The Breakdown - SEC Commissioners Are Fed Up with Gensler and SEC Policies

Episode Date: March 8, 2024

Hester Peirce and Mark Uyeda have written their most scathing and snarky dissent ever, lambasting the SEC for its intentionally obfuscating policies. Today's Show Brought To You By Kraken - Go to https://kraken.com/thebreakdown and see what crypto can be Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet 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 Thursday, March 7, and today we are not talking about Bitcoin's price. Before we don't 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 in the show notes or go to bit.ly slash breakdown pod. Right, friends, well, like I said, we are rotating around $67,000 Bitcoin today, which I got to say ain't the worst place to be range-bound, but the lack of volatility in action means we get a breather

to talk about non-price stuff. And that non-price stuff that we're going to talk about comes in the form of a scathing dissent from SEC Commissioner's Hester Perce and Mark Ueda after the SEC's latest enforcement policy action. Commissioner's Persson Ueweeda have called the settlement with Shapeshift as, quote, the latest installment in the serial drama of the commission's poorly conceived crypto policy. So what's going on? Well, on Tuesday, the SEC announced their settlement with crypto swapping platform Shapeshift. Shapeshift has paid a $275 million fine and agreed to stop offering services in the U.S. via their company. The major problem was that Shapeshift had already ceased operations as a company way back in 2021. That year, Shapeshift

decentralized its service, no longer acting as a direct counterparty in swaps. They also decentralized governance to a Dow. In the settlement, the SEC took no issue with anything that has happened since the Dow had been formed. The key allegation was that Shapeshift had operated as an unregistered securities dealer, but, as you might expect, the SEC failed to name a single crypto token on the platform that they consider to be a security. Shapeshift continues to operate as normal in the U.S., and the settlement was widely viewed as the SEC accepting a fairly weak deal to avoid fighting yet another uphill court battle. Personueda called out the obvious problem with such an ambiguous approach to enforcement writing. Shapeshift is in trouble because the Commission, nearly 10 years after Shapeshift's platform started

trading, and more than three years after it changed its business model, now contends that some unidentified number of the 79 crypto assets it traded between 2014 and 2021 were investment contracts without explaining why. Notably, the Commission does not allege any harm. Shapeshift and its customers voluntarily transacted, and the Order Nowhere alleges that Shapeshift defrauded its customers. The commissioners highlighted that without any rules or guidance in place, Shapeshift could hardly be expected to guess how the SEC might consider crypto assets. They added, Perhaps that ambiguity is exactly the result the commission wants. Now, the next person who comes up with an idea for building something to help other people buy or sell crypto will think twice.

Why spend time and effort creating something only to face an enforcement action 10 years later? Indeed, to underscore the Kafka-esque state of the agency's crypto policy, the commissioner scripted a short version of what could be expected when a company attempts to, quote, come in and register. They wrote, Future ShapeShift says, Hello, I would like to register as a dealer. SEC. Why? Future ShapeShift. Because I think some of the assets that I planned a deal might be deemed at some point by the SEC to be securities. SEC. Which ones? Future ShapeShift. I'm not sure because I can't really understand what criteria you use to decide whether a token offering is a securities transaction and, if it is, whether the token that was the subject of the

investment contract remains a security in secondary market transactions. SEC. Well, if you don't know whether you're dealing in securities, you can't register. And by the way, if some of the assets you're dealing in are not securities, you also can't register. Future ShapeShift. So can you help us think through which assets are securities? SEC. No, we suggest you read the 2017 Dow report, and it will all be clear to you. You can also look at our enforcement actions if you want. Future Shapeshift. I read it, and I've read about your enforcement actions. I still have questions. SEC, hire a lawyer. Future ShapeShift. I did, and the lawyer has even more questions. SEC. Sorry, we can't help any more than we already have. We don't give legal advice.

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Ledger combines both hardware wallets and the Ledger Live app to offer the best way to buy, sell, swap, and stake without sacrificing on security or self-custody. ledger features cutting-edge technology in the form of a certified secure chip and a proprietary operating system, but also brings ease of use. This makes Ledger a safe and secure way to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown. The commissioners noted that the rules are getting murkier and murkier as the SEC expands its

jurisdiction, particularly with the recent proposal to require market makers to register as dealers. The agency pointed out that they expect these new rules to cover, quote, certain crypto market participants. And was the SEC certain enough to provide any guidance on this point? Absolutely not. The commissioners capped off their dissent by pointing to the farcical state of token classification, where the SEC claims that some tokens are securities, but, quote, the standards are so opaque and arbitrary that the commission itself is unwilling to stand by its own analysis. If case-by-case determination is possible, we respectfully request, that the commission show its work. Overall, they call the current situation untenable, stating that,

quote, it exposes well-meaning entrepreneurs to a regulatory sort of Damocles. Cases like this do not protect investors. They intimidate innovators and entrepreneurs. We respectfully dissent. In presenting that script of a typical SEC meeting, the commissioners wrote that it was by no means hypothetical. Most of the crypto industry chimed in to confirm that they had experienced that meeting almost word for word. Coinbase chief legal officer Paul Grewell confirmed it was not hypothetical, adding, I have the receipts. Austin Campbell, the founder of Zero Knowledge Consulting, wrote, If you think this is a joke, I have been in a meeting with the SEC where almost exactly this happened. Hundreds of millions of dollars of investment money and tons of high-paying jobs

