Project Syndicate

By Tomicah Tillemann and Chris Lehane

For the first time in 18 months, Gary Gensler, the chair of the US Securities and Exchange Commission, appeared before the House Financial Services Committee on April 18. At a time when the United Kingdom, the European Union, Japan and other advanced economies are developing new frameworks for regulating digital assets, Gensler has taken a different approach. This was his first real opportunity to explain himself to Congress, and it did not go well.

There is an old saying among lawyers: When the law is on your side, you argue the law; when the facts are on your side, you argue the facts; and when neither is, you pound the table. Gensler’s congressional testimony featured a lot of metaphorical table pounding. The SEC chair could not even answer basic questions about the agency’s enforcement strategy, reflecting the ongoing regulatory uncertainty that has contributed to a rapid outflow of technical talent from the United States.

During the hearing, Gensler encountered pushback on everything from short public comment periods to the recent wave of senior staff departures. But the issue that prompted the most heated exchanges was Gensler’s approach to digital assets. In the aftermath of FTX’s collapse, Gensler has positioned the SEC as the lead cop on the crypto beat. Despite ongoing jurisdictional disputes with other regulators, under Gensler the SEC has pursued over 50 enforcement actions related to digital assets. But, when faced with bipartisan criticism of his dragnet approach, Gensler could not provide clear explanations for his actions.

The fact that Gensler has no answers to many of the urgent regulatory questions facing the digital-asset ecosystem after two years as SEC chair reflects America’s incoherent approach to regulating cryptocurrencies and the web3 industry. But his congressional testimony also offered a useful map of that incoherence.

First, US policymakers must decide if cryptocurrencies are commodities or securities. Committee Chair Patrick McHenry began the hearing with a simple question: How does Gensler classify Ethereum, the second-largest digital asset after Bitcoin? Gensler could not answer, despite being asked nearly a dozen times during his testimony. Instead, Gensler maintained that the law is clear, even though Commodity Futures Trading Commission Chair Rostin Behnam has said under oath that Ethereum is a commodity while Gensler has previously suggested that every digital asset other than Bitcoin is a security.

Anyone who cannot categorise the second-largest digital asset should not be regulating the industry. By fueling uncertainty about basic definitions, Gensler is undermining responsible industry players’ ability to operate in a predictable regulatory environment.

Second, Gensler could not define the SEC’s mandate. US Representative Maxine Waters, the committee’s senior Democrat, asked Gensler three times if the SEC has the necessary legal authority to regulate the crypto industry. Each time, he insisted that it does. Moments later, after Representative French Hill reminded Gensler of his own past positions, the SEC chair conceded that Congress might have to empower the agency to oversee the $185 billion stablecoin market.

Third, when asked by Democratic Representative Ritchie Torres why the SEC is targeting US-based digital-asset companies like Coinbase when recent history shows that unregulated offshore firms present a far greater risk to consumers, Gensler could not provide a satisfying explanation. In essence, he claimed that it is harder to get foreign companies to respond to subpoenas. This stunning admission suggests that the SEC is not interested in cooperating with responsible digital-asset firms to reform an American financial system that has channeled 89 per cent of all securities to the wealthiest 10 per cent of American households.

Fourth, despite his repeated calls for digital-asset companies to “come in and register” with the SEC, Gensler conceded that the agency had not established new rules that would enable web3 companies to do so. Ahead of the hearing, the committee’s Republican members signed a joint letter criticising this approach, which forces companies to guess the “rules of the road”.

Lastly, Gensler had nothing to say about the exodus of digital-asset companies from the US. On the day that Gensler faced the committee, Coinbase CEO Brian Armstrong said that the uncertain regulatory environment might impel the cryptocurrency exchange to relocate to another country. The SEC recently sent Coinbase a so-called Wells notice alerting it of a potential enforcement action, a move that raised eyebrows given that the SEC allowed Coinbase to go public just two years ago.

Unless the US changes course, it could lose its lead in digital assets. According to a recent report by the venture capital firm Electric Capital, the US is already giving up 2 per cent of developer market share each year. Despite the enormous potential benefits of keeping web3 firms in the US, the report projects that the number of blockchain developers worldwide will grow from 23,343 today to a million by 2030, Gensler seems indifferent. For web3 players, the contrast with the welcoming attitude of Gensler’s counterparts in Brasília, London, Tokyo, Sydney, Brussels, Dubai and Singapore could not be starker.

The SEC’s policy choices could have far-reaching implications for US economic and security interests, and the risks are too great to leave these choices in the hands of one regulator. On the bright side, Gensler’s congressional debacle, together with China’s recent efforts to lure crypto firms to Hong Kong, may have finally alerted US elected officials to what is at stake.

Tomicah Tillemann is chief policy officer of Haun Ventures. Chris Lehane is chief strategy Officer of Haun Ventures. Copyright: Project Syndicate, 2023. www.project-syndicate.org