The world of crypto has been in a constant state of flux over the past decade, and in 2023 it is clear that the political landscape surrounding crypto is shifting in significant ways. With the SEC taking an increasingly active role in regulating the industry, it’s important to understand what this means for the future of cryptocurrencies and their users.
SEC under Gensler drives up crypto politics
To begin with, it’s worth noting that the SEC’s involvement in the crypto space has been building for some time. In 2022, the agency took a number of steps to increase its oversight of the industry, including issuing some guidance on the classification of digital assets and launching a new unit focused specifically on DeFi enforcement.
In many ways, this increased regulatory scrutiny was a response to the explosive growth of the crypto market over the past few years. As more and more people have turned to digital assets as a way to store and transfer wealth, there has been a corresponding increase in scams, fraud, and other illicit activities. For the SEC, this represents a major challenge, as it seeks to balance the need to protect consumers with the desire to foster innovation and growth in the crypto space.
Chairman of the Securities and Exchange Commission Gary Gensler appeared before the House Financial Services Committee last week for the first time in over a year and since the current Congress assumed office. The rapid transition to Republican control of the House of Representatives became blatantly apparent as the tone became markedly confrontational. The agency’s approach to digital assets was a major source of disagreement.
As with the vast majority of congressional proceedings, the event was dominated by political posturing and grandstanding for the cameras. It revealed the extent of Republican discontent with Gensler’s administration, suggested several points that are likely to become campaign platforms, and publicly undermined the SEC chair’s credibility. In turn, this could result in modifications to the agency’s strategy.
Crypto fuels up politics and regulatory bills in America
In a recent hearing before a Senate committee, the cryptopolitics between the Democrats and Republicans took a radically new turn. Prior to the hearing, approximately thirty elected representatives signed a letter “blasting” Gensler for misrepresenting the registration process for digital asset platforms. The crypto community has been complaining about this for some time.
Rep. Patrick McHenry (R-N.C.), chairman of the House Financial Services Committee, highlighted, among other things, the inconsistency with which Gensler rejects crypto enforcement actions, requests additional budget funding and refuses to provide clarity regarding the application of securities laws to digital assets and their service providers.
McHenry asked Gensler several times if ether (ETH) was a security, and each time Gensler resorted to the standard Howey definition without addressing the question.
Additionally, McHenry attempted to get Gensler to acknowledge that the regulations are unclear. Gensler continued to insist that they were very clear, but he was unable to comment on any specific asset.
Rep. Warren Davidson (R-Ohio) noted that Gensler’s SEC approved the pre-initial public offering (IPO) documents of the Coinbase exchange, which detailed its staking procedures and other operations, thereby allowing retail investors to purchase shares.
Two years later, the SEC sent the company a Wells Notice, indicating concerns about the legality of unspecified listed digital assets, the staking service, the crypto wallet, and other business areas. Davidson proposed Gensler’s removal from office after reciting an extensive list of his failures.
What lies ahead?
To be accurate, the hearing did not solely focus on perceived SEC failures and deficiencies. Several committee members commended Gensler for his courageous approach to securities clearing reform and for “standing up to crypto bro billionaires” (did he? Considering the FTX and SBF saga).
Moreover, many of the Republican criticisms were not directed at the agency’s crypto approach, but rather at its expansion into monitoring the environmental impact of listed companies and other initiatives that would increase the compliance burden for smaller businesses.
There is still considerable time until the November 2024 U.S. election, and a great deal can happen in the interim. It remains uncertain the extent to which the current administration will support Gensler’s digital asset strategy.
More importantly, the digital asset ecosystem is transitioning from a market niche to a political platform. Regardless of stance, the fact that it occupies so much of the politicians’ time is an indication that the industry is gaining a larger position at the table. Politics evolve, as do regulatory officials. Meanwhile, crypto continues to grow.
