June means hot weather and summer shoes, and people are switching to flip-flops — but the SEC seems to be especially fashionable.
In a newly released video from 2018, current SEC Chairman Gary Gensler explicitly stated that Bitcoin BTC -0.17%, Ethereum ETH 0.05%, Litecoin LTC -0.98%, and Bitcoin Cash “are not securities,” a far cry from his current position on the issue. As recently as February of this year, Gary Gensler stated in an interview with New York Magazine that “everything but Bitcoin” is a security.
The confusion was only furthered by the release last week of the infamous Hinman documents, which served as key evidence in the SEC vs. Ripple case. Most notably, the documents show that SEC officials have identified “regulatory gaps” in securities laws on how to classify digital assets, and the emails reflect a lack of consensus among regulators on which cryptocurrencies are securities and why.
Gary Gensler’s public position, however, is one without any ambiguity at all: “Cryptocurrency platforms are effectively stock exchanges, and their activities are entirely within the purview of the SEC. Crypto markets are subject to regulatory compliance.” lack, not lack of regulatory clarity.”
However, Hinman documents show that in 2018 his own agency faced legal gray areas surrounding digital assets. In the same year, Gary Gensler said in a speech to a group of hedge funds, “About three quarters of this market may not be securities.” Here, he specifically refers to the four largest digital assets with the largest trading volume at that time: Bitcoin, Ethereum Square, Litecoin and Bitcoin Cash.
All of this begs the question: what happened?
How did Gary Gensler go from “probably three-quarters of this market is not a security” to “everything but Bitcoin is a security” in just a few years? Does this change reflect a real change of mind in Gary Gensler? Or is it a strategic calculation to expand his influence in Washington political circles?
Inside the Mind of Gary Gensler
Both the timing and substance of the SEC’s enforcement actions against cryptocurrencies show that Gary Gensler is no ordinary regulator — he is a cunning political manipulator and media pundit.
From an early age, Gary Gensler demonstrated an aptitude for political manipulation within large institutions. He became a partner at Goldman Sachs when he was only 30 years old, making him the youngest partner in the firm’s history at the time. After making a fortune on Wall Street, he moved to Washington, where he honed his policymaking skills as an assistant secretary for financial markets at the U.S. Treasury Department under Clinton.
By his own admission, Gary Gensler was a policy novice when he first came to Washington in the late 1990s. But in a lecture for his Blockchain and Currency class at MIT, Gary Gensler described a “sophisticated political lawyer from Texas” who led him and taught him how to play the game.
Gary Gensler was instilled in him by his mentors in the importance of effective messaging: “You know nothing about this city, boy. If you can’t get your message right, you can’t handle your politics. If you can’t get it right Deal with your politics and you’ll never be able to make your analysis and your policy.”
Gary Gensler seems to have taken those words to heart. He probably knows how to play the media game better than any leader in Washington today. In his own words, the crypto industry is full of “cheaters, fraudsters, scam artists, Ponzi schemes.” To drive home that point, he launched a PR and legal attack on the industry.
Using the Kardashian Tactics to Make Headlines
How do you keep a niche policy issue that most people outside of Washington don’t care about making national headlines? Suing a Kardashian is a good start, as Gary Gensler did last fall. The SEC accused Kim Kardashian of using her social media to follow crypto platform EthereumMax without disclosing the payments she received.
Since then, Gary Gensler has dominated the mainstream narrative around cryptocurrencies — and Congress has done little to stop him. Every time Congress tries to move forward on policy, it is blocked by the SEC. Take a look at the following examples:
On the same day that the House Financial Services Committee announced the creation of a subcommittee on digital assets, the SEC announced that it would sue crypto giants Genesis and Gemini for allegedly selling unregistered securities.
A month later, the SEC again sabotaged Congress’ plans when it issued a Wells notice to stablecoin provider Paxos. This comes just two days before the House Financial Services hearing on — you guessed it — stablecoins.
Earlier this month, the House of Representatives released a discussion draft of the McHenry-Thompson bill — the most ambitious cryptocurrency-specific legislation to date. But the SEC responded to the move with the most ambitious lawsuit yet against a U.S. crypto company — a double-action lawsuit against Binance and Coinbase.
In short: Congress is running an alley-oop race — and Gary Gensler is blitzing every time. Congress communicated its strategy by announcing the topics of the hearings early, giving Gary Gensler an extra edge. He can quickly read the opponent’s strategy and almost stop the ball as soon as it is hit.
What Is the Sec’s Diversion of Sight Strategy?
The U.S. capital markets overseen by Gary Gensler are worth more than $40 trillion, and digital assets make up only a fraction of that. However, his crackdown on cryptocurrencies is quickly becoming his legacy as SEC chairman.
It’s possible this is all misleading, Paradigm Policy Director Justin Slaughter tweeted, “If we’re talking about SEC enforcement actions against key crypto companies, we’re not talking about the McHenry-Thompson Act. But we’re not talking about it either The SEC has failed to complete most of the rules on its very large agenda, from ESG (environmental, social and governance) to market structure.”
In addition to failing to deliver results on ESG (environmental, social and governance) and market structural reforms, major banks have also collapsed under Gary Gensler’s watch. However, he has largely avoided the media spotlight by turning it to cryptocurrencies.
At the same time, he built a rock-solid reputation among progressives as a no-nonsense watchdog. House Democrats, frustrated with the slow pace of financial reform on Capitol Hill, have found a useful scapegoat — cryptocurrencies. Cryptocurrencies fall far short of the influence and lobbying power of traditional banks, making them easy targets for Congress and federal agencies. And it was Gensler who directed the firepower.
Win Over Congress
Gary Gensler has developed close relationships with members of the Senate and House of Representatives to increase his influence in both chambers. To ensure greater policy coordination between the SEC and the Senate Banking Committee, he enlisted Corey Frank, a former top aide to Senate Banking Committee Chairman (and prominent cryptocurrency critic) Sherrod Brown, to help lead the agency on digital Asset Disposal. It also includes his close relationship with Sen. Elizabeth Warren, another prominent member of the Senate Banking Committee, who recently vowed to form an “anti-cryptocurrency army.” Meanwhile, Gary Gensler has successfully wooed Democrats on the House Financial Services Committee, who have begun repeating his views in internal documents and in committee hearings.
If policy is like painting, Gary Gensler is Picasso. The media is his brush and Congress his canvas.
By strengthening his relationships with Democratic power players, Gary Gensler is positioning himself for future promotions — in this administration or any other. His track record makes him a prime contender for a future finance minister or ambassador for an important post in Europe or Asia.
There’s an irony here: Gary Gensler’s attack on digital assets poses an existential threat to the industry. But for him, it might just be his springboard to a higher role.
Whether he can successfully hold cryptocurrencies at bay is ultimately up to Congress and the courts.
