Many institutions in the United States are seeking to tighten regulatory laws on the cryptocurrency market, with the Securities and Exchange Commission (SEC) being at the forefront.
The rapid emergence and widespread adoption of cryptocurrencies, combined with their inherently volatile market nature, have created numerous opportunities and challenges for eager and innovative investors, prompting regulators worldwide to establish a strong framework for oversight and regulation to prevent potential problems. In the United States, many entities are pursuing stricter regulatory measures for this market, with the SEC taking the lead. The U.S. Securities and Exchange Commission, often abbreviated as SEC, has long been focused on intensifying its oversight and protecting consumer rights by reviewing investment contracts in the American economy—a situation that has recently affected cryptocurrencies and has also raised concerns among market experts.
Due to the disruption, they have caused in financial and investment markets, cryptocurrencies have now become a focal point of conflict and a tight battle between government institutions and regulators of traditional financial markets and cryptocurrency companies. It is worth noting that cryptocurrency regulation in the United States, as the current largest economy, will influence the cryptocurrency industry worldwide. Thus, the eyes of industry players around the globe are now on American regulators.
The SEC uses the Howey Test to determine whether a cryptocurrency is a security. This test has been around for about a hundred years, and the officials of this body fully trust it. However, many cryptocurrency market participants believe that the transformative and innovative nature of these assets does not fit within a framework that is nearly a century old, and new regulations are needed for greater transparency in the industry.
One prominent figure at the forefront of global regulation is Gary Gensler, the chairman of the U.S. Securities and Exchange Commission, who has caused considerable controversy since taking on this role. Gensler, who has transitioned from a blockchain educator and advocate to a critical official and somewhat of a victim of the market, has faced scrutiny.
Following the disasters in the cryptocurrency market over the past year, this commission has come under increased scrutiny from the U.S. House of Representatives to the extent that its highest-ranking official, Gary Gensler, was invited as a witness to a hearing of the House Financial Services Committee. In the eyes of journalists and media professionals, Gensler appeared more as an accused individual in this session.
The hearing was convened for the chairman of the SEC to testify before U.S. lawmakers to address issues such as cryptocurrency regulation and the laws enacted by this commission. In this public session, congressional representatives posed questions about Gensler’s recent performance, and he was given a chance to defend himself; although Gensler preferred to remain in the role of an accused party during this five-hour session and evaded providing precise answers to the representatives’ questions.
This article aims to review Gensler’s statements and defenses before the representatives of the American people. By delving into the core of the SEC chairman’s remarks, we seek to provide a comprehensive understanding of his and the U.S. Securities and Exchange Commission’s stance on cryptocurrencies, disasters such as the collapse of the Luna cryptocurrency and the bankruptcy of the FTX exchange, and most importantly, the regulation of the blockchain-based ecosystem.
United States Retreats from Digital Asset Regulation
First, let’s examine an action by the U.S. Securities and Exchange Commission (SEC) that has recently stirred controversy and become the subject of questioning by several members of Congress during Gary Gensler’s hearing. The SEC intended to advance cryptocurrency regulation by defining “digital assets,” but ultimately removed this definition from the final version of the law, reversing a move that could have marked the official recognition of cryptocurrencies.
The SEC recently took a step back in cryptocurrency regulation by removing its initial official definition of “digital assets” from its “Hedge Fund” law.
Hedge funds are investment funds that pool investors’ money and invest it in securities or other types of investments to achieve positive returns. Previously, a specific definition of digital assets was to be included in the laws related to these funds, which are overseen by the SEC, to aid in the regulation of cryptocurrencies.
Although the SEC initially included this definition in its 2022 proposal to overhaul the regulations related to these funds, it was removed from the final law approved by the commissioners.
The SEC has stated: “The Commission and its staff will continue to address this issue, but at present, ‘digital assets’ are not accepted as part of this law.”
According to the U.S. Securities and Exchange Commission, despite its decision to retreat from this topic, the agency will continue to examine cryptocurrency-related issues, which have played a significant role in both its enforcement actions and current legislative proposals.
