The Breakdown - The Wall Street Journal Calls Out SEC Chairman Gensler Over Crypto

Starting point is 00:00:00 I will say, I don't think all of a sudden the average mainstream media piece is going to be positive. I think it's much more likely that the tone has been so aggressive for so long that this is the natural next shift to keep people interested. But whatever the case, frankly, right now, it's nice to see. 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. The breakdown is sponsored by nexo.io, chain aliasis, and FTX. and produced and distributed by CoinDesk. What's going on, guys? It is Friday, July 8th, and today we are talking about the Wall Street

Starting point is 00:00:39 Journal going in on SEC Chair Gary Gensler. Before we 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 dig 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. Also, a disclosure, as always. In addition to them being a sponsor of the show, I also work with FTX. So as I mentioned, today our headline topic comes from a Wall Street Journal op-ed from the editorial board. The piece is called Gary Gensler's Bitcoin Regulation Grab. The SEC chief is blocking innovation until he can control crypto markets. And yes, it is every bit as spicy as it sounds. So let's dig into it.

Starting point is 00:01:29 The piece opens, Securities and Exchange Commission Chairman Gary Gensler has his regulatory eye on cryptocurrency markets, and he's taking investors hostage in the process. That's the best way to explain the agency's blockade of spot Bitcoin exchange traded products or ETPs. Right out of the gate, here we are with this very, very severe language, taking investors hostage. And of course, as you can tell, the context is the repeated denial of any sort of spot Bitcoin exchange-traded product or exchange-traded fund. So what else is in the piece? Well, let's talk about what they say their starting perspective is as relates to crypto. They write, we're agnostic on

Starting point is 00:02:10 crypto, including Bitcoin, as long as investors are willing to invest at their own risk. Crypto investors have taken big losses recently, but the market is evolving and financial firms want to serve investors who like the innovation. What does the WSJPs think are the benefits of a Bitcoin ETF. First, they talk about two types of mitigating risk. There is the personal mistake risk, aka crypto owners for getting or losing their passwords. This provides a way for people to have Bitcoin exposure without actually having to own the underlying. The second risk is security risk of hackers stealing funds. They also discuss, however, that there are benefits of a Bitcoin ETF. They point to an ETF drawing in more institutional and retail investors, which they say would

Starting point is 00:02:55 deepen market liquidity, as well as reducing trading volatility. What do they think then of Chair Gensler's reasoning? Well, quote, Mr. Gensler purports to be concerned that Bitcoin trading could be vulnerable to market manipulation, which could harm investors and spot Bitcoin ETPs. Yet the $390 billion Bitcoin market is the deepest and most mature of all cryptocurrencies. It would be hard for an investor to gain. Going on, they discuss how Gensler has told ETF sponsors that they have to show that a significant amount of trading happens on either, one, a regulated venue or market, or two, that the underlying market, quote, inherently possesses a unique resistance to manipulation, beyond the protections that are utilized by traditional commodity or

Starting point is 00:03:39 securities markets. Effectively, they're calling one of these things BS and one of them employ. Quote, Mr. Gensler knows the first criterion can't be met because Bitcoin trading largely occurs on crypto exchanges, which he wants to regulate, but doesn't have experience. press legislative authority over. As for the second, the SEC has arbitrarily established a higher standard for approving spot Bitcoin ETPs than for other commodities, but hasn't explained how to satisfy it. And this is really their key point. They go on to say later, quote, Mr. Gensler is using the unregulated nature of crypto markets as a pretext to block spot Bitcoin ETPs. Until crypto exchanges register with the SEC, he won't authorize spot Bitcoin ETP.

Starting point is 00:04:23 EPPES. Effectively, they're arguing, this is a tool for the SEC to try to get more authority in this interagency battle for crypto. Now, the piece also calls out the hypocrisy around approving a futures ETF, but not a spot ETF. They talk about how that type of futures product comes with higher costs and notes that while the futures contracts themselves are traded on the CME, the prices are tied to the same exchange basket as all the spot ETFs would use. Their conclusion is support for Grayscale's recent lawsuit against the SEC for violating the Administrative Procedure Act. This is something that we've gotten into much more in previous episodes if you want to go learn about. They say that Grayscale, quote, has a strong argument that the SEC's disparate

Starting point is 00:05:07 treatment of Spot and Futures Bitcoin ETPs contravenes the law's requirement that regulators treat similar products and parties the same. In the end, they wrap up, members of Congress in both parties have sent letters to Mr. Gensler inquiring about his holdup. Maybe they should call him to explain why he's undermining crypto innovation and investor protections and remind him who controls the agency's purse strings. Now, this is a pretty savage piece for the editorial board of the Wall Street Journal to go all in on, and as you might expect, it got quite the response from the crypto community as well. The usually very chill and contained Frank Chaparro from the block went off as well. Gensler is a moron, he tweets, allowing crypto fintechs to take deposits and

