Securities and Exchange Commission (SEC) Chair Gary Gensler’s crusade against cryptocurrencies has surprised many. His three-year stint as a senior advisor at the Massachusetts Institute of Technology (MIT) Media Lab’s Digital Currency Initiative before leading the SEC suggested that he would bring an enlightened approach to crypto. No such luck.
Gensler’s foray into cryptocurrencies appears to be more a professional resume builder than a coherent regulatory vision for the innovation that can democratize finance. Along the way, he’s been happy to play along with the SEC’s word games on whether crypto is a currency or security, as long as it moves him to center stage. It’s part of the DC playbook: the regulatory white knight confirmed on the premise to make things right, implements some industry-friendly policy marketed as pro-consumer, and then takes the next plumb job.
Many misread Gensler. His MIT perch conferred the appearance of academic expertise on blockchain. It turns out there is little record of him writing or speaking about the technology until the school hired him in 2018. His few academic presentations were co-authored by the driving force of the school’s crypto program, Media Lab director Joichi Ito. Gensler’s MIT speeches and interviews were not about the substance of blockchain but rather commentary curated to make him look like a policy expert.
The archive of Gensler’s MIT bio shows almost no background in technology. After two decades at Goldman Sachs, his stint at MIT was a needed stop on the Democrat power train, conferring the academic bona fide to secure his nomination as SEC Chair. In retrospect, the Ito’s Media Lab policy strategy becomes clear: keep retrograde bitcoin unregulated (it’s not vital to Wall Street anyway) but every other crypto asset is up for regulatory grabs.
In 2015 Ito told the MIT Bitcoin Expo that the Media Lab’s crypto program came together because “we don’t even know who is in charge”, and he wanted MIT to step into that role. Ito’s view was decidedly bitcoin maximalist, saying “the biggest risk to bitcoin is the architecture of the community not being robust” and the need to choose which assets other than bitcoin would be “in or out…Are altcoins part of it? What about Ripple?,” Ito asked. He was referring to the company that was pioneering a faster, greener consensus protocol, the XRP Ledger, to compete with bitcoin’s slow, fossil-fuel intensive proof of work mechanism. Ito expertly deployed progressive buzz words and purrs to advocate for Wall Street’s preferred regulatory model: “community architecture”, “open networks”, and a “regulatory incubator” that put altcoins and Ripple in their place behind bitcoin.
Gensler was the perfect front man for the Lab. According to reporting by Charles Gasparino in the New York Post, Gensler moved quickly after coming aboard and requested a meeting in March 2018 with then-SEC Chair Jay Clayton. The SEC just emerged from a rash of enforcement actions against crypto frauds and scam coins throughout 2017 and was pondering whether to declare the three top cryptocurrencies – bitcoin, ether and XRP – to be unregistered securities and subject to costly enforcement actions.
Gasparino reports that Gensler advocated for a free pass for bitcoin as “a true crypto” but that ether and XRP “were skirting securities laws, trading as non-registered securities without SEC oversight.” Weeks later, he told the New York Times that “there is a strong case for both of them – but particularly Ripple – they are non-compliant securities.”
Gensler’s zeal to be a top regulator and Ito’s apparent zeal to pick a winner – bitcoin – were a match made in heaven. Neither seemed interested in setting clear, coherent rules that could be applied across the board as much as they wanted to set rules that were best for them. In their June 2018 presentation, Gensler and Ito referenced the Howey Test from the 1946 Supreme Court decision that established a method for defining securities but never contemplated the complexities of blockchains and ledgers. Gensler also proffered “the Duck Test” – if something quacks, walks and looks like a security, then it’s a security.
But Gensler and Ito assert that ducks can morph into giraffes if they are “sufficiently decentralized” – something not contemplated in Howey but eagerly advocated by Ethereum to its friends inside the SEC at the time. Gensler and Ito also made a self-contradicting regulatory indictment of bitcoin rival XRP, saying it is an investment contract in Ripple the company, but conceded that the XRP token and ledger would still function independently if Ripple were to disappear.
All of these exceptions seem rooted in making the lack of regulatory clarity a Rorschach Test of convenient, self-serving theories. It lets Ito argue for keeping altcoins outside of “the community architecture” while letting Ethereum get a regulatory pass. Gensler gets to lord over the regulatory realm while bolstering his party credentials with flashy enforcement actions that deliver him to his next job: Treasury Secretary.
Not all is well at MIT however. While Gensler is golden, Ito took the fall for revelations that the MIT Lab was financed in part by Jeffery Epstein and Leon Black.
Moreover investors are revolting against the SEC. On his last day in 2020, Clayton, in the name of “investor protection”, filed a $1.3 billion enforcement action against Ripple claiming that XRP has been an unregistered security since 2013, and everyone should have known. The case has become an embarrassment for the agency, putting the SEC itself on trial for its arbitrary determinations and absurd take on due process. Over 50,000 outraged XRP holders have filed a class action lawsuit, claiming the the agency tanked their holdings.
Gensler refuses to engage the retail crypto investors he claims to be defending, and his incoherent “everything crackdown” on the U.S. financial marketplace only strengthens the idea that his war on crypto is about furthering his career, not what’s best for investors, the economy, or innovation.
SEC Chair: Innovation Around DeFi “Could Be Real”
Gary Gensler believes that DeFi could offer “real innovation,” but he is convinced that the sector will not survive without regulatory compliance.