Last month, this regulator acted contrary to expectations by reopening a previous proposal that redefined the term “exchange” and explicitly added “decentralized finance” (DeFi) to it.
This revision, which sparked strong criticism from the industry and two of the five SEC commissioners, is one of several recent policy moves that have complicated the status of cryptocurrencies under existing U.S. laws. The SEC also proposed another law in February that prohibits investment advisors from holding assets in cryptocurrency companies.
Despite ongoing discussions about digital assets being a staple of speeches by Gary Gensler, SEC Chairman, and other officials, the agency has chosen to continue its work without officially incorporating the term “digital assets” into its lexicon.
In this context, Ann Marie Kelly, a partner at Mercury Strategies and a former senior official at the SEC, stated: “The SEC is a regulatory body that requires transparency from its applicants, but by not defining digital assets, it continues to withhold regulatory clarity from them.”
She also suggested that the removal of this definition by the SEC might be because any formal recognition of the uniqueness of digital assets as a new product could weaken its legal stance that digital assets are, in some way, securities subject to the commission’s securities laws.
It is worth noting that Americans for Financial Reform (AFR), a consumer advocacy group that regularly criticizes the SEC’s cryptocurrency division, praised the SEC for removing the topic of digital assets from the proposed hedge fund law.
In a 2022 letter, AFR’s education fund wrote: “Although digital assets are often presented as an alternative to the traditional financial system, hedge funds, private companies, and banks are more involved in investing in and lending to these assets.”
On the other hand, the Securities Industry and Financial Markets Association (SIFMA) – an industry lobby group in the U.S. – complained about the SEC’s definition of digital assets and called for a more precise definition. According to this association, the category of non-security digital assets includes commodities, Bitcoin, and non-fungible tokens, but it is unclear whether the definition aims to encompass all digital assets versus all securities.
Gensler’s Testimony at the House of Representatives Hearing
Gary Gensler, Chairman of the U.S. Securities and Exchange Commission (SEC), testified before American policymakers on April 23 of this year regarding the regulatory crackdown on the cryptocurrency industry.
This was the first hearing before the House Financial Services Committee in nearly a year and a half. Videos of the session have been shared on social media, covering only some of the controversial points in Gensler’s testimony. Given the significance of this hearing, we have summarized the five-hour session and explained the key points and their impact on the cryptocurrency market.
Initial Statements at the Hearing and the Climate Disclosure Law
The hearing of Gensler before the House Financial Services Committee began with opening statements from senior politicians on the committee. The session opened with a fiery speech by Patrick McHenry, who emphasized that the committee is now under new management, i.e., the Republican Party, and that Gensler should not forget this. McHenry first criticized Gensler for requesting additional funding while the regulator was avoiding clarity on cryptocurrency regulations. He then highlighted that the SEC has been involved in 50 enforcement actions against the cryptocurrency industry and called for a halt to regulatory rule-making by fiat.
The second speaker was Maxine Waters, a Democrat, who criticized the Republican lawmakers present for targeting Gensler and the SEC for political reasons. Waters then praised Gensler for pursuing cryptocurrency market criminals. However, Waters spent most of her time insisting that the SEC’s proposed climate disclosure law was both legitimate and necessary.
Last year, the SEC unveiled this proposed law, which mandates that public companies and other entities disclose climate-related risks in their registration statements and periodic reports. According to the law, companies are required to disclose climate-related risks that have a significant impact on their business, performance, or financial condition, along with related financial metrics, in a note within their audited financial statements.
This disclosure can be seen as part of the Biden administration’s efforts to address the impact of global climate change and increase investment in environmental, social, and governance (ESG) funds. Given that the proposed law refers to climate-related financial disclosure frameworks and greenhouse gas protocols, there is no need to use a specific set of standards.
Reviewing Gensler’s testimony before the Senate Banking Committee last year reveals that these regulations have raised concerns among both Republican and Democratic factions in the U.S., as they could have practical effects on the bankruptcy of many small and medium-sized businesses.
