It is common knowledge in Washington that Gary Gensler took the job of Chairman at the Securities and Exchange Commission as a steppingstone to becoming Secretary of the U.S. Treasury, an impressive career capstone for the MIT professor. But after such a gruesome year of wealth destruction under his leadership and guidance at the SEC, one must ask the question – to what degree is Mr. Gensler part of the problem? And is it time for him to go?
The stunning meltdown of FTX – the world’s second largest cryptocurrency exchange, until it crashed – is just the latest in a series of multibillion dollar collapses recently hitting the crypto sector. Since becoming SEC chairman last year, Mr. Gensler has insisted that he and his agency are in the driver’s seat on “protecting investors” in crypto, and that rules giving him this authority “are pretty clear”.
His mantra since taking office has been that every digital asset, aside from Bitcoin, is “probably a security” and therefore whoever is responsible for it must “come in and register” with his agency. Unfortunately, this is where any attempt at clarity ends. Gensler has neither proposed nor enacted any guidelines around how a cryptocurrency can be registered, nor who is responsible for registering it. His lack of leadership has brought zero transparency to investors and caused greater market confusion for participants.
His wholesale reliance on judicial precedent from a 1946 Supreme Court decision, rather than a contemporary, clear set of rules specific to this unique digital asset class, has forced the SEC to battle for its own enforcement authority in federal court. The best-known action to date, its bitter $1.3 billion lawsuit against San Francisco-based payments company Ripple, has dragged on for two years over increasingly arcane legal arguments about whether Ripple should have somehow registered the XRP token it uses within its software products. How this should have been known, or accomplished, has yet to be explained in court.
Mr. Gensler has become the target of critics, particularly among industry leaders and Congressional Republicans. They contend he has accentuated the chaos by his confusing approach and has driven many industry players overseas. They claim this has transferred the needed benefits of good actors overseas to America’s competitors, while helping to insulate bad actors further beyond the reach of U.S. regulators.
The SEC itself is divided, with Commissioner Hester Peirce vocally blaming the agency’s own failures for the carnage. Progressives, such as Sen. Elizabeth Warren (D-MA) and Rep. Brad Sherman (D-CA), want Gensler to go much further and shut the industry down altogether, something Mr. Gensler doesn’t have the authority to do.
In such an environment, a steady hand and a clear vision are needed before another 10 or 20 billion dollars in investor holdings are vaporized or stolen. Democrats, on the heels of a much better showing than expected in the midterm elections, should be pressing for a steadier hand at the wheel of this crisis. In his public appearances and statements since FTX’s collapse, Gensler has not deviated from old talking points nor explained how he intends to stem the harm to investors from worsening.
More troubling, Gensler was recently the target of a letter from a dozen Senate Democrats expressing concern over the lack of transparency and public engagement in its regulatory rulemaking. He seems oblivious to the damage these methods of regulating do to public confidence. He simply brushes these political warnings aside.
The SEC’s Inspector General also issued a report that found Mr. Gensler is overwhelming staff and diverting work hours from core investor protection duties while engaging in rulemaking on matters not related to their existing enforcement authority. This kind of overreach sets up easy court challenges that could undermine the causes that Democrats care about. More SEC employees than usual are temporary and have little-to-no rulemaking experience under Gensler’s leadership, the report found. None of this frenzy of activity at the SEC has resulted in a road map for crypto as BlockFi, Celsius, Three Arrows Capital, and FTX all melted down, taking billions of dollars from American citizens, while shaking innovators and investors with it.
The House Financial Services Committee will hold a bipartisan hearing this month on what happened at FTX. House Republicans are hinting they will grill Mr. Gensler more strenuously over his actions when they take over the gavel in January. Maybe it’s time for Democrats to stop playing defense and seriously consider if Gensler is the right person for the job anymore, let alone a promotion to U.S. Treasury. His actions on crypto are no longer comprehensible to the American public he’s been appointed to protect. In this volatile market environment, that promotion is the last thing the country needs.
