There is a strong, bipartisan desire in Washington to adopt a clear set of rules for regulating cryptocurrencies and blockchain technology. Unfortunately, the Securities and Exchange Commission (SEC) and its allies in the Biden administration have been fighting to halt it in its tracks, arguing that the SEC is “the cop on the beat” and already has full authority over digital assets. But after years of legal wrangling, this game of regulatory domination is now hitting a wall in the courts, leaving SEC Chairman Gary Gensler increasingly isolated.
Gensler has repeatedly claimed that the SEC’s authority over what he calls “digital asset securities” is total, that the rules are “clear,” and that every crypto company is non-compliant. But when pressed before Congress to explain those rules, he can’t answer the most basic questions. Gensler has further told companies they have to register their products or digital tokens, but he and the SEC staff are incapable of explaining the process when asked. Court filings by crypto companies show ample evidence of years of frantic attempts by companies to “come in” and understand how to comply with these allegedly clear rules to little avail.
For far too many years the SEC was able to get away with this gaslighting of the crypto industry, but then the judicial rebukes started coming.
In July, the Southern District of New York rubbished the SEC’s argument that all cryptocurrencies are securities in a ruling largely in favor of Ripple Labs, a payments settlement company that uses the XRP crypto token in its software. The SEC had accused Ripple of one, long unregistered securities trade for all XRP distributions since 2013, arguing the XRP token itself is a “digital asset security” and therefore always an investment contract in the company Ripple.
The court found that long-established securities laws say that assets themselves are not securities, and therefore, trading XRP in anonymous blind bids on public exchanges are none of the SEC’s business. It should surprise no one that the SEC finally dropped all its claims against Ripple’s executives for “aiding and abetting” transactions that were proven to be perfectly legal. In short, Gensler’s so-called “clear” rules are not what the law says.
Then in August, the DC Circuit Court of Appeals overturned what it called the SEC’s “arbitrary and capricious” rejection of a Bitcoin spot exchange-traded fund (ETF) for Grayscale Investments. The three-judge panel ruled unanimously that the SEC failed to provide a coherent explanation for why it has allowed crypto futures ETFs but not such vehicles for the assets themselves. Once again, Gensler was hoisted on his own enforcement division’s petard.
Based on this pattern, more court defeats for the SEC are likely to come.
The Agency’s ongoing lawsuit with Coinbase is likely the next domino to fall. Gensler’s SEC approved Coinbase’s 2021 initial public offering knowing its business model was to be a digital asset trading platform. Their rigorous criteria for listing tokens – that did not meet the definition of a security – had never been questioned by the SEC, but two years after they went public the SEC filed suit against Coinbase. Relying on the same deceptive grounds as the Ripple case, the SEC claimed Coinbase had always been an illegal business and that the company should have known all along.
Although questions have lingered about the SEC’s bait and switch regulatory games, particularly in light on Gensler’s increasing losses in court, this is not the only issue that should raise alarm in the Biden Administration about the Agency’s dealings with crypto.
In May, an obscure company named Prometheum announced it had received a special broker-dealer license from the SEC to become the first “compliant” crypto exchange. It raised immediate suspicions about the company, given that it doesn’t even offer any trading of Bitcoin. How does Prometheum get a license only because it won’t use it, while Coinbase gets sued over its core business model two years after its IPO was approved? The message appeared to be that Gensler believes the only compliant crypto exchange is one with nothing to trade.
Gensler has also refused to answer questions from the House Financial Services Committee about his meetings with Sam Bankman-Fried, who is currently on trial for stealing tens of billions of dollars in customer funds on the failed FTX exchange. Chairman Patrick McHenry (R-NC) has warned Gensler he might be the first SEC chairman in history to get a Congressional subpoena if he keeps refusing to answer.
Nothing about this makes sense and shows an important agency operating in appallingly bad faith. Gensler’s credibility is now seriously compromised, and it would be wise for the SEC Chairman to settle the doomed outstanding cases in court and make a strategic pivot towards being part of the solution. He should sit down with the Democrats and Republicans advancing a bipartisan crypto regulatory framework and contribute to a whole-of-government way forward.
But if Gensler fails to change course, then Congress needs to settle all doubts and adopt a legislative framework that makes everything crystal clear once and for all. And it needs to exercise appropriate oversight in holding the SEC accountable for its expensive and failed regulatory overreach at the taxpayer’s expense.
Todd Tiahrt is a former Member of Congress who served on the Transportation, Treasury and Independent Agencies Subcommittee of the House Appropriations Committee.
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