When Gary Gensler came to the Securities and Exchange Commission (SEC), he had the reputation of a regulator who had reformed U.S. law to address novel financial products once before.
In 2009, Gensler was given the task of wrangling the then out-of-control derivatives market after the crash in 2008 and the Great Financial Crisis. Twelve years later, he heads an agency overseeing a financial system shaped by that crisis and in the midst of a raging pandemic that has changed how retail customers interact with the system. And again Gensler is tasked with addressing a class of novel financial products.
This article is part of CoinDesk’s Most Influential 2021 series. The portrait here was created by Skygolpe and is available for auction at Known Origin. The artist is donating 20% of the sale to Children International.
The former Commodity Futures Trading Commission (CFTC) chair also enjoyed the reputation of being well versed in cryptocurrency issues, having lectured on the subject at a small school in Massachusetts called MIT, where he called the burgeoning asset class and technology stack a “catalyst for change.”
Gensler isn’t the first or only regulator with a crypto background – former Acting Comptroller of the Currency Brian Brooks came from Coinbase, former Acting Financial Crimes Enforcement Network (FinCEN) Director Michael Mosier has enjoyed a stint at Chainalysis and current LabCFTC Director Jason Somensatto came from decentralized exchange 0x.
But the excitement for Gensler, who would lead one of the most influential federal regulators from a business perspective, was palpable. He could withdraw the SEC’s lawsuit against Ripple Labs, approve the U.S.’ first bitcoin exchange-traded fund (ETF) and provide clarity for businesses hoping to launch and trade a crypto token compliant with federal law without having to endure the SEC’s expensive and time-consuming registration process.
That’s what the industry hoped, at least.
“Markets – and technology – are always changing. Our rules have to change along with them,” Gensler told the Senate Banking Committee during his confirmation hearing. “In my current role as a professor at MIT, I research and teach on the intersection of technology and finance. I believe financial technology can be a powerful force for good – but only if we continue to harness the core values of the SEC in service of investors, issuers and the public.”
Under his watch, the SEC has approved the first bitcoin-exposed ETF – but only bitcoin futures ETFs, and not any funds exposed to the cryptocurrency directly. Bitcoin mutual funds now trade in the U.S., but the SEC has sternly opposed similar products exposed to other cryptocurrencies, like ether. And still, like 2017, and 2018, 2019 and 2020, the SEC has yet to formalize much of the guidance the agency has long promised explicitly describing how it will apply longstanding laws to the digital asset sector.
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Still, Gensler’s impact on the crypto industry cannot be understated. He’s called on Congress to take specific actions to clarify crypto regulations and discusses his views fairly frequently at various public events. Much of what he’s said resembles predecessor Jay Clayton’s views on digital assets in the U.S., though Gensler has the advantage of all the work the SEC conducted under Clayton to inform some of his public statements. Regulatory clarity – which Clayton similarly hinted at but did not provide – may still be forthcoming, though it remains an open question as to how exactly this will look.
An SEC spokesperson did not return multiple requests for an interview or statement from Gensler.
“I don’t know how it’s going to evolve but I think it’s not going to evolve well outside the tenets of public policy, and I’m speaking about investor protection, but it’s also guarding against illicit activity … anti money laundering and sanctions and the like, tax compliance,” Gensler said at the Digital Asset Compliance & Market Integrity Summit (DACOM). “I think that institutional investors want to see more progress made.”
‘Entire professional career’
Gensler is well prepared for his current role. He’s been a banker, Senate staffer, and a Treasury official as well his roles at MIT and the CFTC. All this to say, Gensler may be the rare regulator with firsthand experience in all aspects of the industry he oversees.
Gensler began his career in financial services at Goldman Sachs, working in mergers and acquisitions, trading and finance and other roles. He later became one of, if not the, youngest partner at Goldman in 1987. He’s served in the U.S. Treasury Department, heading up domestic finance and financial markets teams, worked on the staff of former Sen. Paul Sarbanes (D-Md.) and chaired the CFTC in the wake of the Great Financial Crisis.
