Why Gary Gensler's Nonsense Must Stop
The SEC Chair’s latest tweet shows he cares nothing about consumer protection
Ric Edelman: It's Tuesday, May 2nd. Last week, SEC Chair Gary Gensler posted a short video about crypto on his Twitter account. He uses cute animation in it. First of all, I think it says something pretty important about society and technology. When senior government officials decide to make major policy statements on social media, that would have been like John F. Kennedy placing a full-page ad in the New York Times. I don't think that would have ever happened. But I digress. It really doesn't matter so much where Gensler posted his message. What's important here is what he said about crypto. I'm going to play for you his entire message. It's pretty short, less than four minutes. And then I'm going to give you my reaction to his comments. So here is Gary Gensler.
SEC Chair Gary Gensler: [from Twitter Video] What do the securities laws have to do with goldfish? Many places around the country were required to use a leash when you walk your dog. But let's just say you get stopped because you're walking Rover unleashed. What do you think would happen if you told the police officer that rover is actually a goldfish?
You'd still get a citation. And that's because the law cares about what something actually is, not what you call it.
Well, the same thing is true in the securities markets, as Justice Thurgood Marshall put it so well. Congress's purpose in enacting the securities laws was to regulate investments in whatever form they are made and by whatever name they are called.
That's why Congress's definition of securities includes more than 30 items such as stocks, bonds, notes, and something called investment contracts. An investment contract exists when you invest money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. Intermediaries for investment contracts, whether they're exchanges, brokers, dealers, clearinghouses - they need to comply with the securities laws and register with the Securities and Exchange Commission.
Instead many crypto platforms are just pretending that these investment contracts that they offer are more like goldfish. And the lack of compliance by these crypto platforms means that you don't have basic investor protections. These are things like rulebooks and surveillance to prevent fraud manipulation or appropriate custody and yes, segregation of customer assets so they don't get misused or abused or simply become the property of the platform, especially if it goes into bankruptcy. And you lack basic protections as customers that you aren't just trading against the House.
Further, many of these crypto platforms combine the activities of an exchange, broker-dealer and clearing house under the same roof. And when a platform doesn't register these function, that puts investors like you at risk. When a platform combines these functions, that creates conflicts of interest that undermine our time-tested investor protections. Crypto markets suffer from a lack of regulatory compliance. It's not a lack of regulatory clarity. As we alleged in a recent action, one crypto platform executive knew the law so well that he actually advised issuers to scrub specific language from their web pages in an effort to pretend that their tokens weren't investment contracts.
You could say in other words, they tried to say that their dogs were goldfish. It doesn't matter if you call yourself onshore or offshore. If you make securities available to American investors, you must comply with American laws. The law is clear. If you're a securities exchange, clearinghouse, broker or dealer, you must come into compliance, register with us and deal with conflicts of interest and disclose important information. For 90 years, these laws have helped protect investors like you. You might say they're an investor's best friend.
Ric Edelman: Okay. Let me provide comments to you about some of the things that SEC Chair Gary Gensler just tweeted. Here's one sentence I want to highlight.
Gary Gensler: What do you think would happen if you told the police officer that rover is actually a goldfish?
Ric Edelman: First of all, the issue of crypto regulation is extremely important, and I find Gary Gensler's metaphor of cartoonishly comparing a dog to a goldfish rather condescending and insulting. Crypto is $1 trillion asset class. 22% of US adults own Bitcoin. 81% of institutional investors say digital assets should be a part of a diversified portfolio. Blockchain-related companies employ tens of thousands of people throughout the US in high paying jobs. Hundreds of prominent Wall Street executives, attorneys, and former government officials have all left their positions to embark on careers in the crypto field. It is, after all, the first new asset class in 170 years, and to deride their professionalism with a childish reference to Rover and goldfish, that's a demeaning attempt to trivialize an incredibly important conversation. Crypto is a global technology and we need serious people to engage.
