The Breakdown - Gensler's Dubious Legacy

Episode Date: December 3, 2023

A reading of ‘A Politician Masquerading as a Regulator’ – 3 Takeaways From Fortune's Gary Gensler Profile by Ben Schiller 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, 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 Sunday, December 3rd, and that means it's time, or we are back, better put, with Long Reads Sunday. Before we get into that, however, if you're 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. All right, friends, well, after a few weeks off, we are back with Longreed Sunday. And today's piece, I think, is a pretty appropriate one, given the time of year and the inherent reflection kind of period that it represents, as well as in the larger context of the industry.

Of course, 2023 has been nothing, if not a cleanup year, a year to reflect on the excesses and challenges and outright frauds of 21 and 22, and to think about what we might do differently going forward. Now on the flip side, it has been a bonanza for regulators and politicians who seek to make their name by going after this industry. And chief among those is, of course, the SEC's Gary Gensler. However, Gensler and the administration that he's a part of are coming back up for election. And just as the end of the year serves as a good time to reflect on everything that has transpired in the months before, so too is a coming election year a good time to review just how our elected and unelected leaders have performed. With that in mind, we are reading Ben Schiller's piece,

a politician masquerading as a regulator. Three takeaways from Fortune's Gary Gensler profile. Ben writes, it's strange to think now how crypto received Gary Gensler as he became Securities and Exchange Commission chair in 2021. At the time, he was a breath of fresh air for an industry that badly needed change. His SEC predecessor, Jay Clayton, had seemed largely disinterested in digital assets, whereas Gensler had taught courses on blockchain at MIT. he was supposed to get it. And being a person who got it, we thought, he would surely find a sensible way between the need to uphold existing law and allow a promising industry to grow. How wrong we were. These days, nearly everyone in crypto or close to it dislikes Gensler's

tenure. He hasn't provided any legal clarity to token issuers, many say. He hasn't helped Congress fashion any new crypto-focused legislation. Just look at the docket. He's wound up a lot of people as he pushed an agenda that often seems self-interested and self-centered. This week, Fortune magazine took a deep look at Gary's time at the SEC and put meat on what many of us already know in outline. It's a great piece based on interviews with more than 30 financial experts, politicians, and current and former employees from all levels at the SEC and Commodities Futures Trading Commission, including agency leaders. And you should read it. But in case you don't have time, we'll summarize a few of the key takeaways here, especially as they relate

to crypto. One, a political animal. He may be a regulator, but he acts more like a politician. Gary Gensler previously served as CFTC chairman taking the reins of a backwater agency following the 2008 financial crisis. He lobbied to expand that agency's powers in legislation enacted at the time, pushing a raft of new rules and creating office space for CFTC staffers across the country, much of which was left empty because of budget constraints. In 2016, he joined Hillary Clinton's presidential campaign and then tied his fortunes to Senator Elizabeth Warren, who then, as now, leads a movement to crack down on Wall Street and crypto. Now, he apparently has his eyes on becoming Treasury Secretary when the position becomes open again. Writers Leo Shorts and

Jeff John Roberts write, the running rumor in D.C. is that Gensler has had his eye on becoming Treasury Secretary since the Obama administration. The assumption was repeated in nearly every interview with fortune, although always tiptoed around by his allies. End quote. Allies and critics all agree on Gensler's ambition, said Richie Torres, a Democratic Congressman who supports the crypto industry. Gary Gensler is a politician masquerading as a regulator. Section. Many rules. Little adoption. In the absence of new legislation from Congress, Gensler has looked to existing laws to regulate the financial sector that has led to a spate of rulemaking from his office, covering areas as diverse

as crypto and the way companies report their climate change liabilities. But much of that agenda now apparently appears bogged down in lawsuits and other challenges. Per fortune, quote, finalizing rules has turned into a headache for Gensler. According to the Securities Industry and Financial Markets Association, Gensler issued 62% and 91% more rule proposals respectively than his two most recent predecessors in his first 30 months in office, ranging from how broker-dealers can use predictive analytics about clients to a partial overhaul of the U.S. trading system. Such undertakings require comment periods to solicit industry feedback, however,

and Gensler's ambition has drawn pushback from across the financial world. In August, Bloomberg reported that Gensler's record of getting his rules adopted was the slowest in decades. End quote. Gensler's enforcement actions, meanwhile, have often been hamstrung by lawsuits brought by the companies the SEC is targeted. Ripple largely beat back an effort to class XRP as a security that predated Gensler's tenure. Now, Coinbase seems to have a good chance of stymying another action claiming that it operates in illegal securities exchange. Siting legal experts, Fortune said

Gensler's aggressive approach could end up backfiring. The authors write, litigation over the SEC's jurisdiction and others could short circuit Gensler's broader agenda if such suits lead to judicial rulings that curb the agency's powers. Section. Turf war is so confusion. Gensler ran and built up the CFTC, but he's seeking to limit its remit when it comes to crypto. By arguing that most tokens bar Bitcoin are securities, Gensler makes the SEC responsible for enacting how those tokens should and shouldn't be regulated. The CFTC argues that some tokens are more properly commodities and therefore should be regulated by that agency.

The commodity versus security debate isn't just a matter for the crypto industry. In other words, it matters for regulators and their agencies, often leading to discord between Gensler's current agency and his old one, Schwartz and Roberts said. Speaking to Fortune, Summer Mersinger, a CFTC commissioner, cites the case of a Coinbase employee who has caught insider trading. The CFTC wanted to bring its own action based on its understanding that some of the tokens involved were commodities. The SEC claimed jurisdiction for itself, leading Mersinger to worry that the lawsuit could be thrown out because of uncertainty over which agency held sway. She said relations between the SEC and CFTC are now, quote, more than a

little bit strained. A CFTC staffer puts it more forcefully. It's like a horrible dysfunctional marriage, the person told Fortune. Cooperation between our enforcement and their enforcement is essentially gone. All right, so that's the end of the piece. And here's what I want to add to this. Like I said, the context that I present this in is as a moment of reevaluation around everything that touches the crypto space, but also the moment of reflection that is coming for politicians of all stripes in the American political environment. None of this will be new to any regular listeners of this show. None of it will surprise you about Gensler. Richie Torres has made this point before that Gensler is a politician masquerading as a regulator numerous times, and it is always wrong

true. However, what does stand out to me is the numbers that put such a fine point on this. Gensler issued 62 and 91% more rule proposals, respectively than his two most recent predecessors, and yet his record of getting his rules adopted was the slowest in decades. Think about what it takes to issue somewhere between 62 and 91% more rule proposals and have the worst record of rules adoption in decades. That means that something fundamentally is off. Is it that he is not properly engaging with industry? Could be part of it. Is it that he has lost the confidence of other regulators and politicians? That also could be part of it. Is it that he's more interested in rule proposals that make a point that elevates his political stature than in

actually getting things done? Is the act of trying sufficient for him rather than the action of actually completing things? Certainly this is what it's felt like in crypto, where in many ways he seems way less concerned with actually winning lawsuits than he does in filing them. In any case, I present this as a good reminder that just as the worst parts of the exchange failures and the protocol failures and the excess and the fraud of the last cycle have started to pass, so too will the worst of this regulatory environment. Of course, the election is still wide open and anything could happen, but at least it's not just us asking these critical questions when it comes to someone who, sadly, turned into our biggest antagonist.

That is going to do it for today's episode. Appreciate you guys listening. And until next time, be safe and take care of each other. Peace.