The U.S. Securities and Exchange Commission (SEC) is making waves in the crypto sector this summer. Major players are responding quickly, with Crypto.com announcing it will wind down its U.S. institutional business due to limited demand and Robinhood testifying last week in a House crypto hearing about the lack of help it received from the SEC in registering as a digital assets broker. But what is driving the SEC’s actions?
At the center of the chaos is Gary Gensler, the current chairperson of the U.S. Securities and Exchange Commission. Brokers like Robinhood and eToro have begun delisting tokens from prominent blockchain projects, many of which use proof-of-stake (PoS) algorithms, which have been called into question by Gensler.
The crypto sector has reason to wonder why Gensler is taking a hard stance on the industry, especially compared to his predecessors. The Federal Trade Commission (FTC) reported victims lost more than $1 billion in cryptocurrency scams between January 2021 and March 2022, but this statistic is nine times less than the losses incurred from security frauds in 2022, overall. This leads to the conclusion that Gensler is 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.
Gensler’s focus has raised questions about the evidence and information he is using to make his decisions, as well as speculation about his motives. Conspiracy theories have emerged on social media, including questions about Gensler’s relationship with Sam Bankman-Fried and reports that he was turned down for advisory roles at Binance.
The latest controversy 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 assets. Prometheum has a license to operate as an alternative trading system (ATS) that plans to list digital asset securities – but it’s unlikely any cryptocurrencies will ever fit that regulatory designation.
Lawmakers should be concerned that Gensler is practically creating his own fourth branch of government by introducing a new bill for crypto regulation, bypassing the usual law-making process and standards like the Administrative Procedures Act. This is having an outsized effect, with venture capital, founders and companies fleeing the U.S. because of Gensler’s actions.
It is beyond clear that the traditional regulatory frameworks do not fit Web3, 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 under 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 security assets such as stocks or bonds in 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.
It is encouraging that House Financial Services Chair Patrick McHenry (R-NC), Agriculture Committee Chair Glenn Thomspon (R-PA), and Senators Cynthia Lummis (R-WY) and Kristen Gillibrand (D-NY) are now introducing a crypto regulation bill. But the blame can’t be laid just at Gensler’s feet, as the issue fundamentally stems from a failure to recognize the transformative impact of blockchain technology on finance.