Gary Gensler: Whether they're exchanges, brokers, dealers, clearinghouses. They need to comply with the securities laws and register with the Securities and Exchange Commission.
Ric Edelman: The chairman is exactly correct about this. Everybody who's involved in the sale or activity of securities must comply with all securities laws and must register with the SEC. And that's exactly what all the professionally run companies in the crypto community have been trying to do. More than a dozen companies have filed dozens of applications with the SEC to register their funds. And every time, including twice in the past two weeks, the SEC has rejected their registration application. You want to know why there's no Bitcoin ETF? The SEC keeps saying no.
So SEC Chair Gary Gensler can't have it both ways. He can't criticize crypto companies for not registering when he's the person who's refusing to let them register.
Gary Gensler: The lack of compliance by these crypto platforms means that you don't have basic investor protections.
Ric Edelman: Again, that's correct. But again, it's his fault. If he wants to provide investor protection, then he needs to let these companies register. Last year, Axie Infinity was hacked and investors lost $625 million. Did the SEC prevent that? Did it get any of the money back for any of those investors? Did the SEC protect anyone when Terra Luna collapsed last year, wiping out $60 billion? How about when the crypto hedge fund Three Arrows Capital failed, losing half a billion? Where was the SEC then? Or how about when Voyager Digital or Celsius or BlockFi? Or wait for it?... FTX… all collapsed. Gensler and other SEC officials had meetings with Sam Bankman-Fried, but the SEC did nothing to protect investors. Instead, we get a Twitter video about goldfish.
Gary Gensler: Many of these crypto platforms combine the activities of an exchange, broker dealer and clearing house under the same roof. And when a platform doesn't register these functions, that puts investors like you at risk.
Ric Edelman: Absolutely right, Gary. So why doesn't the SEC create rules to prohibit this? Why isn't the SEC working with Congress to create new laws to govern the crypto market? Just like Congress passed laws governing the stock market and the bond market?
Gary Gensler: It's not a lack of regulatory clarity.
Ric Edelman: Sorry, Mr. Chairman, but yes, it is. Two years ago, Coinbase asked the SEC for permission to become a publicly traded company. Coinbase filed a registration application. It told the SEC that it was in the business of letting investors buy and sell digital assets Bitcoin, Ethereum and dozens of other coins and tokens. Coinbase is a crypto exchange and Gary Gensler said “yes”. And so Coinbase is now the largest publicly traded crypto exchange in the US. But then Gary Gensler started saying that some coins should be registered as securities.
So Coinbase went back to the SEC, spending millions of dollars in legal fees to get regulatory clarity on which coins are securities and which are not, which coins need to register and which don't. Coinbase says that its executives have met with the SEC more than 30 times over the past nine months. This past December, Coinbase asked the SEC for clarity, and so far, five months later, the SEC has refused to provide a response.
How can Gary Gensler say with a straight face that there's regulatory clarity when he knows there isn't any? Listen to this quick video clip. This is Gary Gensler testifying just two weeks ago before the House Financial Services Committee. The person asking the questions is Patrick McHenry (R-NC), the Chairman of the committee. And the person he's talking to is SEC Chair Gary Gensler.
Patrick McHenry: Ether is one of the most popular digital assets and powers of the Ethereum blockchain. Back in 2018, then SEC Corporation finance director Bill Hinman stated that he believed Ether was not a security. Last month, CFTC Chair Rostin Benham expressed his view that ether is a commodity. The state attorney general of New York asserted in a court filing last month that ether is a security. Clearly, an asset cannot be both a commodity and a security. Do you agree?
Gary Gensler: Actually all securities or commodities under the Commodity Exchange Act…But I would agree that a security cannot be also an excluded commodity and an included commodity. I'm sorry, Chair, just to talk about the Commodity Exchange Act more precisely.
Patrick McHenry: Okay. So do you recognize… how would you categorize ether then?
