If you made a list of individuals whom the crypto community has taken issue with this year, you’d likely find U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler’s name near the top of it.
A quick search for his name via social media will deliver a sense of the sentiment currently held towards him. I do not recommend this by the way.
I actually started out as a supporter, for lack of a better term. Even today, I don’t hold any ill will towards him. I don’t know him personally and have no desire to be insulting. I think commentary specific to past statements and present actions are in bounds, however.
My introduction to Gensler came years ago via the Massachusetts Institute of Technology’s (MIT) “Blockchain and Money” course. Now, keep in mind, I did not attend MIT.
Outside of one trip to Fenway Park, I haven’t been within 100 miles of it.
But, in general, I’m very close to my laptop. And MIT did, and still does, offer the “Blockchain and Money” course online for the extremely affordable price of $0.
So, I sat through most of it because, why not? I was interested in blockchain technology, and I loved the price.
I found the course to be measured, informative and detailed. I would recommend that anyone interested in cryptocurrencies take it, to be honest. So, personally, I was pleased when Gensler was named SEC chair in April 2021, as I think many were.
Two years later, I think it’s safe to say that this has changed. As such, I decided to take a second look at the course. Given the current environment, I chose to focus on Lecture 8, which focused on Public Policy.
Granted we have the benefit of hindsight, but perhaps I would find that my disappointment is unfounded. Perhaps present actions are in line with past statements. At the very least I’d get to brush up on policy issues. I started with the assigned readings themselves:
The first, from Gensler himself, was the longest and provided good context.
His opening salvo, “Blockchain technology has real potential to transform the world of finance,” is one that I initially viewed positively. The same applies to his follow-up: “I’m an optimist and want to see this new technology succeed.”
Anyway, here are some other takeaways from Lecture 8:
Illicit activity has been a concern from day one
Gensler’s past statements seem consistent with what he says today. The need to guard against illicit activities and to ensure financial stability and that investors are protected appeared to be at the core of what was discussed in the lecture.
My interpretation is that Gensler believed that broad agreement existed around the need to curtail illicit activity, but that implementation of policies to do so was inconsistent.
This is where I think the SEC is attempting to make waves (some would say too many): by working to establish a framework of implementation that will be emulated on a global scale.
Both bitcoin (BTC) and ether (ETH) were referred to crypto cash commodities, not securities
For all of the discussion around what is and what is not a security today, the course made little mention of BTC or ETH being securities. To the contrary, it was acknowledged that “in terms of market value, probably three-quarters of the space has already been determined by the SEC not to be a security.”
Crypto intermediaries were presented as a viable regulatory target
This is something that maybe I should’ve seen coming. While not discussed at length, approximately six minutes in, the topic of crypto intermediaries was broached and how they serve as viable regulatory targets. A question of why laws historically have been attached to intermediaries was raised as well.
The answer seemed to revolve around systemic risk, and the relative ease in regulating intermediaries chasing smaller entities.
This has been most evident in the recent SEC enforcement actions versus Coinbase and Binance. Allegations of operating as an unregistered securities exchange and broker were levied towards Coinbase. Binance was accused of the same, along with misrepresentation of trading controls.
Public policy strategy does more harm than good
One of the most salient revelations came near the end of the class, when the discussion of public policy development was raised. And I think this is at the heart of the contentious relationship between crypto advocates and Gensler’s SEC.
It was stated, in no uncertain terms, that in the crafting of public policy, “messaging” and “coalition building” are front and center. “Analysis” by comparison was almost an afterthought.
So, while crypto purists argue on the merits of digital asset efficiencies, consensus mechanisms and supply dynamics, crafters of public policy are simply attempting to drive a message home. Because of that mismatch, the two groups are horrible dance partners.
Candidly, that was one of the more disheartening takeaways that I had. It leads me to believe that crypto’s primary critics are more than aware of the benefits of digital assets but are willing to completely ignore them for the benefit of their own messaging, biases … and possibly self-interests.
All told, I enjoyed taking a walk back through Lecture 8. I’ll probably go through others. I do question how the tone of the class would be if taught today however.
