It’s impossible to ignore the specter of regulation in the cryptocurrency space right now. On Sunday, August 1st, the United States Senate introduced a comprehensive $1.2 trillion infrastructure bill. At the time of the bill’s introduction, Majority leader Chuck Schumer suggested that substantial bipartisan support would lead to quick ratification.
However, on Wednesday of the same week, the tech advocacy group Fight for the Future sounded the alarm:
Other prominent players quickly followed suit. The panic was brought on by the bill’s overly broad language concerning tax reporting. Many feared the wording could lead to impossible-to-comply-with obligations on industry participants like miners and software developers.
The reaction likely caught reporters and legislators by surprise. As the $2 trillion industry quickly organized a lobbying effort, it demonstrated a degree of political heft heretofore unseen. The bill eventually passed the Senate unchanged. However, efforts to amend it as the legislative process continues are a near certainty.
Overall, the episode is arguably two-sided: cryptocurrency has arrived on Capitol Hill, and serious regulation is now a reality. Former investment banker and government official Gary Gensler is likely unsurprised by this coming of age.
Crypto enthusiasts often recognize Gensler as the MIT Sloan professor who led the university’s blockchain and money course. In the fall of 2018, the regulator led coursework examining how the technology may change money and finance.
Rightly or wrongly, the role seemed to suggest Gensler is and would be amicable to cryptocurrency space. Ex CFTC official and Coindesk author Jeff Bandman appeared to echo this sentiment in early 2021 when he covered Gensler’s then-pending SEC chairman nomination. Bandman noted:
“From my experience with Gensler, whether the subject is digital assets, swaps, or market structure, I can attest that he is thoughtful and broad-minded about the future of crypto-assets and that he understands the role enlightened regulators can play in boosting innovation. I can also promise he will not simply be a cheerleader.”
Yet, other aspects of the chairman’s resume highlight his ability to reign in speculation. Under President Obama, Gensler led significant reform of the derivatives market following The Great Financial Crisis. He was vital to drafting the Dodd-Frank overhaul of financial regulation, and the sixty-three-year-old has been an advocate of stricter regulation on big banks. The fact led Arlette Saenz and Gregory King to suggest in a January article that Biden’s choice of Gensler signaled the administration’s hard-line approach to Wall Street.
The Elephant in the Room
Recently, Gary Gensler has been more active in his outreach toward the crypto community. In so doing, he addressed the SEC’s market oversight role directly in an August 4th tweet:
The theme of the content was in line with an August 3rd speech before the Aspen Security Forum. Although some had suspected the Biden administration would be “crypto-friendly,” the speech underlined Gensler’s no-nonsense approach toward the industry. The chairman referenced the Colonial Pipeline as he highlighted his intention to tighten regulations:
“To the extent that [crypto is used as a medium of exchange], it’s often to skirt our laws with respect to anti-money laundering, sanctions, and tax collection. It also can enable extortion via ransomware, as we recently saw with Colonial Pipeline.”
He continued, citing his concerns surrounding a lack of government intervention:
“Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West. This asset class is rife with fraud, scams, and abuse in certain applications. There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced, and complete information.”
Like former SEC chairman Jay Clayton, Gensler agreed that ICOs should be considered securities in the majority, if not the entirety, of cases and subject to securities laws.
A Taste of Things to Come
Although some claim it is anathema to the values of bitcoin, an ETF tracking the digital asset has been sought by many investors. 2021 alone saw 15 such filings with the SEC, yet the United States lags behind countries such as Canada, Brazil, and Dubai. In March, Brazil introduced an exchange-traded fund while a Canadian BTC ETF began trading on the Nasdaq Dubai.
Many in the crypto space suspect Gensler may be open to a similar product. He spoke to these suspicions in Aspen:
“I anticipate that there will be filings with regard to exchange-traded funds under the Investment Company Act (’40 Act). When combined with other federal securities laws, the ’40 Act provides significant investor protections. Given these important protections, I look forward to the staff’s review of such filings, particularly if those are limited to these CME-traded Bitcoin futures.”
The admission is likely good news for speculators.
But there’s no free lunch. All indicators point to a dramatic increase in oversight purportedly aimed at establishing safeguards for the investors such a product would attract.
Likely towards this end, Gensler addressed an open letter to Elizabeth Warren. The Massachusetts Senator recently spearheaded criticism against the industry, looking to sideline it in favor of central bank digital currencies, or CBDCs. In Gensler’s response, he alluded to the increased authority needed by the SEC to properly regulate the cryptocurrency industry. Warren also previously called on the Financial Stability Oversight Council to develop a framework for regulating cryptocurrencies and stablecoins.