U.S. Securities and Exchange Chair Gary Gensler said that new technologies do not tend to persist if they fail to come into compliance with the law during a fireside chat with Jay Clayton at the Digital Asset Compliance & Market Integrity Summit.
While Gensler believes that decentralized finance could be the source of innovation, he claims that it has to fall within the existing regulatory framework:
The innovation around DeFi could be real, but they won’t persist if they stay outside of the regulatory framework.
Gensler also voiced his concerns about the centralization of some DeFi projects and implied that the goal of such projects might be to skirt existing anti-money laundering laws.
Speaking of the regulator’s reluctance to approve a spot Bitcoin exchange-traded fund, Gensler told No. 42 that trading around the globe is not inside the U.S. regulatory register. He urged the trading and lending platform to “come in and talk”:
Trading and lending platforms are really in an important place for investor and consumer protection. Come in and talk to us… work with us. Where appropriate we’ll use the enforcement tool. Work to get registered with the law.
The SEC boss has reiterated that stablecoins remind him of poker chips at a casino:
[Stablecoins] made it more efficient within the ecosystem. But it also allowed people around the globe, the people who tried to, to avoid money laundering and tax compliance in jurisdiction after jurisdiction.
According to Gensler, stablecoins are responsible for 80% of trading on the crypto market.
SEC Commissioner Will Not Say If Ether Is a Security
The SEC remains mum about Ether’s regulatory status amid accusations of picking winners and losers that come from the increasingly frustrated XRP community.
U.S. Securities and Exchange Commissioner Hester Peirce did not answer whether or not Ether, the second-largest cryptocurrency, is a security when asked by her Twitter follower.
Rather than analyzing the status of particular assets, I need to focus on building a sensible and clear regulatory framework for crypto.— Hester Peirce (@HesterPeirce) November 21, 2021
The “Crypto Mom” says that she is willing to build a “sensible and clear” regulatory framework for cryptocurrencies, but she will not focus on particular digital assets.
As reported by U.Today, SEC Chair Gary Gensler has repeatedly dodged the very same question on numerous occasions, making it clear that he will not speak about separate cryptocurrencies to remain neutral.
At the same time, the agency has distanced itself from a 2018 speech made by its former top official William Hinman, in which he famously said that Ether is not a security.
Amid the SEC’s almost year-long legal battle with Ripple, calls for regulatory clarity continue to persist.
Last month, Ripple CEO Brad Garlinghouse opined that Ether had managed to surpass XRP by market capitalization because of the SEC’s “free pass.”
Peirce, despite being a staunch crypto supporter for years, has refused to speak about the Ripple case since SEC Commissioners are prohibited to speak about ongoing litigation or enforcement actions.
SEC hawk eyes now on Terra Mirror Protocol and Its CEO Do Kwon for allegedly ignoring several subpoenas
- The Terra blockchain co-founder Do Kwon and the Terraform Labs are now on the SEC’s radar for allegedly repeatedly failing to respond to its subpoenas.
- Kwon says he is surprised by the lawsuit and he has also filed a lawsuit against the regulator for its ‘inappropriate’ serving.
The US Securities and Exchange Commission (SEC) is staying true to its promise of battling alleged unregistered securities as shown by its latest action against the Terra blockchain. The regulator is now going after Terraform Labs – the company behind Terra, and its co-founder and CEO Do Kwon.
As per the litigation release, the SEC delivered to Kwon a series of subpoenas, which he has failed to address. The regulator now seeks to compel the company to comply with the summons that petition for Kwon’s testimony. The investigative subpoenas also call on the production of several documents by Terraform Labs.
Launched in December 2020, Mirror Protocol is a DeFi protocol built on Terra’s blockchain. It is used to mint, issue, and trade synthetic versions of stocks, or Mirrored Assets (mAssets), which track the price of real-world assets. For instance, rather than purchasing Tesla shares, one can buy mTSLA. These assets, according to Kwon, ease global investors’ access to the US equities market.
Terra Blockchain and the SEC
Following investigations, the regulator now has reason to believe that Terraform Labs and Do Kwon “participated in the creation, promotion, and offer to sell mAssets and MIR tokens to U.S. investors.” Such actions are likely in violation of US federal laws which forbid the selling or offering of unregistered securities or being an unlicensed securities broker. Nonetheless, the litigation release reads that:
The SEC is continuing its fact-finding investigation and, to date, has not concluded that any individual or entity has violated the federal securities laws.
Should the SEC produce any confirmation of these speculations, Terraform and Kwon would find themselves in a similar fate to Ripple Labs and XRP.
In retaliation, the Terra CEO has filed a lawsuit contesting the environment in which the subpoenas were served. Kwon was served the documents while presenting at a September Messari Mainnet cryptocurrency conference in New York. The happening became the subject of the Crypto Twitter buzz with many wondering who exactly got served.
According to Kwon’s legal counsel, such delivery was illegal since it took place in public. This, the legal advisory says, is an infringement of the SEC’s policy that states that serving should happen confidentially.
Additionally, Kwon’s filing says he has been in communication with the SEC since some time ago. The commission’s actions, therefore, come as quite a surprise to him.
MIR and LUNA price movements
The Mirror Protocol token, MIR, was trading at $3.11 at press time, having lost 2.5 percent in the day per our data. The token hit its all-time high around mid-April when it traded at $12.40. Terra, the stablecoins ecosystem which recently introduced an 88.7 million token burn, saw its native token trading at $51.02, down 0.3 percent in the day.