Picking A Fight With Gary

Chairman of the SEC Gary Gensler is not hiring 87,000 new SEC agents who will form the backbone of the SEC and “carry a firearm and be willing to use deadly force, if necessary.”

No, that’s the Internal Revenue Service (IRS) but the SEC is starting to trend in that direction in regard to how it views the crypto industry.

We aren’t at the point of the SEC raiding crypto exchanges. That stuff only happens in places like Palm Beach, Florida.

Gensler’s recent message to crypto has essentially been to get with the program or face a tortuous existence.  

His defiant message appears to be falling on deaf ears as the crypto industry has felt they should be entitled to a new set of lenient rules than conventional assets.

I can tell you this has worked out quite poorly for crypto companies who have willfully placed a bullseye squarely on their forehead.

In a recent speech, Gensler criticized the crypto industry, telling an audience of lawyers that the “vast majority” of the nearly 10,000 existing crypto tokens are securities, being issued to the public in violation of federal laws.

He argued that through statements and dozens of enforcement actions, the SEC has made clear how existing law applies to the industry and that no such rules are forthcoming.

Gensler said investors deserve disclosure to help them sort between investments that they think will either flourish or flounder.

The SEC has been adding to its enforcement staff dedicated to protecting investors in the crypto market, announcing in May that it was adding 20 new positions in the newly named Crypto Assets and Cyber Unit, nearly doubling its size.

Crypto infrastructure companies have knowingly avoided the law and SEC as securities exchanges and broker-dealers by failing to properly register while continuing business as usual.

They also believe the products sold aren’t “securities” in the way that the SEC believes they are.

In their world, tokens are like gaming chips or collector’s cards.

We have a word for what they are doing in the English language – illegal.

Coinbase Global Inc. (COIN), the largest publicly traded crypto exchange, said in its most recent quarterly report that the company is under investigation by the SEC, and has received a list of questions about how it chooses which digital assets to list and how it classifies them.

The SEC brought charges in July against a former Coinbase product manager for insider trading, identifying nine tokens it alleges are securities, which were listed on the exchange. Coinbase has said that it disagrees with the SEC’s classification.

In February, the crypto lending platform BlockFI agreed to pay a $100 million for failing to register with the agency.

Gensler said that the SEC will have to come up with new procedures for registering crypto exchanges because they also offer custodial and broker-dealer services, unlike typical stock market exchanges.

I understand that some of these crypto exchanges are a little different from what some of the retail stock exchange platforms are selling, but skirting the law now just means the penalties will be even harsher down the road.

This is not the era of Facebook when the internet police had no idea what was going on with them.

It took decades for sentiment to shift against big tech.

However, from inception, crypto has been unable to shake the stereotype of being a fly-by-night operation and large swaths of it sure appear to be sketchy and they are policed as such.

The brand damage is immense causing the incremental investor to abstain from crypto and the regulators to clamp down even further on crypto companies and products.

We are seeing this in real-time.

The regulation is a footnote on a bull run on the way up, but now crypto has shot itself in the foot and is having a hard time convincing new investors into the asset class precisely because of a loss of trust.