“I have spent my entire professional career in and around the financial markets – in the private sector, in state and federal government and now in academia. And I believe our markets are the finest in the world,” he said in his opening statement during his SEC confirmation hearing.
He’s also a family man. He raised three daughters alone after his wife died from cancer in 2006.
“Before I close, I do want to introduce and thank my three daughters, Isabelle, who’s here with me in Maryland over there, and her older sisters Anna and Lee, who are watching remotely. They are the lights of my life, and I wouldn’t be here today without their love and support,” Gensler said during his SEC hearing.
Gensler similarly introduced his children to the Senate Agriculture Committee 12 years ago, when he was nominated to run the CFTC.
It is perhaps his experience at the CFTC that provides the clearest picture of how he might approach his remaining term at the SEC. At the CFTC, Gensler was responsible for implementing the Dodd-Frank Act, which heavily reigned in some types of derivatives trading. He also led the agency as it tamped down on LIBOR manipulation, when major banks misrepresented their borrowing costs as part of a profit-boosting scheme.
Unclear guidance
Before Gensler, the SEC has offered dribs and drabs of guidance that has often been confusing or unclear. In 2019, it offered a “plain English” framework that has not been mentioned since. Former Director of Corporation Finance William Hinman famously introduced the concept of “sufficiently decentralized” as a yardstick of whether a token issuer might fall in the SEC’s purview or not. Once again, the regulator has not followed up on this in any meaningful way.
This gives Gensler some fairly easy areas to weigh in and leave a mark. And the chair has recognized this. In prepared testimony before the Senate Banking Committee, Gensler said “large parts” of the crypto industry are not operating within existing regulatory frameworks, and there is insufficient consumer protection. SEC staffers are therefore looking at, in Gensler’s words:
“The offer and sale of crypto tokens, crypto trading and lending platforms, stable value coins, investment vehicles providing exposure to crypto assets or crypto derivatives [and] custody of crypto assets.”
Gensler has framed this conversation as one of investor protection, echoing much of the broader U.S. regulatory sector.
Traders using unregulated exchanges, or transacting with tokens that are less than transparent about their backing or governance, may be at risk.
“I think where we are right now, is we don’t have sufficient investor protection in this space, this $2.6 trillion asset class, this worldwide asset class,” Gensler said recently DACOM. “I think that new technologies do not become persistent if they stay outside of the public policy framework. And this is an investment asset class and needs investor protection or people will be hurt and trust will be undermined.”
Gensler has also homed in on exchanges as entities that could or should fall under the SEC’s purview, explicitly saying he believes platforms like Coinbase should register with the agency.
No crypto exchange is currently regulated at the federal level (FinCEN registration doesn’t count), a point of ire for both Gensler and the industry, though for different reasons. Gensler has spoken about the need for a federal framework that can protect consumers, while exchanges want a more streamlined regulatory registration and compliance process.
Gensler’s argument does have merit. Crypto trading platforms famously slow down or stop working altogether during moments of high market volatility. While this appears to be a result of technical issues, some industry participants believe exchanges are incentivized not to fix this – by halting trading, would-be sellers are unable to do so, which could stabilize the price. A regulatory regime mandating uptime could be one solution that would allow investors to cash out on demand.
The two approaches are different, but Gensler’s suggestions for how Congress can regulate crypto could address both of these viewpoints.
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“Absent clear investor protection obligations on these platforms, the investing public is left vulnerable. Unfortunately, this asset class has been rife with fraud, scams and abuse in certain applications,” Gensler said at the beginning of September.
A key note here is his repeated entreaties to Congress to act, rather than look to unilateral action by the agency itself.
Sen. Sherrod Brown (D-Ohio), who chairs the Senate Banking Committee, echoed Gensler’s views on investor rules and praised the regulator in a statement sent to CoinDesk.
“I commend him and will continue to work with him to push policies that protect Americans’ hard-earned money and the integrity and stability of our markets. We must all work to ensure that reckless speculation in cryptocurrencies doesn’t end up hurting workers and families,” Brown said.
Regulatory clarity
Lawyers in the crypto industry say Gensler has yet to clarify their obligations.