Gensler’s Evasion of Direct Answers
The third representative to speak, Ann Wagner, began her remarks by accusing Gensler of not adhering to a directive given to the SEC by Congress. The Congressional mandate states that the SEC must protect investors to maintain orderly and efficient markets and facilitate capital formation. According to Wagner, Gensler’s actions have been completely contrary to this directive.
The representatives’ comments were in stark contrast to those of Brad Sherman, the fourth representative at the hearing. Sherman praised Gensler for his tough stance and what he described as a crackdown on the cryptocurrency market. Sherman, who believes cryptocurrencies are primarily used by criminals and North Korea, thanked Gensler for his stringent actions against cryptocurrency market participants and for implementing the SEC’s proposed climate disclosure law.
When it was Gensler’s turn to respond to these questions, he preferred to spend most of his time discussing the history of securities regulation in the U.S.
It is important to note that the SEC currently considers an asset to be a security if there is a recognizable third party that creates expected returns upon investment; for example, shares in a company are a good example of this definition. (Expected returns are the probability of earning a return multiplied by the profit.)
Gensler then claimed that artificial intelligence is currently the most important technology, not cryptocurrencies. He added that the cryptocurrency industry should comply with existing securities laws. It should be noted that current securities laws in the U.S. are about 100 years old and are not suitable for cryptocurrencies.
He also referred to the risks posed by climate change and the importance of cybersecurity, criticized stock buybacks, and insisted that the SEC makes markets efficient and fair. Gensler concluded by emphasizing that markets should serve investors, not the other way around.
Ethereum: A Security?
Following Gensler’s defenses, Patrick McHenry, who had started the hearing with serious criticisms, once again confronted Gensler. This part of the hearing received significant media attention, as McHenry posed the crucial question: “Is Ethereum a security or not?”
McHenry began by asking whether Ethereum (ETH) can be both a security and a commodity like oil simultaneously, to which Gensler responded negatively. He then directly asked the SEC Chairman whether Ethereum is a security or a commodity. Gensler responded by stating that he could not comment specifically on any digital asset.
Despite Patrick McHenry’s extended efforts to get an answer to this important question, Gensler did not provide a direct response. McHenry used this opportunity to highlight the regulatory uncertainty of the SEC, which he attributed to Gensler’s refusal to answer clearly.
In this debate, Gensler insisted that securities laws determine the status of Ethereum as an asset; however, McHenry disagreed, pointing out that Gensler had previously implied Ethereum was a security but was now avoiding providing a clear answer.
Meanwhile, Maxine Waters also entered the discussion and challenged Gensler with a question: “Can you explain the difference between a commodity and a security?”
Gensler began his response by referencing the Howey Test. The Howey Test is a legal test used in the U.S. to determine whether a transaction qualifies as an investment contract and thus, under federal laws, is considered a security.
He then pointed out two notable aspects. First, he stated that if a group of entrepreneurs is involved in advancing a project together, the asset is considered a security. Second, he mentioned that if an entity sends lawyers or lobbyists to discuss regulations with policymakers and legislators like the SEC, the asset should be considered a security.
The first point is significant because it confirms that if cryptocurrencies are deemed securities, Gensler does not care how many third parties are involved in increasing the expected returns.
The second point is also very important, as many cryptocurrency projects have lobbied, suggesting that all of them could be potential targets of the SEC.
Support for Stablecoins
The next representative, French Hill, asked whether Gary Gensler supports specific regulations for stablecoins (cryptocurrencies with a fixed value). Gensler responded affirmatively but clarified that this support applies only to stablecoins and not to other cryptocurrencies. He mentioned that some stablecoins are classified as securities and are under SEC oversight, noting that one of them had three billion dollars in Silicon Valley Bank.
If you have followed news about the stable value of the US dollar compared to USDC (a stablecoin backed by the US dollar), you will recognize that the company Circle, which issues the stablecoin Gensler referred to, is involved here.
Gensler also pointed out that USDC is considered a security. This statement is significant because Circle had previously argued that USDC should be regulated by the Federal Reserve, but the SEC Chairman disagrees with this view.
