Gensler’s SEC is the same old SEC | Michael J. Casey

All eyes on crypto were on Washington this week as Gary Gensler drew a line in the sand on securities laws and a battle looms for an infrastructure finance bill that would seek to tax transactions of cryptocurrency. We examine the first of these stories in today’s main column and the second in “The Conversation”.

A remark made by the head of the Securities and Exchange Commission about the need for more international harmony and less “regulatory arbitrage” around crypto policy making provides an interesting setting for the podcast episode ” This week’s Money Reimagined ”, which focuses on Ireland, its tax laws and how policy differentiation can help small countries catalyze innovation ecosystems.

We spoke with Michael O’Sullivan, author of “The Leveling”, which describes the post-globalization era, and with Lory Kehoe, Director, Digital Assets & Blockchain at BNY Mellon and Founder of Blockchain Ireland.

Listen after reading the newsletter.

The great disappointment felt by many in the crypto community following Gary Gensler’s speech this week reflects, more than anything, just how much wishful thinking can trump facts. His letter of the law message that most tokens are subject to securities laws was quite predictable.

That doesn’t mean people shouldn’t be frustrated with the SEC Chairman’s online address to the Aspen Institute Security Forum, described by crypto legal commentator Katherine Wu as the “The most aggressive and hostile stance on US crypto regulations to date from the SEC.” “ In fact, it should motivate them to do more to appease policy makers increasingly hostile to Washington.

The reality is that by sharing his predecessor Jay Clayton’s view that “every ICO I’ve seen is security,” the new SEC chief made no substantial difference to what he had expressed before. I know this because I worked with Gensler at MIT’s Digital Currency Initiative, where he frequently cited the “walk like a duck” test to claim that the initial coin offerings seemed to meet the Howey test for what constitutes a title.

When he was appointed to this role, Gensler’s experience teaching blockchain courses at MIT fueled excessive hope that the industry would now benefit from a more user-friendly SEC. But Gensler’s in-depth knowledge and interest in the technology – including the belief expressed that it has the potential to tackle unfair rent-seeking practices within the legacy financial system – has only ever involved this regulator. seasoned would forgo a strict interpretation of the facts before him.

You see, the SEC professor was right then, as he is now, that in terms of the SEC’s worldview, token projects involving issues to investors almost always have the characteristics of a title. Look at them through the lens of a regulator and you will see the three unmistakable characteristics of the Howey test: an “investment of money” in a “joint venture” with an “expectation of profit derived from the efforts of others”.

I also think he’s (most of the time) correct in asserting – as he did on Tuesday and still at MIT – that for an innovative new technology to have an impact at scale, it needs to be built into the scope of public policies.

Where Gensler and I tended to disagree during our time together was on the extent to which regulatory agencies should give leeway to cryptocurrency and blockchain developers to make this innovation thrive. As clear as securities laws are, I think it’s important that financial innovators have a certain amount of time-limited freedom from regulatory risk if they are to have the chance to disrupt the holders of the existing financial system.

I was therefore particularly disappointed on Tuesday that his speech made no reference to any compromise on this issue. Gensler made no mention, for example, of SEC Commissioner Hester Peirce’s proposal for a “safe harbor” provision that would give crypto startups a three-year grace period to build and launch. their plans before they have to worry about federal securities laws.

Instead, the spirit of his post was punitive, focusing primarily on the risks posed by cryptocurrencies, both to investors and national security, and exploiting broad negative stereotypes to describe those risks. While alluding to his belief in the potential of cryptocurrencies, Gensler seemed more focused on their dangers.

I believe he was motivated by the desire to set the record straight. Many startups have received misguided advice that their projects would be exempt from SEC filing requirements. Gensler’s speech made this point clear and made it harder for fee-seeking lawyers to opportunistically tell idealistic founders what they want to hear.

The bigger problem, however, is the second-round political effects of his tough stance on crypto. Generalizations without context – like this: “to the extent that [crypto] is used as [a medium of exchange], it’s often to sidestep our anti-money laundering, sanctions and tax collection laws ”- injecting oxygen into growing crypto-skepticism in Washington.

Gensler’s opinion carries weight in the US capital. He held senior positions in the Treasury Department during the Clinton administration and as chairman of the Commodities and Futures Trading Commission under President Obama, he oversaw some vital reforms after the financial crisis. His position will bolster the likes of Senators Elizabeth Warren (D-Mass.) And Sherrod Brown (D-Ohio), who are calling for drastic limits on the industry.

Some might argue that Gensler’s statements about ICOs don’t matter. Clayton’s statements and early SEC lawsuits have already helped kill the hype-filled ICO boom in 2018, which was mostly a good thing. And the exchanges have put restrictions in place to prevent U.S. investors from buying many tokens found to be in violation.

But Gensler seemed to have a bigger focus than those old ICOs. Citing the need to regulate decentralized exchanges, he made it clear that the SEC is targeting decentralized finance (DeFi) and the various governance tokens that drive it. Whether they are described as “ICOs” or not does not matter. It could do a lot of harm to the sprawling and expanding DeFi ecosystem.

A crypto-skeptic would say, “Why bother making it harder for cryptocurrency developers to get rich? The answer: because this unique area of ​​dazzling, permissionless innovation offers the greatest opportunity yet to reform an obsolete, rent-seeking financial system that excludes billions of dollars from the possibility of doing something their money. A crackdown on DeFi could kill one of the most promising areas of financial innovation in decades.

It’s infuriating that proponents of stricter rules for cryptocurrencies often argue that startups in this space are “freeriding” because the banks and other institutions they compete with already obey strict laws. I say this not because I died against the regulation of crypto – I agree with Gensler’s view that good policy can help technology develop – but because the comparison grossly distorts the various starting positions. occupied by incumbent financial operators and their start-up challengers.

The reality is that because compliance is so expensive – many bankers now complain that it’s the biggest burden they face when providing affordable capital to non-wealthy clients – it works like a ‘ditch’, a barrier to entry that keeps the smaller players who can’t afford it from playing against the bigger players who can. How is a fresh out of college team of brilliant crypto developers going to come up with a cheaper lending model, for example, if they can’t find the tens of millions of dollars needed to make their project compliant? ?

All hope is not lost. Much could be done at the legislative level to make it easier for crypto innovators to thrive while imposing a regulatory framework that appropriately protects investors and maintains financial security. Among the multiple cryptocurrency bills before lawmakers right now, some are doing a decent shot at this.

Now that Gensler has clarified its thinking on the applicability of existing laws to this industry, perhaps lawmakers can create exceptions to those laws that will better achieve this innovation-regulation balance.

Or maybe it’s wishful thinking too.

Data on the chain shows a huge increase in the dollar value of transactions on the Bitcoin network last Sunday, so much so that the daily tally – reaching $ 69.69 billion – was second only after May 28 of this year. .

As the Bitcoin Market Journal’s Mati Greenspan wrote in his newsletter on Monday, the odd thing is that these on-chain high volumes weren’t in sync with the relatively thin summer trades on crypto exchanges, where the Most transactions take place, and with a “completely empty” mempool. , which reflects bitcoin transactions pending confirmation. In addition, the total number of chain transactions “was well below average, and the number of unique addresses used was the lowest since 2016! Greenspan wrote.

As Greenspan noted, there were clearly bitcoin whales moving large amounts of funds. Why? We do not know. The question is whether it is a precursor for greater volume in the market.