What the Gensler hearing means for US crypto regulation and policy

Gary Gensler, the head of the United States Securities Exchange Commission (SEC), recently appeared before the US House Financial Services Committee for a hearing regarding his leadership of the regulatory agency.

The hearing, with Gensler as the only witness, promised to be uncomfortable for the SEC chief, with the federal agency’s actions under Gensler’s leadership since the spring of 2021 under scrutiny.

From the introduction of the committee’s chairman, Representative Patrick McHenry, Gensler was under fire for the SEC’s perceived overreach and approach to regulation through enforcement.

McHenry emphasized that the absence of a clear position on the legal classification of cryptocurrencies does not make it easier for companies to comply with the SEC’s requirements.

A day before the hearing, Representative Warren Davidson announced a measure to fire the SEC chief and cut the power of his successors “to correct a wide range of abuses” against the crypto industry.

As menacing as it may sound, this was not the first and likely will not be the last attack on Gensler. The SEC chief has made several enemies during his two years in the top job – and not just in the crypto industry.

But hyperbole and congressional rattling aside, was the April 18 hearing that bad for the SEC chairman, and could it soften his stance on crypto?

Grilling and cheering

McHenry’s fiery opening statement was inspired by the SEC’s impressive record of 50 separate enforcement actions against digital asset firms and the agency’s request for an additional $78 million in funding to expand its operations.

McHenry blamed Gensler for the “nonsensical” punishment of crypto companies, which failed to comply with laws they didn’t even know applied to them, with “not adequate or sustainable” regulation in enforcement and “overly aggressive” regulations.

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In his prepared testimony, Gensler dismissed the rebuke of rushed rulemaking, citing the standard procedures (the length of comment periods for SEC proposals currently averages more than 70 days) and the need to address the pressing challenges of the times, digitalization being chief among them.

Speaking of crypto, Gensler restated his position that “most crypto tokens are securities” and should be regulated by the SEC. In his opinion, the market is “full of non-compliance” and should, in the name of investor protection, be regulated in line with the standards of traditional finance:

“It is the law; it is not a choice. Call yourself a DeFi [decentralized finance] for example, the platform is not an excuse to defy securities laws.”

Representative Tom Emmer asked whether Gensler was concerned that such an approach could lead to crypto companies fleeing the United States, but did not give the SEC chief time to respond.

Representative Barry Loudermilk was a bit more constructive. He asked Gensler if he thought a government body’s centralized access to private investors’ information is more secure than the decentralized crypto market. In response, Gensler defended the necessity of the consolidated audit trail to “help monitor the market.”

All those who emphasized the word “grilling” were probably disappointed by the support Gensler received during the hearing. At the beginning of the meeting, he received words of appreciation from representatives Maxine Waters and Bred Sherman, who welcomed the SEC’s fight against “crypto bro billionaires.” Representative Stephen Lynch humorously asked to specify whether the amount of written guidance from the commission is not the kind of clarity the crypto industry wants.

It was New York’s Democratic Representative Ritchie Torres who stated that instead of paying more attention to the likes of “offshore, underregulated, handed down” companies like FTX or Binance, the SEC targeted an onshore and regulated exchange like Coinbase.

Torres also mentioned the SEC’s interest in stablecoin issuer Paxos, but not in Tether. Gensler replied that it takes longer to carry out a proper investigation in cases involving foreign companies.

Representative Davidson, whose intention to fire Gensler by law was already announced before the hearing, cornered the SEC chairman with a request to clarify whether he is considering Ether (ETH) and XRP (XRP) securities. It should be noted, however, that Davidson didn’t give Gensler much time to provide a clear answer, going on to recite a long list of the SEC’s alleged wrongdoings.

Representative Mike Flood pressed Gensler to comment that the SEC issued Staff Accounting Bulletin 121 (SAB 121) without consulting any banking regulators beforehand. Issued in March 2022, SAB 121 required crypto platforms to list digital assets as liabilities on their balance sheets at fair value. Reluctant at first, Gensler admitted that the agency did not consult bank regulators, but noted that the SEC instead consulted the Big Four accounting firms.

Last but not least was the participation of representative Erin Houchin, who mentioned the European Markets in Crypto-Assets (MiCA) Act as an example of a comprehensive framework for the digital industry, which in her opinion the US lacks. In response, Gensler assured her that the country has a clear set of regulations built over 90 years.

Takeaways

The hearing was not solely dedicated to the SEC’s crypto strategies. Despite the topic’s strong presence in the opening remarks, the regulator’s climate disclosure rule for publicly traded companies drew the most attention from lawmakers.

The crypto industry didn’t get much news from Gensler, who was on the one hand rather reluctant to go into detail, and on the other faced more symbolic pressure rather than genuine attempts to interrogate.

“It is highly unlikely that any of the questions presented or arguments raised did much, if anything, to influence the SEC’s current regulatory approach to the cryptoasset industry,” Jackson Mueller, director of policy and government relations at Securrency, told Cointelegraph.

“The SEC and Gensler did not confirm whether ETH is a commodity or a security,” CoinRoute’s chief technology officer and co-founder Ian Weisberger told Cointelegraph. However, what should be noted in his opinion is Gensler’s assurance that existing legislation is enough to regulate crypto:

“The SEC’s position is that crypto companies should register under existing securities laws that were written in the 1930s. These laws are tailored for centralized companies and have disclosure requirements that do not work for the unique structure of crypto networks.”

Another important takeaway was the partisan division of crypto. All but one representative who asked Gensler about digital assets was a Republican. This is perhaps not surprising, given Republican opposition to the Biden administration that has been appointed; However, it still illustrates how crypto legislation is not immune to partisan divisions.

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The contours of this division become even more striking if one looks at those who champion crypto advocates, be it Republican Senator Cynthia Lummis at the federal level or State Senator Wendy Rogers of Arizona. The same is true of the critics, with Democratic senators Elizabeth Warren and Sherrod Brown being the most notable.

Is there a chance the SEC might soften its stance under the current chair? CoinRoute’s Weisberger believes the agency has good faith regulators like Hester Peirce. Peirce, also known as “Crypto Mom,” has repeatedly raised concerns about the rules regarding trading platforms that do not handle tokens that qualify as securities, or how to address operators moving from securities trading to non-securities trading. In Weisberger’s view, the best hope still lies with Congress passing some kind of legislative framework above the level of the SEC.