It is noted that any cryptocurrency labeled as a security by the SEC has generally faced issues. For example, Ripple (XRP), once labeled as a security, was immediately delisted from all major U.S. cryptocurrency exchanges, making it inaccessible to retail investors. Considering this, if Circle were to face a halt in issuing USDC, the potential damage could be substantial.
After some unrelated questions from Nadia Velázquez, Pete Sessions continued to attack Gensler, asking why he had stated at the beginning of the hearing that all the comments made were solely his own. Gensler responded that this is the standard practice of the SEC, a point that Sessions criticized, arguing that Gensler speaks on behalf of the Commission.
Anti-Crypto Figures Align with Gensler
Brad Sherman, a representative known for his opposition to cryptocurrencies, was the sixth person to ask questions during the session. Throughout his remarks, Sherman repeatedly expressed satisfaction with Gary Gensler’s performance. Essentially, the only representatives who showed approval of Gensler during the session were those known to be opponents of the cryptocurrency industry.
Sherman asked Gensler if he maintained his views that cryptocurrency exchanges do not comply with SEC regulations, receiving an affirmative response. Sherman then urged Gensler to take action against all these exchanges.
Following some more unrelated questions from Frank Lucas, who seemed to have a friendly relationship with Gensler, Stephen Lynch asked Gensler how many cases the SEC had won against cryptocurrency companies and projects. Gensler responded that the SEC has been very successful in this regard.
Lynch also inquired whether the rulings in these cases had provided sufficient clarity regarding the SEC’s arguments, to which Gensler affirmed. However, many in the cryptocurrency industry found Gensler’s response to be unreasonable and contradictory.
Ambiguity Surrounding the FTX Collapse and the Largest Financial Fraud in U.S. History
The next topic discussed during the hearing was the case of Sam Bankman-Fried. Andy Ogles revealed that the SEC possesses undisclosed documents related to the allegations against Bankman-Fried. He asked Gensler where these documents were, but Gensler claimed that the SEC was not authorized to release documents related to ongoing investigations.
Bill Posey began his questions by asking whether there had been any concerns before the collapse of FTX, to which Gensler essentially answered no. Gensler also responded to a question about when the SEC became aware of securities issues at FTX, stating December of the previous year. However, given that he had met with Sam Bankman-Fried several times before that, this date seems inaccurate, as FTX had collapsed about a month earlier.
The collapse of the Bahamas-based cryptocurrency exchange FTX began in November 2022. The failure of FTX, driven by a liquidity crisis, was exacerbated by its native token, FTT, which acted as a catalyst for its bankruptcy. Before the collapse, FTX was the third-largest cryptocurrency exchange by volume and had over a million users.
Sam Bankman-Fried, one of the founders and former CEO of FTX, played a significant role in the cryptocurrency industry. He is now reported to have committed one of the largest financial frauds in U.S. history. According to Forbes, Bankman-Fried’s net worth, which was once $26.5 billion, fell to about $16 billion and then nearly to zero within a week in November 2022. He was subsequently arrested in the Bahamas, where FTX was based, and extradited to the U.S. in December. He faces multiple fraud charges from the Southern District of New York’s Damian Williams, who described Bankman-Fried’s actions as one of the largest financial frauds in U.S. history. In addition to the federal indictment, Bankman-Fried is also facing charges from the Commodity Futures Trading Commission (CFTC) involving manipulation of the FTT token price and customer funds.
The next representative, Mike Lawler, asked Gensler whether the SEC was in any way responsible for the collapse of FTX. Gensler, as with most other questions, evaded this one as well, stating that the SEC would continue to pressure the cryptocurrency industry.
After another round of unrelated questions from Blaine Luetkemeyer, Jim Himes asked the SEC Chairman about public and private markets, expressing concern about the growth of private markets and the sidelining of retail investors. Gensler used his time to defend public markets.
Bill Huizenga also asked questions focused on the SEC’s climate disclosure regulations, questioning why the SEC only provides meaningless documents to the public when the House Financial Services Committee requests more information about this law. He claimed that the SEC does the same with FTX-related information. Unsurprisingly, Gensler also evaded questions on this topic.
