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U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler came in for more bashing on Capitol Hill from Republicans, some of whom are planning a symbolic vote to bring him to heel.
On May 7, the U.S. House of Representatives House Financial Services Committee’s Subcommittee on Capital Markets held a hearing titled SEC Enforcement: Balancing Deterrence with Due Process. Anyone expecting relief from the crippling partisanship that has made this Congress the least productive in history should probably stop reading now.
Last November, the SEC released its Enforcement Results for FY23, which detailed some 784 enforcement actions over the previous fiscal year. These actions included several “massive crypto frauds,” including Terraform Labs’ Do Kwon, FTX’s Sam Bankman-Fried, Hex’s Richard Heart, and more.
The SEC also targeted Celsius, Gemini, Genesis, Kraken, and Nexo for offering unregistered securities via lending/staking programs, resulting in a few eight-figure penalties. Digital asset exchanges Binance, Bittrex, and Coinbase (NASDAQ: COIN) were targeted for “noncompliance in the crypto asset intermediary space.” And the hits have kept on coming in FY24.
Little of this has sat well with Republicans, who view Gensler as The Grinch Who Stole Cryptmas. Raucous House committee hearings have tended to resemble the Two Minutes’ Hate from 1984, as GOP reps pour out their venom at Gensler for daring to point out the worms in the apple pie that is ‘Murican crypto.
Many (but not all) Democrats, on the other hand, tend to applaud Gensler’s efforts to impose order on the juvenile ‘crypto’ sector. This partisan dynamic was on full display during Tuesday’s hearing, during which GOP reps largely ignored the one ‘crypto’ realist on the witness list, choosing instead to lob softballs at the three less pejorative witnesses.
To correct this imbalance, we’d like to quote liberally from the prepared remarks of that lone realist, aka John Reed Stark, a former chief of the SEC’s internet enforcement division.
Stark’s remarks got right to the point, calling the clichéd ‘regulation by enforcement’ criticism of the SEC “a complete and utter falsehood.” Stark added, “what the digital asset industry calls ‘regulation by enforcement,’ the rest of us call enforcing the law.”
Stark claimed the SEC has always relied on “the inherent elasticity of securities regulation” to police every technological change that confronts it. Stark said securities regulations are “rarely prescriptive,” more a “principles-based regulatory framework.” For example, there’s no law against someone stealing their neighbor’s lawnmower, just a law against stealing property, “which covers all things, including lawnmowers.”
As for crypto operators claiming the SEC never warned them that they were likely breaking the rules, Stark cited a litany of examples, ultimately concluding that he “cannot recall an area of securities regulation where the SEC has taken so many opportunities to broadcast its position as it has done regarding digital assets.”
Stark accused the digital asset sector of mounting “a barely concealed effort to operate free from the constraints that apply to traditional financial institutions.” And while exchanges may resemble tradfi platforms, “behind the crypto-curtain, there exists scant government oversight and inadequate consumer protections … SEC oversight fills that void.”
Stark closed by saying, “It’s time to stop the constant SEC-bashing, the shameless demonizing of SEC chair Gary Gensler and other self-serving sophism disseminated by the digital asset industry.” In short, Stark said “the digital asset industry needs to get its act together and adapt to the laws that apply to it—not the other way around.”
Ready to rumble
Subcommittee chair Ann Wagner (R-MO) got the ball rolling by slamming Gensler’s “heavy handed leadership” and making the first of the day’s many references to the SEC’s own goal in its action against Digital Licensing Inc., aka Debt Box. In March, a judge sanctioned the SEC for making misleading statements in its application for a temporary restraining order against the company, leading to the resignations of two SEC attorneys.
Wagner called the SEC’s behavior in the Debt Box case “extremely concerning” and warned that the SEC was acting in an “unethical and unprofessional manner” causing market participants to lose confidence in the regulator.
Rep. Brad Sherman (D-CA), a noted crypto critic, responded by saying the SEC attorneys were right to resign. However, Sherman noted that the disproportionate attention the SEC appeared to be devoted to ‘crypto’ enforcement actions was primarily the result of operators having “fought to prevent meaningful regulation” of their operations.
With that, we proceeded to the day’s other three witnesses: the Mercatus Center’s Andrew Vollmer (a former SEC deputy general counsel); Nick Morgan, president/founder of the Investor Choice Advocates Network; and Professor Paul Eckert of William & Mary Law School.
The above trio weren’t necessarily there as ‘crypto’ advocates, with Vollmer going as far as to wearily declare: “I thought I was going to get through this whole hearing without talking about crypto, but apparently not.” Most of their commentary dealt with the general nature of SEC enforcement actions and whether there needed to be additional constraints on these actions.