In the last year, the failures of crypto companies like FTX, Celsius and BlockFi, as well as recent bank collapses, eroded belief in financial systems. A flight to safety has begun as investors of all sizes worldwide seek reliable and secure crypto storage. When investors approach custodians, their primary concerns are the safety of their funds and the ability to access them.
Regulated custodians play a vital role in ensuring the security of assets. They offer services such as segregated accounts, protection from financial instability, cold storage of keys, advanced security technology and insurance against theft, loss or misuse.
Recently several institutions unveiled their plans for crypto, bringing new interest, capital and participants. Notably, we saw BlackRock file for permission to create a bitcoin ETF, which fired a bright signal flare to the rest of the financial world. As one of the world’s largest financial entities, dipping their toe into the waters of bitcoin is no small matter. It is a symbolic move that tells the rest of the market, “Bitcoin is here to stay.” Institutions such as this will ultimately have a need for regulated custody to secure the assets for these new market instruments. However, it is not easy to gloss over what has happened in the past 18 months.
What have the crypto failures taught us?
Not all custody is the same: Just because someone is holding your assets doesn’t mean they are a regulated custodian. In traditional finance, custodians must meet specific regulatory standards to protect client assets. In the crypto space, custodial services range from software solutions to fully licensed and regulated cold-storage solutions. The same controls that exist in other financial institutions are not yet global standards in crypto.
Investors need the underlying systems to work together to protect their assets from misuse, theft or fraud: Trading and custody should be done by separate entities. Traditional finance market infrastructure involves a carefully organized network of exchanges, broker-dealers, clearinghouses, transfer agents, banks and custodians. Each entity has a specific, well-defined role and rules they must abide by.
Do you really know who your custodian is? Does your custodian have a long history of caretaking assets? What is their security model? Many sought to withdraw their assets in 2022 and were greeted by disappointment.
If your custodian can’t reconcile these points with your own personal risks analysis, you may need to look elsewhere. Over time I believe that custodial practices will become much stronger out of necessity. No custodian wants to become the next news story about losing customer assets. The lessons we’ve learned together as an industry over the last 18 months have only shown the need for strong safeguards to protect investor assets. The future is getting brighter for the custodial space, and we all must rise to meet the challenges. Digital assets continue to be the most novel asset class on the planet and reliable infrastructure is crucial for the industry to grow.
From CoinDesk Deputy Editor-in-Chief Nick Baker, here is some news worth reading:
DOLLAR BILLS: One of the surprises when you dive deep into covering crypto as a journalist is just how much you have to know about things other than crypto. Knowing about corporate restructuring is often important these days. Some accounting chops can be very useful. And understanding the biggest market of all, foreign exchange, is crucial. Take this story about the relationship between crypto and the U.S. dollar. It’s full of talk of global liquidity, risk appetite, correlations and the like. Not crypto degen stuff!
XRP TIME?For its adherents, the XRP token and its associated blockchain have long typified a core goal of crypto: removing friction in the global financial system. A main proposed use case: cross-border remittances, something that’s not exactly super cheap or easy via conventional banks. Yet, XRP has languished after U.S. regulators said in 2020 that it’s a security. Major exchanges delisted it. But Ripple, the company behind the token, fought that ruling and last week got some qualified good news: XRP sometimes isn’t a security. Major exchanges changed their tune and agreed to list it again. So now the question becomes: Can XRP, whose price shot up after the court ruling, start achieving that goal?
DIGITAL BONDS: For years, there’s been talk about the allures of moving conventional financial stuff onto blockchains: stocks, bonds, whatever. There is truly very little to show for all the hype, and many Wall Street blockchain initiatives are dead and buried. And yet! Hope is not lost. Take U.S. Treasuries, as an example. There are some promising signs that digital versions of the oldest of old school financial products are gaining traction. Lest you think I’m adding to the hype: This is still nascent. But digital bonds do seem increasingly to be becoming a thing.
It is now more important than ever to set industry standards and align on practical short-term and long-term objectives through pointed conversations with the best legal minds and Washington D.C.’s most important decision makers.
Join us at State of Crypto: Policy and Regulation on October 24 in Washington D.C. for an unprecedented opportunity to evaluate, dissect and ultimately shape crypto regulatory frameworks that support a vibrant, secure and healthy future for the digital economy.
