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The failure of tech-heavy Silicon Valley Bank (SVB) and the initial uncertainty over its causes led to public fear of contagion to other banks simply because of the raw numbers -- $212 billion in assets, including the high-dollar deposits of some of the most prominent tech start-ups. But the facts have started coming out, where the two biggest sins of SVB appear to be a heavy bet on long-term U.S. Treasury bonds until the Federal Reserve started hiking rates, and the delayed decision to shift away from them that triggered a run on the bank.

While they could be signals of the consequences of the Fed’s heavy-handed monetary policy, weak senior management at one bank and social media-enhanced panic in tightly knit Silicon Valley don’t seem to be credible ingredients for a global financial meltdown.

Of course, that didn’t stop the defenders of the administrative state from rushing into the haze of initial confusion to capitalize on the fear. Senator Elizabeth Warren (D-MA) had an opinion piece ready to go for the New York Times within hours of SVB’s failure, declaring that “we all know who was responsible” even though the facts weren’t clear yet. One has to dig through 1000 words of hysteria and demands for more regulations to find a begrudging reference to the “toxic” asset at the heart of SVB’s failure being U.S. Treasurys.

In the background, Warren’s chief regulatory ally, Securities and Exchange Commission (SEC) Chairman Gary Gensler, was more calculating. When the SEC announced it was opportunistically investigating whether securities laws were violated by SVB, it reminded many of his critics of the collapse in December of the Bahamas-based crypto exchange FTX. He’d done nothing to prevent harm to the retail victims of FTX’s garden variety fraud, but he moved quickly to take advantage of it to launch a full-scale legal attack on the entire crypto industry.

If his investigators fish out a single SVB position in anything related to digital assets, expect Gensler to find a way to sue SVB and its executives into oblivion just to gamble on getting some judge somewhere to intimate that a cryptocurrency is an unregistered security under his exclusive jurisdiction to regulate. It won’t make a single depositor or investor whole, but it will enhance Gensler’s power. That’s the objective in everything Gensler is doing, after all.

This is also the crux of why Gensler is regulating crypto through enforcement rather than setting clear and specific rules for digital assets that everyone can understand and comply with. Regulation by enforcement is an administrative state scheme to get the courts to grant an agency power that Congress hasn’t given it. Gensler will never propose a regulatory framework for crypto through rulemaking or by asking Congress for legislation because the fear of being trapped in federal lawsuits that grind on for years, no matter how ridiculous the legal theories behind them, is enough to get settlements from his victims and favorable headlines for himself.

Indeed, Gensler’s recent $2.4 billion budget request to Congress confirms how valuable regulation by enforcement has become to him. The document promises to ramp up enforcement lawsuits on crypto market participants who don’t “come into compliance”. For an agency that depends on collecting massive fines, usually through settlements that set no legal precedents, there is no incentive for Gensler to make clear what “compliance” means, so he won’t do it.

But not everyone is settling, and judges are naturally starting to push back against the SEC’s regulation by enforcement on crypto because it is built on legal gobbledygook that crumbles under legal scrutiny. Ripple Labs has put up a brutal fight against the SEC’s 2020 lawsuit over its sales of the XRP token dating back to 2013, drawing supportive briefs from the leading lights of the crypto industry, Wall Street legal experts and even 75,000 indignant XRP holders who have entered the case against the regulator that is allegedly “protecting” them.

Early on, it was clear that the SEC never intended to end up at trial with Ripple, and its tiresome defense of its laughable legal theories drew a harsh rebuke from Magistrate Judge Sarah Netburn, calling out the SEC for “adopting its litigation positions to further its desired goal, and not out of a faithful allegiance to the law.” In essence, Netburn summed up Gensler’s tenure as chairman.

This month, the court moved closer to a trial on the Ripple case by excluding key SEC expert witnesses, including one who purported to know the mindset of retail XRP purchasers despite confessing he’d never interviewed a single one. It wasn’t the only recent setback in court for Gensler. Grayscale Investments is suing the SEC over its denial of a Bitcoin spot ETF after approving one for futures, forcing the agency to justify its “arbitrary, capricious and discriminatory” reasoning in open court. During oral arguments on March 7, the three-judge panel appeared frustrated at the SEC’s refusal to clarify its non-existent “rules” or anchor them in credible legal precedent.

Both Ripple and Grayscale have vowed to take their cases all the way to the Supreme Court, and legal scholars believe the SEC is likely to lose because Congress didn’t give it the power it’s using in court against crypto. But Gensler won’t likely be around for those bad headlines. Neither will a long line of innocent companies chewed up by his enforcement division who didn’t have the resources to fight.

Roslyn Layton, PhD is a leading international expert on technology policy. She is Senior Vice President of Strand Consult, an independent consultancy. She is also a Visiting Researcher at Aalborg University in Copenhagen, Denmark.

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