Gary Gensler had a lot to say about crypto in 2021

In his short time heading the SEC, Gary Gensler has shaken up Wall Street and the crypto industry.

Most of this he’s done just with his words, before the agency under his leadership has taken substantial enforcement or regulatory actions.

He’s had a lot of say about the need for stronger regulatory control of Wall Street, crypto and Chinese companies, which has affected markets and drawn strong reactions from the industry.

Gensler, who was confirmed to head the SEC in April, was no stranger to Wall Street, having been a partner at Goldman Sachs. He had a background in cryptocurrency as well, having taught a course on the topic at MIT. That led to some hoping he would prove somewhat friendly to the crypto industry, or at least not hostile.

With his background running the CFTC where he helped reform credit default swaps after the 2008 financial crisis, he was expected to ramp up enforcement on Wall Street after the Trump years. At the time he was confirmed, regulators and politicians were focused on Robinhood and the meme-stock frenzy that took over Wall Street in January. Crypto was barely on Washington’s agenda.

Then Gensler started talking. Crypto said it wanted an informed regulator, but Gensler showed he knew the industry all too well. Here are some of his top moments this year.

“Inherent” conflicts

In early May, Gensler made his first major appearance in Congress as head of the SEC at a House Financial Services Committee hearing. He made it clear that payment for order flow, in which wholesalers pay retail brokers for handling retail orders, would be scrutinized by the SEC.

He noted that payment for order flow can be a “conflict of interest” and that these conflicts were “inherent” in the system. Gensler cited a case that Robinhood settled with the SEC in December 2020, noting that the Robinhood had been able to decide how much of the profit from trading spreads it would keep and how much it would pass on to investors.

Gensler also made it clear he wasn’t happy about the current regulatory environment for crypto.

China watch

In July, Gensler warned of the risks of Chinese companies listing in the U.S. He focused on variable interest entities or VIEs, which Chinese companies have long used to sidestep that country’s restrictions on foreign ownership. Gensler was seeking to provide greater transparency for investors in Chinese companies, which do not always make the same disclosures or receive the same auditing oversight as U.S. companies. Under pressure from both American and Chinese regulators, DiDi delisted its shares from the New York Stock Exchange in December.

“Wild West”

On Aug. 3, Gensler returned to crypto in a speech at the Aspen Security Forum: “Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West."

“This asset class is rife with fraud, scams, and abuse in certain applications,” he said. “There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced, and complete information.”

Two days later, Gensler called for legislation in a letter to Elizabeth Warren to address crypto trading, lending and decentralized finance. It was a recognition that there are some things Gensler can’t do himself at the SEC without federal legislation — which is a likely reason why he has been so public about talking about crypto but has yet to take substantial action.

“In my view, the legislative priority should center on crypto trading, lending, and DeFi platforms,” he wrote. “Regulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending.”

A reminder: Gary Gensler is not your daddy

In September, Gensler told the Senate Banking Committee that he wouldn’t rule out having the SEC regulate stablecoins since “they may well be securities.” While he didn’t come out and say they definitely are securities, he indicated that the SEC could regulate stablecoins — or at least is interested in doing so. Later, in November, the President’s Working Group called for bank-like regulation of the fiat-linked digital tokens.

He also pushed back on senators’ criticism that the SEC has been vague on when a crypto token is and isn’t a security. "I think that there's a fair amount of clarity over the years. I think at the heart of our securities laws [is] protecting investors against fraud. They get to decide. They get to take the risk. I'm not negative or minimalist about crypto. I just think it would be best if it's inside the investor protection regime that Congress laid out."

In perhaps the most memorable exchange of the hearing, he was grilled by a senator on his agency’s view on climate risk disclosure. "The people and the companies that you regulate as chairman of the SEC, do you consider yourself to be their daddy?" Sen. John Kennedy asked.

"No," Gensler said.

"Then why do you act like it?" Kennedy responded. "Why do you impose your personal preferences about cultural issues and social issues on companies. … I'm sure you have you have personal feelings about abortion. Do you have plans to implement or impose those values on companies?"

"Sir, I think I am not doing that," Gensler replied. "What I've been trying to do is say, if investors want information about climate risk, we at the SEC have a role to put something out to notice and comment, do the economic analysis and really see what investors are saying."

Poker face

Later in September, Gensler compared crypto to “poker chips” at a Washington Post event. He again noted that help from Congress would make regulation easier. Still, he said, the SEC already had plenty of room to regulate crypto. “But in terms of the SEC, I do think we have robust authority, but there are gaps as I’ve identified them,” he said.

Meanwhile, a number of major players in the crypto industry had begun responding to Gensler’s jabs. Their response has largely been looking to put someone other than Gensler in charge. Andreessen Horowitz said it was time to “look beyond the SEC,” while Coinbase made an even more direct critique of the agency, proposing a new regulator to oversee crypto. Coinbase was already unhappy about the SEC not approving its Coinbase Lend product.

Marking territory

In a November speech at the Securities Enforcement Forum, Gensler took up sports as a metaphor: “Think about a football game without referees. Teams, without fear of penalties, start to break the rules. The game isn’t fair, and maybe after a few minutes, it isn’t fun to watch.” He went on to defend the SEC’s role in protecting investors.

It was as if he was responding to some of the crypto industry’s proposals and marking the SEC’s territory. While there are many agencies that have oversight on parts of the crypto industry — such as the Office of the Comptroller of Currency and the Commodity Futures Trading Commission — Gensler made it clear he was not giving up the SEC’s role.

And he defended the SEC’s moves to rein in some boundary-pushing firms. “Some market participants may call this ‘regulation by enforcement,’” he said. “I just call it ‘enforcement.’”

Cleanup on aisle three

In December, Gensler talked up the need for proactive regulation, rather than swooping in after a crisis. “We're gonna have a spill on aisle three,” Gensler said at the DACOM Summit. “And the public's gonna say: 'Where was the official sector?'” But he struck a more conciliatory tone at a Wall Street Journal event that month, asking crypto exchanges to “come in, work with the SEC, get registered.” Crypto trading firms that hold customers’ tokens as well as executing orders became a focus of Gensler’s regulatory rhetoric late in 2021, with the SEC chair positioning them as a natural subject for his agency’s oversight.