Suggested fixes included limiting the SEC’s ability to ‘forum shop,’ aka choosing to file a suit in a jurisdiction where judges haven’t previously ruled against the SEC on similar matters. Another suggestion involved requiring the SEC to complete an investigation within a particular window of time rather than have it stretch on forever, leaving the targets of those probes in limbo.
As Vollmer told Rep. Bill Huizenga (R-MI), the process by which the SEC issues a Wells notice—which advises an individual/entity that a probe has concluded and an enforcement action is imminent—is “basically good.” But Vollmer added that SEC staff “can just go silent for a very long time” after that individual/entity submits its response to the Wells notice.
In addition to the stress of having this guillotine blade hanging over their head for an extended period, Eckert added that receiving a Wells notice can “put pressure on companies to disclose” its existence, which could cause their share price to tank.
Coin mixers, Tether, deep thoughts
There were no real bombshells from Tuesday’s hearing, although Rep. Sean Casten (D-IL) announced that he—along with Reps. Sherman, Bill Foster (D-IL), and Emanuel Cleaver (D-MO)—would introduce a bill later this week to “clamp down” on coin mixing services. The Treasury Department has already tagged mixers with their scarlet letter, but mixers have been in the news of late, so…
Casten also brought up the Tether (USDT) stablecoin, citing recent mainstream media reports that USDT was “indispensable” to Russia’s efforts to dodge U.S. economic sanctions while also referencing the HAMAS terror group making use of USDT on the Tron blockchain.
Casten asked Stark how Tether should be addressed given the various stablecoin bills currently stagnating in Congress. Stark noted that he’d never personally invest in a company with a dodgy auditor, and “that’s exponentially true of Tether,” which has never performed a proper third-party audit despite years of promises to do so. Stark asked: “What’s so hard? Any of us on this panel could conduct that audit.”
Rep. Wiley Nickel (D-NC) broke the partisan vibe by claiming that the SEC’s tough-on-crypto stance had companies “packing up their laptops and heading overseas,” where friendlier jurisdictions were ready to “eat our lunch.”
Nickel got Vollmer to say, “Congress needs to draft some authority to regulate digital currencies in the way Congress thinks is the right policy … deep thought needs to be given as to what does the country want to do about crypto assets.”
Not everyone was pleased with crypto’s high profile during the hearing. An annoyed Rep. Bryan Steil (R-WI) prefaced his question time by saying the subcommittee “might as well be renamed the Digital Assets Subcommittee rather than Capital Markets.”
Squawk and awe
While the hearing was ongoing, Gensler was giving an interview to CNBC’s Squawk Box, with much of the discussion focusing on Monday’s news that the ‘crypto’ division of online brokerage Robinhood (NASDAQ: HOOD) had just received its own Wells notice.
Gensler ducked talking about any specific companies, saying only that “the field of crypto assets, without prejudging any one of them, many of those tokens are securities under the law of the land, as interpreted by the U.S. Supreme Court. So we follow that law, and you, the investors, are not getting the required or needed disclosures about those assets.”
Pressed regarding the SEC’s alleged plans to declare Ethereum’s native token ETH an unregistered security, Gensler was asked to respond to last week’s comments by Rep. Patrick McHenry (D-SC), who claimed Gensler had “misled Congress” by refusing to give a definitive answer on ETH’s security status when Gensler was grilled by McHenry’s committee last April.
Gensler said the SEC’s practice was that “we don’t speak about whether we have an investigation or whether we don’t have an investigation and we don’t speak about whether somebody is in our opinion not following the law unless we actually bring a case. So we stay quiet on many questions.”
Hypocrites assemble!
Meanwhile, May 8 will see the House of Representatives vote on a joint resolution put forward by Rep. Mike Flood (R-NE) to express formal disapproval of the SEC’s Staff Accounting Bulletin (SAB) 121, the policy guideline by which virtual asset service providers handle accounting for digital assets. SAB 121 also sets out rules for digital asset custodians, which many Republicans blame for traditional financial institutions’ reluctance to fully embrace digital assets.
Assuming it passes the House, the resolution must also be passed by the Senate and then signed by the president before it has any effect. The likelihood of hitting all three of those marks is minimal, meaning this is basically more performative poo-flinging at Gensler.
Rep. Tom Emmer (R-MN) threw a double helping at Gensler during a press conference this week, hailing Flood’s resolution as Republicans doing their bit to “provide oversight and accountability to the SEC.”
It’s worth remembering that Emmer—a committee member who had better things to do than attend Tuesday’s meeting—publicly praised SBF for ensuring there was no fraud in crypto a year before FTX’s dramatic collapse. Six months before that collapse, Emmer co-signed a letter telling Gensler to back off his crypto investigations because the companies complained about the scrutiny.
Who do you think really has the public’s interest at heart, here?
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