Gensler Hearing Wrap Up: Who is really being protected by SEC “investor protections”?

SEC Chairman Jay Clayton recently announced that the SEC will be implementing new investor protections for cryptocurrency investors. The announcement was made in response to the recent uptick of fraud-related activity in the cryptocurrency space.

The sec decision on xrp date is a recent SEC decision that has been widely criticized. The decision was made to allow for more time for investors to be protected by the “investor protections” offered by the Securities and Exchange Commission.

CryptoLaw’s Founder and Host, John E. Deaton

The Senate Banking Committee’s confirmation hearing for Gary Gensler as the next head of the Securities and Exchange Commission was the first opportunity to ask direct questions regarding the future of crypto laws in the US. Three senators asked questions relevant to digital asset holders, which was a step forward, but Gensler’s responses lacked the clarity we’ve been looking for.

In summary, Gensler lauded crypto technology’s advancements, but always concluded by emphasizing “investor protection” — and never defined what such protection meant in legislative terms. Because there are presently no clear guidelines on how to govern digital assets – no use cases, token taxonomy, or anything – the SEC’s authority to “protect” us may be stretched to the point of destroying our holdings without even consulting us, as happened in the Ripple case.

  • Senator Mike Rounds (R-SD) asked Gensler about the “outdated crypto regulatory regime” and what Congress and the SEC could do to create a “forward thinking regulatory environment for innovators in this space,” to which Gensler replied with a talking point he’d repeat throughout the hearing: blockchain and cryptocurrencies “have been a catalyst for change.” Cryptocurrencies, he added, have “introduced fresh ideas to payments and financial inclusion,” but “investor protection concerns that we still need to address.” “I will engage with other commissioners to both encourage the new innovation and, at the heart, guarantee investor protection,” Gensler said. He then reduced it to a catchphrase: “Promote technology while remaining loyal to our fundamental principles of investor protection and capital formation.” As he answered Rounds, he seemed to be reading from notes, and his use of phrases like “at its heart” and “fundamental principles” seemed to imply a hazy concept of “protection” above creativity. Given the SEC’s position, it’s not surprising, but defining what “protection” means is ultimately the issue that has to be addressed for crypto investors.
  • Senator Cynthia Lummis (R-WY) went a step further, asking how “consumer protections” for digital asset owners might be implemented in a manner that “doesn’t stifle innovation.” Gensler, on the other hand, was a little more explicit. He linked “consumer and investor protection” to the custody of digital asset holders’ funds, “ensuring” that the use of private keys “works,” but added that markets must be “free of fraud and manipulation” – which he called “a greater challenge” because some markets – “usually operating overseas” – have been “rife with fraud and scams.” This was somewhat more reassuring, since no one could deny it. However, without clear regulations defining what constitutes “fraud” or “manipulation” in the sale of digital currency, network development, or utility token distribution, the SEC has unrestricted authority to damage investors rather than protect them.
  • Lummis went on to urge Gensler to elaborate on remarks he made in 2018 on how blockchain might “promote financial inclusiveness, decrease risk, and establish new markets.” He reiterated his “catalyst for change” theme, noting that fiat issuers are increasingly interested in central bank digital currencies (CBDCs) in order to “provide more inclusive payment structures.” He went on to say that “other payment system providers” (presumably private businesses and developers) are working on “payment systems that run 24 hours a day, seven days a week, and at a cheaper cost, both cross-border and locally.” So, when Ripple began releasing the cryptocurrency XRP in 2013 to create a network enabling such payment systems to be feasible, Gensler was praising the exact business model being built by firms like Ripple.
  • Senator Steve Daines (R-MT) unintentionally posed a question that encapsulates what digital asset investors want to know, especially XRP holders who were hurt unjustly by the SEC’s action against Ripple. He inquired as to how the SEC Enforcement Division determines when to use its hammer and when fresh regulation is more suitable. Gensler, to his dismay, did not respond. He said his enforcement “philosophy” is to “follow the facts and the law where they lead you” – which is difficult when there is no law pertaining to cryptocurrencies or specific rules on how they should be treated – and that such actions are about “using limited resources to effectuate where there are the greatest problems in the market,” i.e. setting enough examples to make other players take notice. He did not respond to the issue of when regulation is required. However, it raises an interesting question: was the Ripple case an appropriate use of the SEC’s limited resources to combat a widespread issue in the crypto markets? 

In the end, the few conversations we had about our worries didn’t provide enough information for us to know anything. During a confirmation hearing, however, there is almost never any. What we can say is that there are more pressing issues for Gensler to address as a result of this hearing:

  • What exactly does “investor protection” imply for XRP holders who have been affected by the SEC’s decision to sue Ripple and two of its executives?  
  • What does it mean for the SEC to “encourage technology” in practice? Will payment system providers be able to construct networks and distribute currencies as a result of this? What assurances, in the form of explicit regulations, will it provide them?
  • Was it the greatest use of the SEC’s limited resources to launch the Ripple case in order to “effectuate” where there is a larger issue in the market?

Finally, I must say that I was dissatisfied by Gensler’s evidence. Some may argue that I shouldn’t be since his aim as a candidate should be to do no damage and pass his confirmation hearing. That is a theory I disagree with. His confirmation hearing was little more than a formality. Gary Gensler will be confirmed as Chairman of the Securities and Exchange Commission. There’s no denying it. He had the chance to make a strong statement about how the SEC would change under his leadership. He had the chance to accept modern advancements. Instead, he said that the SEC will be technologically agnostic. He made it plain that the SEC would not be anti-tech, but is being technology-neutral enough in 2021, when the United States, among others, would lose its leading position to China?

Gary Gensler is a brilliant individual. At MIT, he taught blockchain technology. However, he sounded today like a professional politician who adhered to his talking points no matter what was asked of him.

Mr. Gensler achieved his objective of doing no damage to his confirmation today. However, the SEC has caused irreparable damage to private investors and American innovation. He didn’t say anything today that gives me a lot of faith that he’ll repair it or even attempt. After his confirmation, I’d be happy to be proved incorrect.

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