The Breakdown - Gensler's SEC Has No Plans to Ban Crypto

Starting point is 00:00:00 I also think it's a completely fair criticism to accuse the SEC of regulation by enforcement. It seems vanishingly simple to give their specific legal logic around particular tokens, but they don't because that opens themselves up for challenge in a way that would be extremely time-consuming and costly. They seem content to move on their merry way going after the biggest infringers and supporting the agenda of others like the Treasury Department, which makes me increasingly think that the issue isn't Gensler or the SEC being out to get crypto, but instead just the simple lethargy of bureaucrats. Welcome back to The Breakdown with me, NLW.

Starting point is 00:00:36 It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDes. What's going on, guys? It is Wednesday, October 6th, and today we are talking about why it's clear now, or it seems clear at least, that Gary Gensler's SEC has no plans to ban crypto. Now, in some ways, this is a silly theme for a show. First of all, there's not really been much of a concerted call to ban crypto. Certainly, there is a huge amount of regulatory discussion around it right now.

Starting point is 00:01:15 But also, especially when it comes to Bitcoin, it's pretty clear that there's no real way to ban it. You can only ban your citizens from the Bitcoin network. That's what we're seeing in China. but, of course, it is the example of China that has people asking this question, concerned with this question right now. Is it the U.S. government's intention to eliminate access to these new technologies for its citizens? Folks like Ray Dalio have continued to say that as they got big enough, of course the government would bring the ban hammered down. But over the last week,

Starting point is 00:01:50 there have been a couple high-profile testimonies from important macro-political economic figures that have suggested that that is not the route that the U.S. is going. The first, of course, came last week during questioning of Jerome Powell, the Federal Reserve Chairman. Congressman Ted Bud from North Carolina pointed to comments that Jay Powell had made over the summer, that one of the things that recommended a central bank digital currency to him is that it would negate a lot of the uses of cryptocurrencies and other private digital currencies. Powell said that even in that moment when he gave that answer back in the summer, he knew he had misspoken, and that what he was saying is that digital currencies could do a lot of the things

Starting point is 00:02:29 that people were excited about, but that didn't mean that he meant that he thought we should be trying to get rid of those digital currencies. Well, yesterday, it was Gary Gensler, the SEC chair's turn to have that sort of discussion with Congress. Let's listen first to Congressman Ted Bud again, who brought the same line of questioning that he gave to Powell to Gary Gensler. China's been on a war path against cryptocurrency, it seems, since 2013. And we've seen them implement bans on mining, initial coin offerings, cryptocurrency exchanges, and their most recent move, an outright ban on cryptocurrencies themselves. So, Chair, do you support what China has done and is the SEC planning on implementing similar bands?

Starting point is 00:03:15 I'm familiar with a number of the things that you mentioned in terms of the People's Republic of China. I think our approach is really quite different. And it's a matter of how do we get this field within the investor and consumer protection that we have and also working with bank regulators and others? How do we ensure that the Treasury Department has it within any money laundering, the tax compliance, and of course, the financial stability issues that stable coins could raise as well. But no bans that you're interested in implementing via the SEC, as China has done, really to funnel everyone through their own digital currency. No, I mean, that would be up to Congress.

Starting point is 00:04:05 The way that I read this testimony is basically that Gensler is saying, look, I am going to force this industry into the public policy framework, at least around the parts that touch my mandate, come hell or high water. But that is still categorically different than banning. And yes, it is weird in some ways that we have to make sure that our banning butts are covered, but that's where we are. I don't think that the Bitcoin market going up is exclusively related to that testimony, but I do think it affirms what we were discussing in last week's show, why this autumn seems like it could be a good one for Bitcoin. Hearing high-profile public figures say that they're not intending to try to ban it resets or confirms what the base of the worst

