In April, SEC Chair Gary Gensler gave a cautious assessment of crypto: “lots of innovation, but plenty of hype.”
Ripple general counsel Stuart Alderoty picked up on something else Gensler said in his speech at the University of Pennsylvania, in which he reminisced about studying at his alma mater’s law school library.
“So let me get this straight, Chair Gensler isn’t a lawyer, but he once visited a law library,” Aldeorty said in a tweet.
That’s not just Twitter snark. The slam by a top industry lawyer epitomizes Gensler’s stormy relationship with an industry that once saw him as a potential ally but now considers him a serious nemesis. Since taking on the role last year, Gensler has quickly become crypto’s favorite whipping boy on Twitter, where critics portray him as a tyrant and accuse him of being aggressively anti-crypto.
The central complaint: Instead of providing clarity on how crypto companies should operate, the SEC under Gensler has embraced a policy of “regulation by enforcement,” marked by threats of legal action and fines.
The SEC, which has markedly not engaged publicly with the criticism outside of Gensler’s public speeches, could not be reached for comment.
Gensler has also taken heat beyond the crypto realm. He’s been criticized for new SEC rules that would expand the agency’s control over private markets, a concern that 47 House members, including 28 Democrats, raised with him recently.
But his stint as SEC boss has been defined by his agency’s very public skirmishes with the fast-growing crypto industry.
In September, Coinbase announced that it was shelving a plan to roll out a lending product after the SEC threatened legal action to block it. CEO Brian Armstrong complained in a tweet: “Some really sketchy behavior coming out of the SEC recently.”
His tweetstorm also underlined the crypto confusion about securities laws. “Seems strange. How can lending be a security?” Armstrong said, which prompted responses that offered to help him review the Securities Act of 1933. Even the SEC subtweeted Armstrong.
BlockFi learned this the hard way after the SEC announced that the crypto company would pay a $100 million penalty for offering a crypto lending product that should have been registered as a security.
Some crypto companies have had more constructive encounters with the SEC. Katherine Dowling, general counsel and chief compliance officer at Bitwise, said the crypto investment management company has had “a very good and open dialogue” with the SEC.
“That dialogue is based in part on a recognition by the SEC and companies like Bitwise that these are not assets for everybody, and it’s not something that grandma should be mortgaging her house and putting all her money in,” she told Protocol.
But more clarity is needed, she said: “Investments are coming into the space, the brainpower is coming into the space, there's a lot of products that are being created, their businesses being born, and we want to make sure that they are moving in the right direction.”
Marc Fagel, the SEC’s former regional director for San Francisco and now a lecturer at Stanford Law, said the cases the agency has filed “are well-reasoned that under settled law, these are securities.” But he also said where the SEC “falls short is giving more than proactive guidance with rulemaking of what the industry can do that won't get them in trouble."
The responsibility for the problem also rests with Congress, which has also failed to legislate on crypto. As a result, “both politicians and regulators are not finding a way to quickly get in there and provide some industry guidance,” he said.
What’s ironic is that the crypto industry initially cheered Gensler’s appointment as SEC head because he taught blockchain at MIT. He didn’t come across as an anti-crypto crusader in his popular lectures, which have garnered millions of views on YouTube.
In a 2018 lecture, Gensler offered a positive view of blockchain and DeFi, saying that “in some circumstances, decentralization really will compete and beat the centralized intermediary.”
Gensler also co-wrote a 2018 paper that said “blockchain technology has a real potential to be a catalyst for change in the world of finance.”
“The consensus that the group reached was that there was promise in blockchain technology that could have an impact either directly by replacing legacy infrastructure technology and financial services or by catalyzing change in the industry,” Klaros Group partner Jonah Crane, one of Gensler’s co-authors, told Protocol.
But Gensler has serious concerns about the way the crypto market is evolving. One of them is how major crypto exchanges are structured.
“Unlike traditional securities exchanges, crypto trading platforms also may act as market makers and thus as principals trading on their own platforms for their own accounts on the other side of their customers,” he said in his University of Pennsylvania speech.
That can lead to serious conflicts of interest. Crane cited situations in which “just by agreeing to list a new token an exchange can have a material impact on its price.”
In fact, that issue got some attention recently when Coinbase announced that it would start posting a list of tokens being considered for listing. The announcement sparked speculation that Coinbase was grappling with front-running, or traders making bets based on insider information about cryptocurrencies the exchange was planning to list.
Crane acknowledged that people from the industry have “reported that they had negative interactions or [were] frustrated by the lack of interaction” with Gensler.
Those negative reactions get amplified on Twitter, where Gensler now routinely takes a beating from crypto executives and their followers.
In a November interview with Protocol, Alderoty acknowledged that the tweets against Gensler were a way to “poke the bear” because "it's clear that the bear has no interest in cooperating.”
But that’s probably not going to change Gensler’s position, Crane said.
“This is the one area I'll comment on his personality,” he said. “I don't think what anybody says on Twitter is going to change his mind. … He's looking at the policy merits. I don't think he's working on the basis of any animosity or personal grudges.”
Crane added, “I think people in the industry should think about the way that they engage publicly with the chair of the SEC.”
Fagel said: “I would hope that the SEC is not taking its marching orders from Twitter. You wouldn't want to think that the regulators are looking to Twitter for guidance.”
Painting a picture of Gensler as an anti-crypto hardliner would be a mistake, Crane suggested.
“I think if he wanted to put a bunch of crypto exchanges out of business in the U.S., he could have at least tried to do that already,” he said. “He hasn't. … He hasn't done anything that I think I find all that surprising and/or that is all that sweeping in terms of its impact on the industry.”
It wouldn’t be the first time a Twitter conversation had gotten detached from the real world. But with crypto’s economic impact growing by the day, the stakes of that disconnect could be measured in the trillions of dollars.