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When Gary Gensler (ex-Goldman Sachs investment banker) was announced as the new head of the Securities and Exchange Commission (SEC) in February 2021, the crypto industry saw a glimmer of hope. After all, the man in charge of regulating the industry was a “crypto native,” having taught a course on the subject at MIT. However, two years later, it is clear that Gary has been a major disappointment to the industry as the SEC failed to identify major frauds and protect investors.
The following opinion editorial was written by Joseph Collement, General Counsel at Bitcoin.com.
This should come as no surprise, as history shows the SEC to be as effective as a screen door on a submarine when it comes to protecting investors. They are supposed to be Wall Street’s watchdogs, but they are more like Wall Street lap dogs.
Take Enron’s collapse in 2001 as an example. The SEC did not formally review the company’s cooked-up financial statements for at least three years before it fell. Six years later, the SEC’s complete laissez-faire approach to Wall Street led to the biggest financial crisis since the Great Depression. In the years leading up to the 07-08 collapse, experts and whistleblowers warned of the dangers of subprime loans and lenders’ risky practices. Despite its power to supervise investment banks, the SEC took no meaningful steps to protect millions of investors.
Then there’s the Madoff Ponzi scheme, the man who stole billions of dollars from unsuspecting investors for decades. The SEC conducted several investigations into Madoff’s business practices, but they were unable to uncover the fraud. Madoff was able to continue his scheme for decades until the bubble burst in 2008. It is worth noting that Madoff sat on the SEC’s advisory committees while running his Ponzi scheme.
And now we have the collapse of FTX and Alameda, which left hundreds of thousands of customers out of pocket. Despite clear signs, the SEC had the chance to intervene, but they didn’t. Instead, they met with the SBF behind closed doors for private discussions. This is especially notable considering that the father of Alameda’s CEO, Glen Ellison, was Gary’s boss at MIT.
So why is the SEC failing us? One reason may be that they are too focused on small, insignificant issues, instead of focusing on the big, systemic problems. When you’re a bully, it’s easier to pick on the smallest kid at school. For example, we’ve seen the SEC go after relatively small projects for technical violations of securities laws (think LBRY) while failing to intervene in large frauds like FTX. The SEC knows that smaller projects don’t have the resources to fight them, so it’s an easy win for them and good PR. This is not to say that small cases should be ignored, but rather that the SEC should be able to balance both.
Another rationale may be that the SEC is not properly equipped or staffed to handle these complex cases. The SEC’s budget and staffing levels have remained relatively stagnant in recent years compared to the exponential growth of crypto markets since 2017. This may have left them struggling to keep up with the rapid pace of change.
Another explanation could be that the SEC has been caught up in the industry it regulates. It’s no secret that the SEC has close ties to the financial industry. In fact, many of the SEC’s top officials come from Wall Street firms, and they often return to the industry after leaving the SEC (think Mary Jo White, former head of the SEC, who now represents Ripple against the SEC). This revolving door undoubtedly creates a conflict of interest and can lead to a lack of oversight of the industry. It is also not impossible to imagine that someone in the government was influenced by FTX. This would explain why SBF was not investigated before FTX’s collapse and why he essentially walked out of court a free man after the bond hearing.
Finally, there may be a lack of political will to hold the SEC accountable. The SEC is an independent agency, but it ultimately answers to Congress and the president. Unfortunately, politicians are often more interested in scoring political points than in addressing the real problems facing the securities markets.
Whatever the reason may be, the fact remains that the SEC continues to drop the ball. It is crucial that the public demand accountability from our public agencies. We need an SEC that operates without political bias and fearlessly takes on the elite to protect investors from exploitation.
What do you think should be done to ensure that the SEC operates without bias and effectively protects investors in the crypto industry? Let us know what you think about this topic in the comments section below.
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