Starting point is 00:04:50 type of action they might take would be. Now, I do want to also flag that last line where he says that would be up to Congress. It's not particularly confidence-inspiring, but I also think there is a larger meaning to it, which we'll circle back to towards the end of the show. Representative Tom Emmer, another member of the Congressional Blockchain Caucus, brought some heat to Gensler as well. He said, quote, it's really important for the SEC to develop a framework that the crypto industry can operate in. Crypto is one of the highest performing asset classes in decades. Retail investors got into the space before institutional ones and your job, the SEC's mandate, is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Starting point is 00:05:32 When you make conclusory public statements and regulate through enforcement action, you jeopardy that mandate. Emmer was clearly not satisfied with the answers he got from Gensler and later tweeted a thread that said, Gary Gensler thinks that most cryptocurrencies are securities. Let's indulge his line of thinking for a moment so we can see how harmful it is to everyday investors. Let's say someone who issued a token agrees with Chairman Gensler and wants to register it as a security with the SEC. Once registered, can this token trade on the NYSC or NASDAQ? No. Can a broker dealer like Charles Schwab dealing a digital asset that has gone through SEC registration? Would they be able to trade these digital asset securities in custody them? No. If Gensler deems a coin with a $1 billion market cap

Starting point is 00:06:13 and tens of thousands of investors a security, what happens to those investors? The value of the token will plummet and retail investors won't be able to trade it. Clearly, there is no path for digital asset securities to be traded anywhere. So it is clear that retail investors would be hurt by Gensler's actions. Gary Gensler, step out of the way. Unsurprisingly, most of Crypto-Twitter agrees with Emmer and disagrees with Gensler around this idea of securities designation, and the logic, if you look at just tweets from yesterday, is something close to what I've shared before. Texas Low Voltage tweets, please be mindful that the retail investors made this space what it is today. Going forward, we should not be locked out in the name of investor protection.

Starting point is 00:06:53 Regulations will help grow the industry, but I don't know anyone in crypto that is asking to be protected. Irish Tiger 15 goes farther and says, I opt out of protection. The world has changed and people can buy stocks or crowd fund or buy crypto through platforms at as much or as little as they want, depending on their own assessment of risk versus reward. I tweeted last night something that I genuinely feel, which is that I just can't get over. Elizabeth Warren's comments from a couple weeks ago when the example of who she held up as needing investor protection was an investor who bought Ethereum on a Monday night only to see its price crash on a Tuesday and be desperate to get back onto Coinbase that Tuesday, to sell, only to find Coinbase down. Now, this isn't saying that it's a good thing that any exchange goes down in a moment of market volatility. But the idea that the investor that needs to be protected is someone who is going to buy on a Monday and sell on a Tuesday suggest to me that they just don't

Starting point is 00:07:49 understand who investors are or what makes investment work. It's clear that there is no understanding, that without risk there is no reward. You just have a flat line. Anyways, going back to Emmer, part of why Emmer was pushing so hard is that he's promoting a new framework in his Security's Clarity Act. That framework creates a new category of security called an investment contract asset. And basically the thesis is that today's framework is not particularly functional in that either enforcement on the one hand or registration as a security on the other will lock tokens out of liquid markets and, ergo, harm the retail token holders. The SEC spends so much energy saying their mandate is to protect. This podcast is sponsored by Nidig,

Starting point is 00:08:35 the institutional-grade platform dedicated to building a more inclusive financial system through Bitcoin. To find out more about NIDIG and their mission to bring Bitcoin to all, go to nidig.com slash NLW. That's N-Y-D-I-G forward slash NLW. Emmer is not the only one pushing a different type of regulatory framework. There was another representative also putting Gensler's feet to the fire, and that was Republican leader of the House Financial Services Committee, Patrick McHenry. Let's listen to a clip of their conversation regarding Hester Purse's Safe Harbor proposal. You know, as you noted back in 2018, you noted in your testimony that at the time, the SEC did not view Bitcoin and Ether as securities.

