework would establish a process for firms to come into the regulatory parameter and comply with consumer protections, rather than relying on enforcement actions to punish a bad actor after the damage has already been done. Now, this letter expressed concern over recent SEC rule proposals as well as the agency's enforcement actions against crypto firms. The lawmakers suggested that, quote, this approach does not result in compliance in customer protection, but instead creates further confusion as demonstrated by the recent summary judgment. In that case, they are, of course, referring to that recent ripple decision. Now, in that letter, Johnson also accused Gensler of timing the actions of the agency to dominate news cycles, in that way

overpowering the actions of Congress. This concern, they wrote, is exacerbated by certain commission actions seemingly timed to coincide with related congressional activity, which appears calculated for maximum publicity and political impact. Now, just to be clear that the scrutiny around Gensler's SEC is not limited to their activities with crypto, yet another letter came this week from Tim Scott and James Commer, who wrote expressing concern over possible coordination between the SEC and EU counterparts on ESG initiatives. The letter reads, we are deeply concerned that U.S. agencies under the Biden administration are either passively allowing a foreign entity to regulate U.S. companies in America, or are willfully circumventing the U.S. regulatory process by actively

coordinating with foreign governments to dictate climate and economic policy to U.S. companies. Any such efforts to advance the EU's ESG agenda over the interests of the U.S. and American companies would be an alarming development and a significant deviation from historical practices. As Fox Business Journalist Eleanor Territ writes, A former SEC source tells me Scott and Comer are so tired of Gensler's lack of responses to oversight requests that they are now targeting the staff, who will not be able to evade questions on the record to get answers. That source said, I have never seen this requested before, at least not at the SEC. And that brings us to yesterday's hearing.

Gensler appeared in front of the Senate Committee on Appropriations to make the pitch for a significant funding boost for the SEC. Gensler requested $109 million in additional funding for the SEC's enforcement budget, which would bring the total funding up to a cool $1.4 billion just for the enforcement division. The additional funding was justified by Gensler as necessary to add dozens of additional full-time staff, which would bring the agency's total manpower to the equivalent of $5,139 full-term. time employees. Gensler touted the SEC's record of bringing a total of 750 enforcement actions last year, which was a 9% increase from 2021 and raked in $6.4 billion worth of fines and disgorgement penalties. Gensler said, with funding to meet the scale of our mission, we can be an even

stronger advocate for the American public. Investors and issuers alike. Stamping out fraud, manipulation, and abuse lowers risk in the system. Now, Republican senators took the opportunity of Gensler's appearance in Congress to take him to task over many recent failings. Senator John Kennedy ripped into Gensler over the SEC's failure to identify and deal with SBF in a timely manner. Kennedy said Sam Bankman-Fried did everything but by Mount Rushmore and you weren't curious where this guy's getting his money? Where was the SEC? Now, Kennedy also asked why Gensler had not pursued an emergency injunction or even sent a team of investigators to observe, and the clips of this have gone pretty viral.

However, I think Bill Hughes, a lawyer at consensus, makes an interesting point when he writes, Lots of people think that a withering line of questioning like this is great because it's beating down the SEC and embarrassing the chair. But I see a Republican senator who doesn't care this way or that about crypto specifically telling the SEC that it wasn't being assertive enough prior to starting on their crusade against crypto. He's telling the chair he should have been crushing crypto even earlier. Is he not? He doesn't say the SEC is the wrong agency for the job. Why are you clapping? I think in this particular case, Hughes is dead on and the enemy of our enemy is not our friend. Dave Wiseberger, CEO of Coinrout, says the problem with this line of questioning is the SEC does not have jurisdiction over crypto. FTX fraud happened because no U.S. regulator has clear jurisdiction or have rules that are workable to protect client assets. That's why congressional action is needed.

