When he was chair of the Commodities Futures Trading Commission (CFTC), Gary Gensler developed a reputation as a tough regulator. According to a Bloomberg profile, his name became an expletive to many on Wall Street—to the delight of Elizabeth Warren and her allies in the Obama administration. He faces a similar assignment when it comes to cryptocurrencies and blockchain as he enters the Securities and Exchange Commission (SEC) chair role.
Gensler's CFTC experience should stand the 63-year-old, whose "downtime pleasure" is dancing, in good stead as he takes over the Securities and Exchange Commission (SEC) chief's job under the Biden administration. As CFTC chief, Gensler was largely credited with bringing order to a derivatives industry that had run amok and, according to many observers, caused the financial crisis of 2008.
- Former CFTC chair Gary Gensler became the SEC chief under President Biden.
- He has extensive experience that spans Wall Street, government regulation, and a stint teaching about cryptocurrencies and blockchain at MIT.
- Gensler's appointment is good news for those clamoring for regulatory guardrails for the industry.
A Broad Perspective
This is an especially critical juncture for cryptocurrencies and blockchain in terms of regulation. Crypto prices rose as institutional investors warmed up to the asset class and crashed after as they withdrew from the asset class. Coinbase, North America's biggest cryptocurrency exchange by trading volume, filed for an initial public offering (IPO) with the SEC and went public. An increasing number of countries worldwide have launched or are considering the possibility of launching digital currency projects. And the SEC has filed a case against Ripple's XRP (XRPUSD)—the third-biggest cryptocurrency by market capitalization—claiming that it is an unregistered security.
Gensler's resume combines experience and a sophisticated understanding of Wall Street, government regulation, and cryptocurrencies and blockchain. He worked at investment bank The Goldman Sachs Group, Inc. (GS) for 18 years before shifting gears to serve various posts in the Clinton administration. In addition to shackling the runaway derivatives industry to a strict regulatory framework, he played a key role in drafting the Dodd-Frank Act—legislation that has shaped the financial services industry's workings and revenues after the 2008 financial crisis—under President Obama. More recently, Gensler taught a course on blockchain and cryptocurrencies at the Massachusetts Institute of Technology (MIT) and has commented extensively on various aspects of the industry.
The breadth of Gensler's experience is good news for a crypto industry struggling to find its footing in a regulatory framework whose rules, at times, seem outdated to accommodate blockchain or cryptocurrency's workings. Former SEC Chair Jay Clayton was especially fond of quoting the rulebook to justify his agency's actions against crypto proposals. Gensler's appointment injects a broader perspective than is currently available in the ossified discourse about frameworks for cryptocurrencies and blockchain.
More Oversight for Crypto
Gensler has alternated between censure and praise in his commentary on cryptocurrencies and blockchain. In a previous Coindesk op-ed, he referred to cryptocurrencies and blockchain as an "innovative irritant" and as a "catalyst for change." He also discussed the need to bring the Federal Reserve into the modern payments era and recommended that digital currencies, such as Libra, be brought under SEC regulation to ensure investor protection. But he has come down hard on initial coin offerings (ICOs) and repeatedly talked about bringing unregulated cryptocurrency exchanges under SEC supervision.
For Gensler, the connection between regulation and cryptocurrencies is related to their role in society. At the 2021 Aspen Security Forum, he said that cryptoassets should adhere to public policy goals of financial markets. "A new form of money has come along, and we need to make sure that we are achieving public policy goals [with the new form of money]," he told audiences.
Within the context of his agency, Gensler said the goals are about investor protection, facilitating capital formation, and ensuring fair markets. "This asset class is ripe with frauds, scams, and abuses in certain applications," he said. "In many cases, investors aren't able to get rigorous, balanced, and complete information."
While it does not guarantee the accuracy of information or disclosures provided by a company, the SEC does make sure that investors get information necessary to make a judgement about a security. With Gensler at the helm, crypto companies and funds, which have largely escaped the agency's rigorous disclosure standards, might have to provide more information about their offerings and operations.
Tokens as Securities
Another big question mark in the cryptocurrency ecosystem currently relates to the status of tokens sold to investors. In the past, the SEC has taken action against security tokens that were sold as utility tokens to investors. However, enthusiasts and proponents have argued for a new definition of securities to fit the crypto mold. Gensler might disappoint them. "I find myself agreeing with my predecessor about the definition of security tokens," he told audiences at the Aspen conference.
Gensler's predecessor, former SEC chief Jay Clayton, earned the crypto community's ire for hewing closely to the definition outlined in 1933's Securities Act. During interviews, he pointed to the three-part Howey test that is used by the agency to determine whether a token is a security. That definition led to the closure of high-profile projects.
At an MIT conference in 2018, Gensler posited that Ripple's XRP and Ethereum's ether (ETHUSD) should be deemed securities. Since then, former commissioner William Hinman clarified that ether was sufficiently decentralized to not be counted as a security. Ripple's XRP, however, is still under the SEC scanner. Back then, Gensler predicted that the courts would ultimately decide XRP's fate as a security. That event is already in motion, and his agency will have a big hand in deciding its outcome.
Gensler said that he wouldn't shy away from using enforcement authority against false tokens being peddled by startup. "What I am saying to those platforms, come in and discuss it with us," he said at the Aspen summit.
Bringing Order to Crypto
In some respects, at least as far as cryptocurrencies and blockchain are concerned, Gensler's job as SEC czar is similar to his assignment at CFTC: bringing order to an unruly ecosystem. After the Glass-Steagall Act was repealed during the Clinton Presidency, the derivatives industry ballooned into a multi-trillion dollar Wild West. In his time under President Obama, Gensler went after criminals and established tough rules to ensure protection for investors.
While the cryptocurrency ecosystem does not have the heft or trading volume of derivatives, it shares the leaky regulatory roof that allows criminals and unscrupulous characters to flourish and bars the entryway to institutional and retail investors. Gensler will have to marshal his experience and understanding of crypto and blockchain to bring order to the ecosystem while preserving its potential to reshape modern finance's plumbing. In the process, his name may well become an expletive again for actors clamoring for less regulation of crypto markets.