WASHINGTON, DC - SEC Chair Gary Gensler has cultivated close ties with members in both chambers of ...
Quis custodiet ipsos custodes? Who watches the watchmen?
The age-old question has become all the more relevant as the federal bureaucracy balloons in both budget and size.
But as the U.S. government has grown, so too has the influence of the Fourth Estate. Social media has empowered a new generation of citizen journalists to hold officeholders to account by shining a spotlight on their past positions. And in recent weeks, that spotlight has been fixed on Securities and Exchange Commission Chair Gary Gensler.
As the SEC buckles down on digital assets, members of Congress have pressed Gensler on his shifting positions on crypto over the years. Contradictions between Gensler’s past and present statements have surfaced on Twitter, thanks to the crowdsourced work of professional journalists and amateur sleuths alike. Together, this decentralized community is dutifully watching the watchmen.
And what have they found? A remarkable evolution in Gensler’s views on crypto. Below is a timeline of his long arch from industry ally to apparent adversary.
Stage 1: The Ally (2018 to 2020)
While Gensler’s recent enforcement actions have painted him as an industry foe, that wasn’t always the case. Many crypto leaders once regarded him as a forward-thinking regulator and a friend of the space—and not without reason. Before taking over at the SEC, Gensler spent three years in academia, where he built a reputation as a public leader who saw the innovative potential of digital assets. Consider the events below:
2018
- Gensler gives a presentation before a group of hedge fund managers on the policy implications of emerging cryptocurrencies. In his remarks, he states definitively that bitcoin, ether, litecoin, and bitcoin cash are “not securities.” With these tokens comprising the bulk of crypto trade volume at the time, he says that “three-quarters of this market is probably not securities.”
- This same year, Gensler begins research on digital assets at the Massachusetts Institute of Technology, where he also teaches the university’s Blockchain and Money course. While there, he delivers a lecture in which he publicly grapples with the question, Is cryptocurrency a security or a commodity? His reply: “It’s both. I know that’s not an answer that a lot of people like, but that’s kind of where we are right now.”
2019
- Gensler speaks at a fintech conference in New York City, where he heaps praise on Algorand ALGO and its lead developer, Silvio Micali—Gensler’s then-colleague at MIT. Gensler calls Algorand’s project “a great technology” and a blockchain so efficient “you could create Uber UBER on top of it.”
- This same year, according to lawyers at Binance, Gensler offers to advise the crypto exchange, even meeting with Binance CEO Changpeng Zhao for a special meeting in Japan. (To this day, Gensler has yet to refute the claim).
2020
- Gensler teaches his last course on Blockchain and Money at MIT in the fall. His lectures, which are available online, lead many to believe he will take a pro-innovation approach to crypto if he re-enters public service. With President Joe Biden winning the election, speculation grows that he will tap Gensler to lead the SEC.
Stage 2: The Agnostic (2021-2022)
Sure enough, President Biden appoints Gensler as SEC Chair. Given Gensler’s past statements and praise of various crypto projects, many leaders in the digital asset community cheer the announcement. Senator Cynthia Lummis, for example, tweets: “While the SEC has a reputation as a black hole for innovators, Gary Gensler recognizes the potential of digital assets.”
Indeed, the mood on Capitol Hill with Gensler’s ascension is one of sunny optimism. But shortly after taking office, Gensler’s attitude towards crypto begins to change.
2021
- In both press statements and public remarks on digital assets, Gensler’s tone shifts from one of openness to skepticism—and in some cases, hostility.
- The SEC Chair begins signaling the need for more regulation, calling crypto a “Wild West” fraught with fraud and abuse. He goes further by saying, "I believe we have a crypto market now where many tokens may be unregistered securities.”
- Still, Gensler admits that digital tokens are suspended in a state of regulatory limbo. And he says that legislation from Congress would be helpful in providing greater clarity to the industry since “exchanges trading in these crypto assets do not have a regulatory framework either at the SEC, or our sister agency, the CFTC.”
2022
- Gensler doubles down on the “Wild West” narrative, and his tone hardens. “Of the nearly 10,000 tokens in the crypto market, I believe the vast majority are securities,” says Gensler in a September speech before the whole agency. Just two months later, crypto exchange FTX goes belly up, vindicating some of Gensler’s claims.
Stage 3: The Adversary (2023-Present)
After the FTX debacle, the gloves come off as Gensler’s skepticism turns to opposition. His agency tires of waiting for Congress to pass legislation, and instead, assumes a regulation-by-enforcement approach that entails a series of Wells notices and lawsuits against high-profile crypto exchanges.
There’s just one problem—the new tack requires Gensler to swallow whole many of his previous statements on crypto.
2023
- In a noticeable departure from his 2018 statements that several major cryptocurrencies are not securities and that many tokens have the characteristics of commodities, Gensler muses in an interview with New York Magazine that “everything other than bitcoin” is a security.
- Contradicting his own request in 2021 that Congress pass legislation to provide greater clarity for the digital asset industry, Gensler says that “crypto markets suffer from a lack of regulatory compliance, not a lack of clarity.”
- While Gensler asserted in 2021 that digital assets lack a clear regulatory framework at the SEC, he now argues that “The law is clear,” and all crypto exchanges must register with the agency.
- Despite reports that Gensler offered to serve as an advisor to crypto giant Binance in 2019. his agency is now suing the company for alleged market manipulation and misuse of customer funds. The SEC is simultaneously suing Coinbase for listing what the agency considers to be “unregistered securities.”
- Speaking of unregistered securities, the SEC alleges in a lawsuit that ALGO is exactly that. Bear in mind that ALGO is the native token of Algorand—the same protocol Gensler praised in 2019 as a groundbreaking technology.
Gensler’s Anchor Strategy
So what gives? Why Gensler’s sudden about-face?
Odds are, there’s a coherent strategy behind his contradictory statements.
As a seasoned bureaucrat, Gensler understands better than most how negotiations work in Washington. Effective policymakers employ a negotiating technique called “anchoring,” in which they set their first offer far away from the expected outcome. (Think Representative Alexandria Ocasio-Cortez’s Green New Deal or the original $3.5 trillion price tag on President Biden’s Build Back Better plan).
These initial proposals are often outlandish and have virtually no chance of becoming law. But they set a reference point for negotiations and give the appearance that the proposing party is making significant concessions as policy inevitably moves towards the middle.
This is the likely logic behind Gensler’s actions at the SEC. By taking the hardline position that “everything other than bitcoin” is a security, he has set the frame of the negotiation and all but forced Congress to take action on legislation.
Enter ‘Digital Commodities’
Congress’s response to Gensler is the McHenry-Thompson bill, which (far from labeling everything but bitcoin a security) carves out a wholly new asset class known as “digital commodities.” Many existing tokens meet the definition of digital commodities outlined in this bill and will therefore fall under the purview of the Commodity Futures Trading Commission—not the SEC.
The McHenry-Thompson bill is the most comprehensive crypto framework ever to come before Congress. It has strong support in the House, but it could face significant opposition in the Senate, where Democrats have shown deference to Gensler on many questions related to digital assets. So if the legislation passes this Congress (a big if), it would likely be in a diluted form.
The other option for the bill’s supporters is to hope for a more crypto-friendly Congress in 2025. But this is assuming the industry can absorb another 18 months of heavy blows from the SEC. A rope-a-dope strategy is risky in any circumstance—but it’s even riskier against a fighter as formidable as Gary Gensler.
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