Starting point is 00:05:51 lend them without any risk management, won't approve a safe Bitcoin ETF, embarrassing. It's actually wild how Gensler has actually done nothing to protect crypto investors and done everything to hurt them. Anthony Scaramucci says, want evidence that Bitcoin will soon be on the menu for all institutional investors? How about a pro-Bitcoin ETF op-ed by the Wall Street Journal editorial board? Coin Bureau tweets great to see the WSJ editorial board pick up on the spot Bitcoin ETF rejections and the bewildering excuse is given for it. It's a regulatory power grab and the more mainstream news covers it the better. Political ally Senator Pat Toomey wrote, The SEC under Chairman Gensler has imposed enormous costs on investors with no legitimate

Starting point is 00:06:33 rationale. Their blanket rejection of numerous Bitcoin spot ETFs, despite the SEC's prior approvals of Bitcoin futures ETFs, demonstrates how this SEC has arbitrarily chosen to deny investors' access to financial products. I'm pleased that the SEC's decision will now be subject to court review and hope the court decides more Americans should have access to these new investment options. So, man, oh man, is there a lot to unpack here? First of all, let's just talk mainstream media in general. In some pockets, we are seeing at least a small shift in tone and coverage. Eric Baukunis, who covers ETFs for Bloomberg, says, nice to see the Wall Street Journal editorial board echo my colleague's note from April that Gensler is holding spot Bitcoin ETFs and

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Starting point is 00:08:43 One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. I also saw The Washington Post ran a piece called Why Crypto Will Rise Again. It was a guest contributor, Sebastian Malaby, who's a senior fellow at the Council on Foreign Relations. His summary tweet is, crashing crypto prices tell us pretty much nothing about crypto's prospects. The real test for crypto is whether it delivers useful services for non-crypto folk.

Starting point is 00:09:20 On this, I am cautiously bullish. The piece cautions those who are dancing on Bitcoin's grave to have a little bit of look at the history of speculation and technology and innovation. He gives examples like dot com, e-commerce, cars, railways, bicycles. All he argues experienced euphoria, waves of bankruptcies, decimating their industries, and then a rebirth into useful technology and profitable investments. He points out that, quote, the new technology was sound, but it set off an unsound mania. He also walks through three takeaways from previous tech bubbles. One, new technologies generate investor excitement, as they should, but there is no way to gauge how much enthusiasm

Starting point is 00:09:56 is warranted. Two, the boom-bust cycle is no way to gauge whether a technology will succeed. Investors bet on hope. Early-stage bets mostly go to zero. There is no meaningful signal of success in the euphoria of soaring prices, but plunging prices are just as meaningless a signal. And finally, three, innovation and profit are not correlated. Innovators go bust every cycle. Google and Facebook were not the original innovators in search and social media respectively, but they captured most of the value in the segments. Maliby then goes on to set the clear next test for the crypto industry, which he sees as creating services that non-crypto people care about. He points to possibilities such as upgrades to consumer reward systems like airline miles,

Starting point is 00:10:35 remittances, play-to-earned gaming, streaming media micropayments, and more. These are all potentially fertile grounds, he argues, for finding a resonant use case for non-crypto users. He concludes that the internet has evolved into a frictionless system for storage, transfer, and sharing of information to the extent that we cannot imagine the world without it and that crypto has the potential to do the same thing with value. Now, this is a ways away from the Wall Street Journal cover in mid-June of last year, the Crypto Party is over, or the Washington posts early June piece, the Crypto-Sceptic's voices are getting louder. That was the piece that gave an immense amount of coverage to the letter written to Congress by a consortium of self-appointed

Starting point is 00:11:14 tech and financial experts, who were basically neither. Now, I will say, I don't think all of a sudden the average mainstream media piece is going to be positive. I think, I think, it's much more likely that the tone has been so aggressive for so long that this is the natural next shift to keep people interested. But whatever the case, frankly, right now, it's nice to see. Still, that's not the only interesting dimension to this whole hullabaloo around the SEC. There are some reports that suggest all is not well within the SEC itself. In late May, Fox business covered what seemed to be a rather serious exodus of experienced lawyers from the SEC. Internal SEC sources leaked to Fox that, more than a dozen staff

Starting point is 00:11:53 attorneys in the agency's Division of Enforcement had resigned since Gensler's appointment in 2021, as well as three senior officials. Christina Littman, the head of the crypto assets and cyber unit, who was a 12-year SEC veteran, Jennifer Leet, the associate director in the Division of Enforcement who had been with the agency 23 years, and Adam Aterton, the co-chief of the Division of Enforcement's asset management unit who had served 14 years at the agency. Wall Street lawyers expressed the opinion that this level of turnover was unprecedented. An SEC enforcement lawyer told Fox, always some turnover with a change in administrations. But the loss of so much experience in such a short time is unusual and bound to hamper the agency's enforcement efforts at a time when Gensler

Starting point is 00:12:34 wants to be seen as tough. Multiple SEC sources told Fox that the problem with working for Gensler is, quote, both style and substance. People at the SEC are complaining about his expansive agenda, including pushing the commission into new areas of enforcement such as crypto regulation and mandating new company disclosures on issues like the environment. These sources said, that combined with his abrupt management style he had created a toxic work environment. Now, it's definitely the case that Gensler has been looking for a larger mandate for the SEC. He obviously is a key player in trying to win the battle to regulate cryptocurrencies, but he also wants to reform equity market structure and change how order routing functions.