Impact of Cryptocurrencies on Banks
Joyce Beatty, the thirteenth representative to ask questions, inquired about how climate disclosure regulations impact small and medium-sized businesses. Gensler responded that this regulation only applies to public companies.
One point he did not mention is that these companies are required to collect data from the businesses they work with. Joyce then allowed Gensler to speak about anything he wanted in the last 40 seconds of his time. This topic, however, was overlooked by most cryptocurrency media.
At this moment, Gensler shifted the topic and stated that all the banks that went bankrupt were involved with cryptocurrencies, and their collapse led to USDC losing its dollar peg. Some experts have interpreted Gensler’s statements as an indication that the SEC truly aims to crack down on stablecoins.
Sean Caston then asked Gensler if climate disclosure regulations pose a risk to public companies, to which Gensler evaded answering by stating that this is what investors want.
The next representative, Andy Barr, asked Gensler about the SEC’s cryptocurrency custody rule, which effectively prohibits banks from holding cryptocurrencies. Gensler responded that the Commission is proud of this rule and revealed that it was drafted with the help of four major accounting firms.
This is significant because all four major accounting firms are heavily involved in Environmental, Social, and Governance (ESG) standards. Therefore, the question arises whether the entire ESG community has turned against the cryptocurrency industry.
Environmental, Social, and Governance (ESG) is an approach to assessing how a company’s operations align with social goals beyond maximizing shareholder profits. Typically, ESG’s social goals include striving for certain environmental objectives, supporting social movements, and ensuring the company’s management aligns with diversity, equity, and inclusion goals.
Mike Seal then asked Gensler why he had not responded to his letter inquiring about the cryptocurrency custody rules for banks. Gensler merely said he had forgotten. Seal continued by asking why these custody rules are needed, receiving the response that banks holding cryptocurrencies pose a threat to financial stability.
Cryptocurrency Industry Embraces Communist Party
Next, Democratic Representative Bill Foster asked Gensler if the SEC could identify all individuals using cryptocurrencies. Gensler said this would be possible when cryptocurrency exchanges are under the SEC’s oversight.
Tom Emmer, the twentieth representative to ask questions, confronted Gensler with a long list of yes-or-no questions. This exchange summarizes that Emmer criticized Gensler and the SEC for the fear and panic following the collapse of FTX and for allegedly pushing the cryptocurrency industry into the embrace of the Communist Party of China. Gensler had no response to these attacks.
Josh Gottheimer, the twenty-first representative, expressed concerns about all the regulations proposed by the SEC and their potential impacts on the market. The only response Gensler gave was that he takes pride in the work the Commission has done and will continue meeting with investors like BlackRock and Co. about future regulations. Josh also argued that the Commission’s regulations, by putting pressure on the cryptocurrency industry, create more risks and do not protect investors.
He then asked Gensler if the SEC would start providing regulatory clarity to the cryptocurrency industry, and Gensler said that the Commission had already done so.
Exodus of Cryptocurrency Companies from the U.S.
The next representative, Barry Loudermilk, spent his entire time fiercely attacking Gary Gensler. One of the highlights of his remarks was that the regulations proposed by the SEC need Congressional approval and that the disclosures required by the Commission normally require a court order.
Gregory Meeks then brought up the important topic of cryptocurrency companies leaving the U.S. and asked why the SEC is forcing cryptocurrency companies to leave the country. Gensler responded that these companies would not need to leave if they adhered to SEC guidelines. However, the cryptocurrency regulations at the SEC are so vague that Coinbase is currently suing for more clarity.
After a few short questions from Alex Mooney, Richie Torres asked Gensler about FTX. Noting that FTX was based outside the U.S. due to poor cryptocurrency regulations by the SEC, Torres asked whether the SEC could target cryptocurrency companies that are based outside the country. Gensler responded that, while not easy, it is possible.