Starting point is 00:09:23 Is that still your view? I think you're referring to when I was at MIT testimony I gave in front of the this committee in 2019, if I remember. And I was speaking to what the SEC correct. career staff had said. So where the- But I'm asking your view now. I understand all that context. I've done the research and in fact, I was at that hearing. But is it your view now that Bitcoin and Ether are not securities?

Starting point is 00:09:57 No, I'm not going to get into any one token, but I think the securities loss are quite clear. If you're raising money from somebody else and that's the investing public believes that they anticipate or have a reasonable anticipation of profits based on the efforts of others, that fits within the securities law. And so, okay, and that's why today, along those same lines, Chairman Gensler, along those same lines, that's why I introduced the Clarity for Digital Tocens Act with Representative Davidson and Bud, based on Commissioner Persis' digital token safe harbor proposal. I asked about this before, have you had a chance to review her proposal?

Starting point is 00:10:38 Commissioner Purson and I talk actively about these matters and but I have not yet reviewed I think you're you just introduced your bill this morning and I look forward to looking closely. Yeah but the bill is based off of her proposal and I was asking if you if you've reviewed her proposal. Commissioner Purson I've had a number of conversations about her thoughts on these. Okay so you're not you're not willing to answer that question okay so No, she and I have talked about her thoughts on this around a potential safe harbor. I think that the challenge for the American public is that if we don't oversee this

Starting point is 00:11:20 and bring it in investor protection, people are going to get hurt. Now, after that, Patrick McHenry goes on to basically lamb-based Gensler saying some of the comments that you've made have raised questions in the marketplace and made things less than clear. You've made seemingly off-the-cuff remarks that move markets, you've disregarded rulemaking, by putting a statement out without due process, you've essentially rode roughshod over American investors. Masari's Ryan Selkis also did not like

Starting point is 00:11:46 Gensler's answers to McHenry, saying, let's go. Ranking member McHenry opening in the Gensler hearing today, we need a digital asset safe harbor like that proposed by Commissioner Hester Perce. This is what leadership looks like, not hiding behind 90-year-old securities laws to cripple an emerging industry for fun. Worth noting that Gary Gensler intentionally refused to answer

Starting point is 00:12:05 whether he had reviewed Pers's Safe Harbor, a slippery deflection to say he and Perce talk regularly about crypto without acknowledging that he's read the Safe Harbor language itself. McHenry pressed and exposed the double-speak. For some context, as McHenry mentioned, he released that day the Safe Harbor Bill, aka the proposing clarity for Digital Tokens Act of 2021. He tweeted about the bill, the U.S. should be a global leader, not a global follower, when it comes to digital assets. My bill, which builds on the great work of SEC Commissioner Hester Purse, will help provide the necessary

Starting point is 00:12:36 legal certainty to digital asset projects when they launch. The gist of this bill is that a token can evolve over time. It's allowed to have an initial launch and distribution and to get to network maturity without being in breach of the Securities Act of 1933. The bill articulates a few different approaches to effective sufficient decentralization. For example, 20% of ownership of tokens and 20% of governance, capacity centralized in one person or group as a cap. It would come with a public disclosure of a bunch of things, including source code, transaction history access instructions, token economics, plan of development towards decentralization, list of prior token sales, initial team identities and token holdings, list of exchanges that trade token, list of related

Starting point is 00:13:17 party transactions. And when all this was released, the token would have a three-year window, after which the development team would have to offer a specific legal analysis that if they failed, they would have to register as a security. That legal case would need to include things like a demonstration of participation in development or governance of parties outside the initial development team. Discussion of how the initial development team has more limited influence on governance than at launch with specific reference to lack of ability to influence the price of a token. Confirmation that there is no outstanding private information, description of dev team's ongoing activities, description of how tokens are utilized in the protocol, and an explanation of how the initial