Starting point is 00:13:13 The Fox business piece speculated, based on the insiders that they talked to, that, quote, Gensler is said to be looking past his job as SEC chief to one day replace Janet Yellen as Treasury Secretary. And that's the real insider source reporting here, which of course we have to be very careful of how much stock we put in. They're basically insinuating that Gensler isn't really at the SEC because he wants to be at the SEC. It's just as high up as he could go in the Democratic Party apparatus at this time. We spoke the other day about incentives and government and how dangerous it can be for people to just focus on their own advancement and sense of power. And I don't know if that

Starting point is 00:13:50 applies to Gensler or not, but if it does, it's something to be worried about. So where does this leave us? Well, Jake Chirvinsky from the Blockchain Association wrote a great threat a couple of days ago on what to expect from the SEC. On July 1st, he wrote, despite all the fears and predictions of a regulatory crackdown on crypto in the U.S., and despite historically bad market conditions to put it lightly, we saw no major government actions in the first half of 2022. I feel good about this. The second half of 2022 may be different. In Congress, we're mostly done for the year. In H1, we saw several promising legislative proposals like Llamas Gillibrand, which will come back in 2023. In H2, we may see more proposals, but likely nothing will pass. It's campaign season and everyone's focused on the election.

Starting point is 00:14:34 In the Biden administration, the EO process is ongoing. In H1, POTUS issued an EO assigning various agencies to write reports analyzing crypto's benefits and risks. In H2, those reports are due. I don't expect any hasty action while they get done or soon after. Across the government, almost everyone is lined up behind the smart national strategy that POTIS set forth in the executive order to proceed thoughtfully and act deliberately. And almost everyone gets that only Congress can answer major questions like how to regulate crypto. Almost everyone except the SEC.

Starting point is 00:15:05 We all saw the SEC's overt hostility to crypto in H1, concluding with its unjustified denial of gray scale's ETF conversion this week. Sadly, I expect it will get worse in H2. The SEC seems to be waging war on crypto on two fronts, rulemaking and enforcement. On rulemaking, the SEC proposed two rules in H1 expanding the definitions of exchange and dealer to capture defy protocols and market participants that are not and should not be subject to securities laws. Blockchain Association and many others filed comments opposing these rules. As our comments explained, the SEC's proposed rules exceed its statutory authority

Starting point is 00:15:40 and violate both the Administrative Procedures Act and the First Amendment. Nonetheless, the SEC's rulemaking agenda suggests that the exchange rule will be finalized this October and the dealer rule next April. If that happens, depending on what the final rules say, it's hard to imagine a viable resolution outside of litigation. On enforcement, the SEC announced in May that it was nearly doubling the size of its crypto assets and cyber unit in the division of enforcement. That's expensive. The SEC will need to prove the cost is worthwhile to rightly skeptical appropriators. It's also typical for the SEC and other agencies to bring a flurry of enforcement actions right before the fiscal year end on September 30th to shore up their performance

Starting point is 00:16:16 reports and budget requests. I'm guessing, but I expect this means we see new actions filed in the next few months. Why is the SEC acting this way? I wish I knew. It might be the most discussed topic in all of crypto policy since it makes so little sense. Everyone else seems on the same page. follow the president's orders and use the lessons learned to inform smart legislation in Congress. Yet leadership at the SEC granted an independent agency seems not to care what the president of its own party has directed. Why? Theories abound, from failing to understand the industry and technology to prioritizing sheer political ambition. Your guess is as good as mine. Regardless, although most of government is set for a productive and positive, if uneventful H2 for crypto, you should be ready for the SEC to ramp up its attack. I hope it won't, but if it does, know that it acts largely alone, without or against,

Starting point is 00:17:08 the consensus of policymakers. Nothing's in stone, and I hope cooler heads prevail. Importantly, the SEC just got two new commissioners who may bring some much-needed perspective to an agency that seems more and more embattled by the day. That goes far beyond crypto, by the way. The political calculus could also shift significantly in November, depending on the election in the composition of the next Congress. Either way, I'm as confident as ever.

Starting point is 00:17:31 It may be rocky in the short term, but don't let the headlines fool you. We're doing well in D.C. And that, I think, is a great note to leave this show on. I want to say thanks again to my sponsors, nexus.com, chain aliasis, and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - The Wall Street Journal Calls Out SEC Chairman Gensler Over Crypto

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