Speculation About Gensler’s Collusion with the Democratic Party
Warren Davidson, the twenty-sixth representative to ask questions, had his debate with Gensler widely circulated online. Davidson asked Gensler if he had coordinated with Elizabeth Warren or the Democratic Party before his testimony. Gensler evaded a direct answer and acknowledged that he has support from SEC staff. This implicit admission was viewed with great concern by experts.
Davidson further questioned how public and pension funds could invest in Coinbase shares when the SEC claims that the exchange violates securities laws. Gensler was unable to respond to this question either.
After a few unrelated questions from Sylvia Garcia, John Rose asked why Gensler’s testimony had been delayed for over a year without a clear response. Rose also inquired whether Gensler had seen any of the letters from the House Financial Services Committee requesting information. To the surprise of the representatives, Gensler responded, “Thank you for reminding me; I will review them later!”
Dan Mosier noted that Gensler previously managed Hillary Clinton’s 2016 presidential campaign finances and pointed out that his role involved financial support for attacks against Republican opponents.
He also argued that political bias from Gary Gensler persists, as the SEC has blocked or ignored requests and investigations from companies and Republican politicians. He accused him of lacking partisan neutrality as the Chairman of the U.S. Securities and Exchange Commission.
Gensler: Inexperienced in the Cryptocurrency Field
Continuing, after Wiley Nickel’s alarming announcement about a bipartisan bill to digitize all documents, Brian Steel revealed that Gensler had been problematic for using personal emails for work matters at the CFTC. Steel asked if Gensler still used personal emails at the SEC, to which Gensler specifically responded no.
Steel then asked Gensler if he or anyone else involved in regulating the cryptocurrency industry at the SEC had previously used or invested in cryptocurrencies. Gensler admitted that he had never used or invested in any cryptocurrency and had only taught a course on cryptocurrencies at MIT.
This response from Gensler was met with significant criticism, including questions about how someone with no tangible experience in the cryptocurrency industry could teach about blockchain at one of the top universities in the country.
Suspicions About the U.S. Dollar Losing Its Status as the Global Reserve Currency
William Timmons’s questions were similarly intriguing. He revealed that one of the regulations essentially legalizes institutional investors who are leading retail investors. He also disclosed that the Biden administration had hired a prominent economist who opposed the U.S. dollar’s status as the global reserve currency. Timmons asked Gensler if the SEC’s agenda was aimed at contributing to the removal of the dollar from its current position.
It seemed that Gensler fundamentally denied this issue and expressed support for the U.S. dollar as the reserve currency. However, Gensler’s weak response created the suspicion that his actions at the SEC might support William Timmons’s claim.
Al Green then used his time to discuss how the U.S. dollar is losing its status as the global reserve currency. He specifically mentioned that there is currently a battle for currency supremacy, and while the dollar may be the winner today, it might be the loser tomorrow.
Artificial Intelligence or Cryptocurrency Industry?
In the continuation of the hearing, Brittany Peterson asked Gary Gensler about artificial intelligence and what policymakers should consider when drafting AI regulations. Gensler’s only response was that the SEC is focused on the role of AI in investment and advisory.
Juan Vargas then asked Gensler to explain his views on artificial intelligence, given that he had initially stated that AI was more important than the cryptocurrency industry. Gensler responded that AI would be a revolutionary development, just as often claimed about the cryptocurrency industry.
Gensler also made a startling admission about artificial intelligence. He acknowledged that AI is currently used to analyze social media to assess how credible individuals are or, in other words, how much they can borrow.
Inconsistencies in Gensler’s Definition of Securities
Erin Houchin was the next to ask questions and inquired about Gensler’s inconsistencies regarding the definition of cryptocurrencies as securities. Gensler claimed that his statements were not inconsistent and argued that the perceived contradictions were due to inadequate media coverage.
The SEC chair then elaborated on his criteria for securities. He clarified that if a group of entrepreneurs or developers plays a central role in cryptocurrency projects, and if they manage websites, Twitter accounts, and blogs providing updates that promise expected profits, then the associated coin or token is a security and must be registered with the SEC.