Now, as an aside, I agree broadly with Dave, but let's be clear that the FTCS fraud happened because Sam decided to steal people's money and no other reason. Johnny Deaton nailed it when he said these elected officials are doing a dance for the public. Senator Kennedy knows Gensler was in meetings with SB fraud and no one asks the questions that need to be asked. Why not ask Gensler if it was true that he was close to some sort of short-form deal with SBF is rumored? Why not ask whether Gensler is going to turn over the notes and emails and correspondence relating to those meetings? Why not ask why Gensler focused on non-fraud cases like LBRY and Ripple instead of the massive fraud and pump and dump schemes? Instead, Kennedy wants a soundbite about a cow out of the barn.

Notice how Gensler commented that he enjoyed the private meetings with Kennedy before Gensler testified. It's all a song and dance. I'm telling you all these politicians are mostly the same, whether D or an R is before their name. Here, here. Now moving on, Senator Bill Haggerty rattled off a series of statistics, which indicated he said that the crypto industry was moving offshore due to a lack of regulatory clarity in the U.S. Haggerty said, what I've seen happen just this year alone is that the U.S. share of stablecoin volume has gone down, U.S. blockchain developer jobs have decreased here in America, and I think what's happening is the industry players are migrating overseas to other jurisdictions where the rules of the road are clearer. Haggerty noted that

allowing the industry to develop offshore has presented major issues in oversight. If we had had a robust rule set here, he asked, would we have had the ability to track the illicit actors that operate here in America? And is there a way for clarity? Bill Hughes again had another good comment here saying, Haggurty taking Gensler to task about speeding up rulemaking, rightfully pointing out the litigation risk. The chairman is clearly much more uncomfortable when he's criticized and knows the criticism has merit. The camera ready chair just evaporates. Now, when asked by reporters to address the Ripple case after the hearing, Gensler declined to commit to launching an appeal or discussing whether there is any internal timeline on making that decision.

Instead, he reiterated the regulator's partial success in the case, stating that, quote, parts of the ruling with regards to institutional investors, the Howie analysis applies to those institutional sales, that we appreciate, less so as it relates to the Howie analysis on retail sales, but still taking a look at it. So my take, and I talked about this with Scott Melker on his show today, is that Gensler, has always been first and foremost a political animal. For some time, he has seen his goals as aligning with the SEC's goals, but he quite early on made a clear guess that taking an aggressive posture towards markets was going to be the most politically profitable stance for him to

take. Indeed, you've seen his allies parrot his assessment that more enforcement actions equals success, even if, as we discussed before, they are all after the fact, and don't actually do anything to prevent people from being harmed in the first place. Now we find ourselves at an interesting moment from a political perspective. Gensler's ambitions are clearly bigger than the SEC, and we are coming down the pipeline of a presidential election. The narrative of enforcement actions good, more enforcement actions means we've been successful, has been kind of locked in, I think, for the next year heading into those elections. But at the same time, I don't think that Gensler thinks that he's going to be around to see all these things through.

I think he's looking at the next job opening. And in that light, as more pressure comes to bear on all these different dimensions, the thing to watch is whether he's going to try to put more points on the board, or whether he's going to try to hone in and focus on a few key remaining victories. You have to think that he's going to be most stressed about the Coinbase case and the grayscale case, because those potentially have the most room to create reputational harm for him. Finance is obviously big relative to its size and scope in the industry, but it's not really an American company. I don't know exactly what that means in terms of what to expect out of Gensler's SEC, but I do think that we have to at this

point look at everything through the lens of the election cycle and what he personally wants next. Of course, there are many animals out there who are the most dangerous when they are wounded and backed into a corner. And so as richly satisfying as it is to see him in such a state, after so long as crypto antagonist in chief, we do probably need to be even more wary of what that might mean he does. Anyways, guys, that is going to do it for today's episode. I want to say thanks one more time to the sponsor of this show in Wolf's clothing. Wolf is, as you guys know, the first and only startup accelerator dedicated entirely to Lightning and Bitcoin startups, and applications for their third cohort are open now through

the beginning of August. Go check them out at Wolf NYC.com. Until next time, guys, be safe and take care of each other. Peace.