are leaving the U.S., and founders aren't just refusing to return, but actively distrust the U.S. and its law now. Crypto litigation expert Jason Gottlieb gave his take, tweeting, this dissent is absolutely right, including their script, for what happens in I'd like to register meetings, which is a very accurate version of how these meetings go. Others noted how much the dissents from Perce and, more recently, Ueda, have shifted in tone. Purst in particular, has dissented against basically every crypto decision made by the SEC since 2020. Her criticisms began as relatively constructive. They largely focused on the loss of opportunity that comes from cracking down on a nascent industry that is crying out for clear

rules and guidance. With this dissent, however, we are now at the point of open and direct mockery of the SEC's incoherent policy approach. One of the reasons that Perce may be feeling more emboldened to openly mock SEC policy is that the agency's credibility under the agency's credibility under Gary Gensler has completely collapsed. The outrage from the crypto industry has been loud and persistent, but the SEC agenda has received a huge amount of pushback from the traditional finance sector as well. The list of poorly thought out and executed rulemaking proposals presented by the SEC is frankly too numerous to get into at this point. As one example, however, on Wednesday, the SEC released the final version of their highly controversial ESG disclosure rule. The finance industry has

been highly critical of the rule since it was first proposed. They argue that it would add a huge compliance burden, with firms forced to measure their environmental impact against poorly defined criteria. Specifically, large companies would be required to disclose the greenhouse gas emissions associated with their entire supply chain, a nearly impossible task to achieve with any level of accuracy or consistency. They would also be required to disclose risks associated with climate-driven extreme weather events and how they are managing them. That category is obviously so broad that it becomes almost meaningless as a risk disclosure. The policy rule received more than 24,000 comments since it was first put forward in 2022. The SEC has now released a severely watered down,

rule that has managed to upset both sides of the argument. Emissions related to the supply chain are no longer included in the rule, leading to environmental groups criticizing this exclusion, with, for example, the Sierra Club's executive director, Banjellis, saying, allowing companies to continue hiding a full accounting of their climate pollution keeps investors in the dark. On the business side, meanwhile, Chamber Center for Capital Markets Competitiveness, Executive Vice President Tom Quadman said, while it appears that some of the most onerous provisions in the initial proposed rule have been removed, this remains a novel and complicated rule that will likely have significant impact on businesses and their investors. In many ways, this rule is a microcosm of the issues with the current

SEC agenda. Numerous rules have been put forward with very minimal functionality, high compliance costs, with a seemingly overt political agenda. All the while, many feel that the SEC has lost sight of its core mandate to promote and safeguard the integrity of U.S. capital markets. Investor Adam Cochran highlighted that Gensler's time as head of the SEC could be a political liability heading into election season, writing, If Joe Biden wants to appeal to fiscal Republicans and independence, I know a lot of single-issue voters who really want to see Gary Gensler replaced with a competent chair like Hester Purse.

Gensler refuses to give guidance for policy to industry, bully small U.S. startups, has led to the highest turnover and lowest job satisfaction rate at the SEC, has lost his court battles with crypto at every turn, denied Americans access to a Bitcoin ETF until courts forced him to catch up with the rest of the world, has sent millions of jobs overseas by creating a chilling effect on fintech industries and has sent millions of jobs overseas by creating a chilling effect on fintech industries. Replacing Gensler and the new administration isn't controversial, as most people don't know who he is. Those who do know don't like him. A large chunk of crypto are single-issue voters.

A large chunk of fiscal Republicans want to see an admin that can catch across the aisle of fiscal policy. Seems like some real low-hanging fruit to commit kicking Gensler to the curb and having Hester Purse proposed some new crypto regulation. Moving over to the other office in Washington, in the CFTC, CFTC Chair Rosten Bentham appeared at the House Agriculture Committee on Wednesday for the annual agency budget and oversight hearing. Crypto was clearly a major topic, with Benham urging Congress to act, stating, we need to fill the gap in crypto regulation, specifically around Bitcoin, which clearly is a commodity. Here are two of the largest tokens making up approximately 60 to 70% of the whole market capitalization. This referred to spot Bitcoin and