In other words, according to the SEC, every digital currency except for Bitcoin (BTC) is considered a security. Some argue that even Bitcoin might meet Gensler’s criteria and could be considered a security. Nonetheless, representatives criticize that these criteria are still not clearly defined for stakeholders, and there are many inconsistencies in these definitions. The only response Gensler provided to these criticisms, which left representatives disappointed with a lack of clear and transparent stance, was that cryptocurrency companies must continue to adhere to these regulations as usual.
Conclusion of the Gensler Hearing
At the end of the hearing, the final politician to ask Gary Gensler questions was Byron Donalds. He inquired whether the SEC had the authority to request climate-related information from companies. Gensler responded by stating that the securities laws written in the 1930s grant the SEC this authority.
Byron Donalds, however, emphasized that the law was never written with that intention. He also reiterated that the SEC had not provided any regulatory clarity for the crypto industry, but Gensler only countered this assertion.
The next question from the representative was whether the SEC has the personnel to regulate the cryptocurrency industry. Gensler’s affirmative response indicated that the SEC would continue its crackdown on the cryptocurrency sector.
Impact of the Hearing on the Cryptocurrency Industry
We have summarized the key points from the hearing and testimony of Gary Gensler, Chairman of the SEC, before the House Financial Services Committee.
But what does this hearing mean for the cryptocurrency industry? Although watching the videos of this hearing and Gensler’s grilling by pro-crypto politicians might have been satisfying for industry participants, the reality is that Gensler and the SEC still intend to severely crack down on the cryptocurrency industry.
It seems that the cryptocurrency industry is on the brink of a crackdown involving a major exchange or a stablecoin issuer. Coinbase and Paxos both received Wells Notices over two months ago. This means that the SEC could strike against them at any time. However, what exactly will happen remains unpredictable.
Wells Notices are named after John A. Wells, who served as the chairman of the SEC Advisory Committee in 1972. These notices are issued by the SEC to warn a company. For example, the SEC is planning to take executive action against Coinbase for alleged securities law violations.
On the other hand, it is undeniable that legal actions against these large entities are likely to be very costly and lengthy, with no guarantee of victory for the SEC.
Recent rumors suggest that Gary Gensler may be set to replace Janet Yellen as Secretary of the Treasury. However, if he fails in his current battle with Congress and his cryptocurrency cases, his chances of retaining that position will also diminish. Meanwhile, Gensler’s political and regulatory allies cannot keep him in place due to his negligence toward the industry. He has managed to keep them satisfied by cracking down on some cryptocurrency projects and exchanges, except for the Ripple case. However, it is evident that these allies are becoming more impatient and have higher expectations of him. Ultimately, it seems that these politicians, mainly Democrats, are supported by large banks that do not accept competition from the cryptocurrency industry.
Similarly, most Republicans seem to be supported by fintech companies, including the cryptocurrency industry. Therefore, the hearing and testimony of Gensler can be seen not only as a battle between Democrats and Republicans but also as a struggle between traditional banking and modern fintech. Although this alignment is not that simple, there are also overlapping interests among these groups.
Furthermore, asset managers like BlackRock and large banks like Bank of America want to profit from cryptocurrencies like others. However, they also want to be part of the elite group aligned with Central Bank Digital Currency (CBDC) and Environmental, Social, and Governance (ESG) standards.
When you realize that both political parties are being courted by similar entities, understanding what is happening with cryptocurrency regulations becomes a bit easier. In summary, the real powers are trying to figure out how to make the impossible possible and how to control cryptocurrencies while maintaining CBDCs. If this analysis is correct, stablecoins are likely to be inconsistent with their vision, as they exclude commercial banks from the CBDC equation.
Stablecoins are also essential for the functioning of Decentralized Finance (DeFi), which removes other financial intermediaries from the equation. For this reason, we may have to wait until the dust from these legal battles in the United States settles to see regulations similar to those proposed in Hong Kong. These regulations would make investment and trading in cryptocurrencies completely legal, but only for the largest digital currencies. Everything else in this industry, including financial privacy, would be banned.
