The Breakdown - The Failure of Gary Gensler

Episode Date: July 2, 2023

As the crypto industry takes the fight to the SEC, a reading of Gary Gensler Failed the U.S. Crypto Industry, and So Has Congress 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 Sunday, July 2nd, and that means it's time for Long Read Sunday. A quick note before we dive in, if you have not signed up for the breakdown first five newsletter, you really, really should. Every weekday, I send out the five most interesting or important news stories from Bitcoin, crypto and macro, and I think it's a really great way to get set for the day. You can find a link to that at breakdown.network, or you can go directly to breakdown.bh-I-I-V-Spelled, B-E-E-H-I-I-V-com, and you will find it there. But with that, let's get to today's long read Sunday.

Given yesterday's show all about the legal tide-turning, I thought it only appropriate that we read an essay from Paolo Taska, professor and economists at University College London, called Gary Gensler failed the U.S. crypto industry, and so has Congress. It is a pretty scathing piece, and I'm excited to share it with you here. We are entering the summer of the U.S. Securities and Exchange Commission. The agency's latest actions against the world's foremost exchanges, Coinbase and Binance, have the crypto sector reeling. Major players are making moves quickly. Crypto.com announced it wind down its U.S. institutional business due to limited demand. Robin Hood testified last week in a House crypto hearing about the complete lack of help it received from the SEC in registering

as a digital assets broker. This isn't a full accounting of the SEC's recent activities or crypto's response. There is far more to explore. But the ringleader of the chaos is Gary Gensler, the current chairperson of the U.S. Securities and Exchange Commission. Robin Hood, E. Toro, and other major brokers have begun delisting tokens from some of the most prominent blockchain projects in the space. Many of those projects happen to use proof-of-stake or POS algorithms, which guarantee high levels of network security, but have been called into question by SEC Chair Gary Gensler. Suffice it to say, scrutiny is increasing. The crypto sector has reason to wonder why Gensler is taking a hard stance on the crypto industry, especially compared to

his predecessors. It is true, there are several problems in the crypto space. The Federal Trade Commission FTC reported victims lost more than $1 billion in crypto scams between January 21 and March 22. However, the statistic is nine times less than the loss is incurred from securities frauds in 2022 overall. Gensler's focus leads me to believe he's following the nine over one rule, i.e. spending 90% of his time policing the crypto industry, a sector that accounts for just 10% of scams across the financial industry. What kind of evidence and information is Gensler using to make his decisions? What can we expect from future SEC actions? Why has he changed his mind so much? And why is it that a government official is employing social media,

in a manner akin to a social media influencer, predominantly sharing content related to crypto, while displaying personal satisfaction and emotional investment. I was shocked when I recently re-watched an interview between Gensler and CoinDesk Managing Editor for Global Policy and Regulation, Nick Day. He abruptly interrupted Day, emphatically claiming three times in a row that all cryptocurrencies are securities. Shouldn't any government official, particularly the SEC chair,

maintain impartiality, emotional detachment, and fairness in carrying out their duties? As speculation continues to rise, conspiracy theories about the SEC's true motives have also emerged on Twitter, Reddit, and beyond. There are questions about Gensler's relationship with Sam Bankman-Fried, and reports he was turned down for advisory roles at finance. He doesn't have to be collaborating with SPF for operating out of spite to question the soundness of Gensler's thinking. The latest brouhaha is that the SEC is clearing the way for Prometheum

and a handful of other firms founded by regulatory insiders to be the primary dealer for digital Prometheum has a license to operate as an alternative trading system, ATS, that plans to list digital assets securities, but it's unlikely any cryptocurrency will ever fit that regulatory designation. Regulatory reality. Accusations that Gensler is a deep state agent hell-bent on banning crypto, a criminal collaborator with SBF, or an insider trading favors are fun to entertain, but they miss the point. Gensler is not an irrational player. His actions make complete sense when you come to terms with the fact that he's a long-term thinker who thinks he understands and therefore should be allowed to restrict an entire sector. He's the worst kind of rational player, one who