Gary Gensler: I think that the general sweep of what Congress did, not just in the 30s, but as amended…
Patrick McHenry: I'm asking you, sitting in your chair now to make an assessment under the laws as exist is ether a commodity or a security?
Gary Gensler: Without speaking to anyone…
Patrick McHenry: I know you've repeatedly said that you're not going to speak to one except you've spoken to one Bitcoin, so I'm asking you to speak to a second one. The second largest market cap here.
Gary Gensler: And speaking to the tokens, there's 10 to 12,000. If there's a group of entrepreneurs ….
Patrick McHenry: I’m asking about one. I'm asking you a specific question. Chair Gensler, I said this in private. This should be no shock to you. I'm asking this question Is ether a commodity or a security?
Gary Gensler And again, it depends on the facts and the law. And if there's a group of…
Patrick McHenry: I'm asking you about the facts and the law sitting in your seat and the judgment you are making.
Gary Gensler: And so, Mr. Chair, I think you would not want me to prejudge because…
Patrick McHenry: But you have prejudged on this. You've taken you've taken 50 enforcement actions. We're finding out as we go, as you file suit, as people get Wells Notices on what is the security in your view and your agency's view? I'm asking you a very simple question about the second largest digital asset. What is your view?
Gary Gensler: And my view is if there's a group of individuals in the middle that the public is…
Patrick McHenry: All right. So let me just ask a second question then. Do you think it serves the market for an object to be to be viewed by the commodities regulator as a commodity and the securities regulator to be viewed as a security? Do you think that provides safety and soundness for the product? Do you think it provides consumer protection? Do you see do you think it serves the value of innovation? I think “no” should be a very simple answer for you here. I think that uncertainty is bad, is it not?
Gary Gensler: And I think that Congress has said that there's one agency, the Securities and Exchange Commission, under this committee,
Patrick McHenry: …and you won't answer my question. And you're the head of that agency. So give me a break. Come on.
Gary Gensler: I'm answering it in the generic because you would not want me to speak about any one set of facts and circumstance.
Ric Edelman: This is how Gensler behaved throughout the entire five-hour hearing. He refused to answer questions. He obfuscated. He dodged. He evaded. He refused to answer direct questions, despite the fact that he claims there is regulatory clarity. If there is clarity, why couldn't he provide the clarity upon direct questioning by members of Congress of both parties? Let's return to Gensler's Twitter video. Here's his final comment in that video.
Gary Gensler: For 90 years, these laws have helped protect investors like you. You might say they're an investor's best friend.
Ric Edelman: Yes, indeed, the securities laws do protect investors, but today's SEC is failing to do that because it's failing to provide the rules that the crypto community has been asking for years. Congress is so furious about Gensler's performance that a bill has been introduced to fire him. If Gary Gensler has his way. Innovation in this emerging technology will be stifled in the US. Companies will simply move overseas. Coinbase CEO Brian Armstrong has already said he'll do just that. He'll move the company to London, where British officials are welcoming him with open arms.
Gary Gensler can't kill crypto, but he can harm American investors and damage American economic leadership in the world.
You need to contact your elected representatives in Washington and tell them to pass the laws. We need to foster development of this technology while simultaneously protecting US investors. We can do both. We've done it in stocks and pharmaceuticals and auto safety and agriculture; in dozens of industries. We don't need to ban technology; We just need rules to govern it. That's how we maintain our global leadership. That's how we help everyday investors achieve financial security.
I encourage you to go watch Gary Gensler's Twitter video and read some of the 4000 comments; virtually all of them horribly negative against that video and Gary Gensler's behavior. His behavior is bad for America. He's ultimately going to fail. And the sooner Congress puts him in his place, the better for all of us.
If you'd like to learn the truth about crypto, read my Amazon number one bestseller, The Truth About Crypto. Or better yet, get your Certificate in Blockchain and Digital Assets. A brand-new course for consumers and investors. Learn about that at my sister company, DACFP.com. The link is in the show notes. See you tomorrow.