Starting point is 00:13:53 dev team will continue to be focused on token's use and not price appreciation. Congressman Warren Davidson also asked related questions around when a network would become sufficiently decentralized for someone like Gensler. At CryptoLaw US tweeted the full clip of Warren Davidson's questions to Gary Gensler. Congressman Davidson also asked this question to chair Gensler about when a token becomes sufficiently decentralized and could not get an answer out of him. Now, two big things you always notice in these Gensler testimonies. First, is that he is given no indication of being willing to see some period of evolution, the idea that a thing could be a security when it launches, but then evolve to not be a security. It strikes me that this is the central legal battle and why it's good that we're fighting

Starting point is 00:14:35 the Safe Harbor fight. Second, Gensler is exceedingly fond of quoting the precedent from Howie that supports his case, the investment in a common enterprise and the anticipation of profit. He does not, you'll notice, ever reference the part of Howie test that is focused on the efforts of others. So the four prongs of the Howey test are, one, an investment of money, two, an expectation of profits, three, in a common enterprise, and four, from the efforts of a promoter or a third party. It is that fourth part that is the trickiest when it comes to some of these new types of crypto networks. The fourth part assumes that the people who are buying tokens don't have involvement in creating the network and maintaining the network and making the network what it is,

Starting point is 00:15:15 that they have no hand in the common enterprise. And this is where it gets complicated. This is certainly not to say that every terrible shit coin out there has a strong network where the people who hold the token are actually network participants. But there's a reason that Gensler never brings up this fourth prong of the Howie test is because it's the one where there are the clearest and biggest questions around whether this framework really can apply to a new type of asset. But at this point, let's zoom up and out. The SEC has been the office with the greatest scrutiny from crypto for the last half decade

Starting point is 00:15:45 because it has said everything as a security and it hasn't been willing to engage with proposals like the Safe Harbor. Basically, they've been up in our face, so we've been up in theirs. The reality is that there are many, many regulatory bodies who have a big hand in crypto. How many of us really started to get to know what the Office of the Comptroller of the currency did only last year when Brian Brooks, the former General Council of Coinbase, went in and actually started making it work for the crypto industry, at least for a time. Now, when it comes to the SEC, I clearly have issues with the way we think about investor protections, or rather they think about investor protections. who's listened to this show for more than one or two definitely has heard that.

Starting point is 00:16:24 I also think it's a completely fair criticism to accuse the SEC of regulation by enforcement. It seems vanishingly simple to give their specific legal logic around particular tokens, but they don't because that opens themselves up for challenge in a way that would be extremely time-consuming and costly. They seem content to move on their merry way going after the biggest infringers and supporting the agenda of others like the Treasury Department, which makes me increasingly think that the issue isn't Gensler or the SEC being out to get crypto, but instead just the simple lethargy of bureaucrats. He's basically saying in every testimony, look, they all look like

Starting point is 00:16:59 securities to me. If you don't think so, Congress, you go figure it out and then tell me what to do. Now, a cynical take is that he's not doing the work to engage with alternative thinking about all of this, such as that of Commissioner Hester Perce. A charitable take, though, is that Gensler is right, that ultimately it's the job of Congress to decide on new frameworks for these types of significant changes. Indeed, that's why it was so frustrating during the infrastructure bill process when we learned that it was the not-so-invisible hand of the Treasury Department having their way with this bill that was supposed to be written by elected officials, elected officials who are accountable to their constituencies, rather than appointed officials

Starting point is 00:17:39 who are not. Look, there are bills clearly everywhere now with new approaches to how we regulate crypto that are running through Congress, but the issue is getting them voted upon. If we want Patrick McHenry's bills or Tom Emmer's bills to actually get a fair shake, we have to engage with the political process. It's just the only way. Otherwise, all we have are the bureaucrats, the folks who are going to rule their specific little part of the world based on their specific little mandate. That's clearly suboptimal, so I hope we have a chance to actually debate this in a much bigger way and on a much bigger stage. For now, guys, I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Gensler's SEC Has No Plans to Ban Crypto

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