Larry Florio, general counsel at the Syndicate DAO, called Gensler’s statements over the past year “confusing” due to a lack of practical, applicable guidance.
“The statements regarding decentralized exchanges along the lines of ‘they list hundreds of tokens, some of which must be securities’ and similar phrasing in the actual SEC releases does nothing to provide useful guidance to the majority of the space that is trying to operate within the law,” he told CoinDesk.
“It feels like playing musical chairs blindfolded. You don’t know how many chairs are left or where they are, you just hope you land on one when the music stops.”
He’s not alone in this view.
Donna Redel, an adjunct professor at Fordham University’s law school, told CoinDesk that many in the industry hoped he would propose regulations for crypto based on his experience both as a longtime participant in the financial sector, as well as his digital asset knowledge.
His speeches and interviews do not serve as regulatory proposals, she said.
Some believe Gensler’s comments may be sowing more confusion, particularly with respect to lawyers. Redel said Gensler continuously tells startups to talk to the SEC, but he’s also “intimidated everyone” in the industry.
“On the one hand it looks like he’s going after attorneys, and he’s saying what we’re supposed to do, but he’s not telling us how to position that role,” Olta Andoni, the former chief legal officer at NFT startup Nifty, told CoinDesk.
To date, Gensler seems to be following in predecessor Jay Clayton’s footsteps through his attention on enforcement actions, she said.
This is not sustainable, said Nisa Amoils, managing partner at A100x Ventures.
“The lawyers at the SEC are exhausted – and not just from Ripple,” she said.
Looking ahead
2022 is poised to be pivotal for crypto regulation in the U.S. A bipartisan infrastructure law with language opposed by the industry will take effect, several other bills addressing crypto will face the House and Senate, and the SEC will approve or reject nearly a dozen outstanding bitcoin ETF applications.
The SEC is likely to pay more attention publicly to stablecoin regulation, trading on exchanges or crypto lending – three issues Gensler has discussed in various public statements.
The most impactful regulatory proposal he’s suggested would be to regulate crypto trading exchanges as federal securities trading platforms. Now, exchanges are regulated at the state level, usually as money-services businesses. There’s no federal oversight of normal spot market activity, though the CFTC does target illicit activity such as fraud.
Gensler seemingly hinted at this in his recent comments at DACOM. He has said they think that agency is the right regulator for crypto exchanges, even when the bulk of their trading volume comes from commodities (like bitcoin or ether) rather than securities (like many other cryptocurrencies). Gensler took this further, looking to non-crypto examples such as silver and gold trading on the New York Stock Exchange.
“Right now, the public is not protected as it could be, and as I believe it ought to be,” Gensler said on Dec. 1. “And I think for those of you in the audience, you’re thinking about the longer term future of this asset class and these projects. It’s not just the asset class, it’s the projects, it’s the technology.”
What industry participants hope for, however, is applicable, “bright lines” clarity on how specifically securities law might apply to different types of tokens.
Read more: Gary Gensler Isn’t Buying Your Decentralization Theater – David Z. Morris
“I hope we’ll get clarity around criteria for determining when a token – especially a governance token – is or is not a security, and some insight into his thinking on where regulation should be,” Florio said, asking whether the area of focus should be at the wallet, protocol, interface or fiat on/off-ramp layers.
Others simply hope a spot bitcoin ETF will be approved within the next year. Amoils noted that Fidelity, a $4.9 trillion asset manager, just launched a spot bitcoin ETF in Canada.
“I am technology-neutral. I think that this technology has been and can continue to be a catalyst for change, but technologies don’t last long if they stay outside of the regulatory framework,” Gensler said in another recent speech. “I believe that the SEC, working with the CFTC and others, can stand up more robust oversight and investor protection around the field of crypto finance.”
The story of Gensler’s term at the SEC so far has been one of potential. He may propose specific guidance, explain how a spot ETF can come to market, resolve outstanding questions about issues around custody and more, and he is the right person to do this. But he’s only eight months in, and it’s not yet clear when or how he will take more concrete steps to solve these issues.
