Gensler's crypto crackdown

Gary Gensler has made his approach to regulating crypto clear: Sure, the government’s ready to talk to you. Just be prepared to pay up if you’ve broken the rules. That’s the message the industry should get from the $100 million penalty BlockFi just agreed to pay, after the SEC decided its high-yield crypto lending product was illegal.

That’s Gensler’s stick. The carrot is the agency’s “willingness” to work with crypto firms to get their products under its regulatory umbrella, a path BlockFi is now taking. BlockFi’s founders agreed, kinda, painting the settlement as a win for the company and for crypto, and calling it a step toward “regularity clarity.”

Clearly, it was a win for Gensler. Was it really a win for crypto, too?

Gensler shows he’s serious about securities laws. This became evident shortly after the SEC took over last year, a change that actually got many in the crypto world excited given Gensler’s cred as a crypto wonk and blockchain expert.

• To be sure, Gensler had been giving crypto a lot of thought. In a 2018 MIT lecture, he actually predicted that “in the next 18 to 36 months, we're going to start seeing crypto lending and crypto finance in the form similar to what the goldsmiths were doing in the early 1700s in England.”
• Now as SEC boss, Gensler just sent a strong signal that crypto companies should think carefully about offering lending products, saying “crypto markets must comply with time-tested securities laws.”
• This finding is critical for crypto companies offering products that have “been sitting in a regulatory gray area,” said Alex Johnson, director of fintech research at Cornerstone Advisors. “That’s over. The SEC has clearly said that these products are securities.”

Could this also be a victory for crypto, though? That was BlockFi’s spin, telling clients that the SEC deal creates a “foundational path forward” for its clients and the entire crypto industry that could lead to the “increased regulatory clarity we’ve been hoping for.”

• “If it costs a company $100 million to go talk to the SEC, is that clarity?” INX General Counsel Cathy Yoon told Protocol, calling the penalty a “steep fine for a company that hasn’t harmed any investors.”
• BlockFi neither denied nor admitted the SEC’s findings. But it agreed to stop offering the lending product to U.S. customers and plans to register a new offering under the Securities Act of 1933. If BlockFi is able to resume its business in the U.S. after getting an OK from the SEC, “I’d say that’s some progress,” Yoon said. But “the SEC has been saying ‘Come talk to us’ and ‘You need to register’ for a while, and it hasn’t shown that registrations are actually going through.”

It’s definitely a wake-up call for the industry. Gensler just made it clear that there are “robust protections for investors in federal law and that all participants in these markets are expected to abide by the rules,” Santa Clara University law Professor Stephen Diamond said. And BlockFi’s upbeat tone? “It’s just spin,” Johnson said. “Better to position this as helping to pioneer a new regulatory framework than being fined for selling an unregistered security.”

— Benjamin Pimentel (email | twitter)

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A MESSAGE FROM ESRI

The global nature of business makes tracking your company's operations trickier than ever before. Overseeing supply chains and an international, dispersed workforce is tough. Maintaining visibility over all aspects of your operations is even tougher. The changing norms of business make location services no longer a "nice to have" but a "need to have" — and at the forefront of the geospatial intelligence revolution is Esri.

Learn more