Ethereum markets, which currently have no regulator with rulemaking authority over them. There was some concern expressed by Democrat members that the currently proposed legislation isn't comprehensive enough, specifically that it stays silent on defy regulation. Benham's broad opinion was that time is of the essence to get something passed, even if it's imperfect. He didn't want to slow down the lawmaking process for the sake of covering defy, which he viewed as a relatively niche portion of the industry. Benham also noted that many crypto firms are heading overseas because other jurisdictions

have been working hard to clarify their regulatory structure in recent years. Other Democrats were concerned that regulatory clarity would provide legitimacy to the industry. Benham was of the opinion that the subjective value of an asset class in the eyes of lawmakers should have no role in deciding to protect investors with regulation, adding, the lack of legislation addressing the regulatory gap over the digital commodity asset spot market has not hindered the public's enthusiasm for digital assets. And I continue to believe Congress must act. Benham pointed out that we are entering another crypto cycle, which he called a quote, period of irrational exuberance. He suggested there is no time for Congress to sit on their

hand, saying, this notion of crypto going away, I think, is just a false narrative. He continued, there is real persistent adoption and demand from Americans to invest in this asset. Every minute that goes by is a new investor who is potentially going to lose money. If legislation is passed, Benham was confident that the CFTC could stand up a regulatory framework within 12 months. Benham pointed out that the majority of CFTC enforcement is now focused on crypto firms and protocols, and suggested that clearer rules could help reduce investor harm proactively. One quite interesting portion of the hearing was a question from committee chairman Glenn Thompson dealing with the classification of Ethereum. Thompson raised the controversy surrounding Prometheum.

The super short recap is that Prometheum is the only crypto firm, big, big air quotes on that one, by the way, to successfully register as a special purpose broker dealer with the SEC. They haven't launched any product so far, but recently announced they would begin an Ethereum custody service. As part of this process, Prometium self-assessed Ethereum to be a security token. Many believe that Prometheum is working with the SEC to present an example, that regulatory compliance is possible for crypto firms. In that frame of thinking, there is a concern that the SEC could leverage this classification of Ethereum as a security to deny the ETF. Benham noted that that regulated Ethereum futures have been available for almost four years, which would only be possible

if Ethereum is considered to be a commodity. He said that discussions with SEC staff have indicated that, quote, this was an independent decision by Prometheum. It is my understanding that this was not at all a decision by the SEC. However, how this plays out is still critical. Benham said that if we see any validation of this decision by the SEC, quote, it would then put our exchanges who list Ether as a futures contract in noncompliance with SEC rules. Benham assured the committee that his agency is working with the SEC to make sure that, quote, whatever steps are taken are deliberate, that were involved and that they understand what the consequences would be if there was a decision to determine that ether is a security. He implied that this would be a risky move, adding, quote, as of now,

we need to protect the integrity of our markets and understand that this is a year's old decision where these markets are functioning well under the conclusion that ether is a commodity. Now, I think when push comes to shove, the point that was being hammered over and over again is that Democrats need to get it through their heads that crypto isn't going away. There is a certain wishful thinking that is holding back policy, and ultimately it's just not going to work. Lastly, today, Crypto Policy Action Committee Fairshake is declaring victory after a successful first outing on Super Tuesday. For our overseas listeners, Super Tuesday is the biggest day for primary voting in America, when 15 states select their party candidates ahead of November's election. Fairshake and other

crypto packs had thrown their weight behind several congressional races to ensure their preferred candidates secured the party nomination. All four election campaigns, which saw significant crypto money spent, ended up with a favorable result for the industry. By far, the most attention was focused on the California Senate race, where Katie Porter was attempting to make the transition from her House seat to the Senate. Fairshake had committed $10 million to running a campaign against Porter, with the primary concern being that Porter is a staunch ally of Elizabeth Warren and could become a key member of the anti-crypto army in the Senate. Porter fell far short of her ambitions, running a distant third at the polling booth. She did not take this well, claiming that her gigantic defeat was not of her own making, but rather,

due to, quote, billionaire spending millions to rig this election. John Vlasto, a spokesman for Fairshake and other crypto packs, treated the night as a coming out party for the crypto voter, stating, Katie Porter sided with Elizabeth Warren and against the 52 million Americans who own crypto. Tonight, her choice ended her career in Congress. From the White House to the Senate to the House, make no mistake. The crypto voter is here. Crypto voter cares whose side a candidate is on, and the crypto voter will play a pivotal role in the 20-24 election. Investment Bank, T.D. Cowan noted the importance of crypto money in this year's election cycle, but suggests that the industry would fall short of establishing a pro-crypto coalition in Washington. Analysts wrote in a Wednesday note, we believe crypto-election spending could help in the next Congress if the industry's preferred candidates win in November. Yet it won't be decisive, as enough crypto-economic. critics will remain to ensure whatever bill advances is a compromise. Key critics remain in power,

including Senate banking chair Sherrod Brown and Senator Elizabeth Warren. And indeed, much commentary focused on Brown's hotly contested Senate race in Ohio as the key place where crypto money can make a difference. Investor Nick Carter wrote, the most important statewide race in 2024 is Ohio. Unlike Warren, Sherrod Brown is actually beatable. Moreno, the frontrunner in the Republican primary, is strongly pro-crypto. Brown is a massive hater and a colossal hindrance in the Senate. Focus on For their part, Fairshake still has over 60 million in donations to spend as we approach November and will likely seek to boost their war chest as we head into the thick of election season. Interesting stuff in the world of crypto and politics, but that will do it for today's breakdown.

Big thank you as always to my sponsors for today's show. First up Cracken, go to Cracken.com and see what crypto can be. And of course, thank you to Ledger as well. Check out the Ledger Bitcoin Nano. 5% of sales of that particular ledger will go to supporting Bitcoin development. Until next time, guys, be safe and take care of each other. Peace.