knows the rules and where there are gaps. He's used them to navigate himself into a powerful position on the board. Lawmakers should show concern that Gensler is practically creating his own fourth branch of government by introducing a new bill for crypto regulation, bypassing the usual lawmaking processes and standards like the Administrative Procedures Act. Whether legal or not, it is having an outsized effect. Venture capital, founders, and companies are fleeing the U.S. because of Gensler's actions. This will cost the U.S. economy billions of dollars. Until lawmakers decide which agencies should oversee the crypto sector, there will continue to be hyperrational players working on setting their precedent, for what motives only time will

tell. It is beyond clear that the traditional regulatory frameworks do not fit Web 3, blockchain, and crypto, and likely need to be updated. As a sector, we must continue to demand revolutionary approaches for effective regulation in these rapidly evolving markets. And as new bills are proposed, we must provide vocal commentary in whatever route is available. We need to speak out against the assertion that all cryptocurrencies should be classified as securities. This is a simplistic interpretation akin to saying an airplane is an automobile because they both go from point A to point B. Although there are points of comparison that need to be determined, treating a cryptocurrency like securities assets such as stocks or bonds and a new wrapper, makes as much sense as calling

an airplane a car with two wings and aptly encapsulates the flaws in our present classification system. We require a comprehensive, well-structured taxonomy that aligns with these technological advancements and a modernized regulatory body, proficient in handling the intricacies of these nascent markets. Perhaps in response to the increasing technologization of the markets, a new fintech regulator should be established to better navigate the complexities of emerging digital technologies when it comes to financial consumers' protection. The blame can't just be laid at Gensler's feet, however, the issue fundamentally stems from a failure to recognize the transformative impact of blockchain technology on finance. Failing to come to consensus and past legal frameworks that

could have fostered a vibrant industry and prevented many failures will go down as a massive abnegation of duty. It is encouraging that House Financial Services Chair Patrick McHenry, Agriculture Committee Chair Glenn Thompson, and Senator Cynthia Lummis and Kirsten Gillibrand are now introducing a crypto-regulation bill. But crypto has been here for nearly 15 years. Even Europe Europe only introduced the regulation Mika in 2020. So while yes, Gensur is out to make this summer one to remember for crypto firms, his power to do so is a failure of elected representatives over the years to recognize crypto is here to stay. All right, back to NLW here. This is going to be just a quick one today, because candidly, I am racing to make sure that you guys get your content

for the weekend, even though I've just landed from Europe. But I think it's notable in the context especially of what we've been discussing over the last couple of days. One of the big challenge that's being put forth right now by advocates in the crypto industry is that Gensler's series of statements make clear that he is not an impartial actor in the way that he is required to be. That's at the root of the Blockchain Association pushed to have him recuse himself from future digital asset enforcement actions. Unless it seemed like these are just the rantings and ravings of the crypto industry itself, at numerous points in these cases that have come up, judges who are overhearing various suits seem to agree with the crypto industry that Gensler's public

statements do constitute a meaningful bit of information, as much as the SEC tries to say that they just represent his opinions. The courts aren't really buying that line, and I don't think they're going to be able to say it for much longer. Now, the other really interesting thing that's happening is all of this discussion around the major questions doctrine. This is again the idea, as handed down by the Supreme Court in previous decisions unrelated to crypto, that U.S. regulatory agencies should not be in the business of making policy. That policy is the business of elected officials, not appointed officials, and that regulatory agencies are required to have elected officials dictate the mandates of what they can and can't do. The fact that there is now

so much activity in Congress to get clarity on crypto regulations might undermine the SEC's ability to create de facto regulations through enforcement. It feels to me overall like there is a storm coming for the SEC, although frankly it's one that I'm not sure that Gensler cares all that much about. If he wins these battles, he gets to look tough. If he doesn't, he'll just blame it on the other guys across the aisle and use it as another part of his bully pulpit to get appointed to whatever position he wants next. While Dr. Toska here made the correct point that one doesn't have to believe that Gensler was necessarily in the pocket of SBF or anything else to be very upset by his performance,

I do think it's important to examine individual motivations when it comes to politics. I simply don't believe that Gary Gensler's motivations are somehow entirely abstracting. away from his own career advancement. But politics or not, and whatever comes next for him, our job right now as an industry is to take the fight to him. I'm glad to see that happening, and I'm glad we're getting louder about it. That's going to do it for today's breakdown, Long Read Sunday. I appreciate you guys listening as always, and until next time, be safe and take care of each other. Peace.