by Dr. Chris Kacher
Today's selloff in crypto which affects Bitcoin and Ethereum related instruments that trade on the US exchanges was not due to SEC Chairman Gary Gensler's testimony but rather to longs being liquidated as well as a hot inflation reading in the UK. Nevertheless, Gensler's position could create temporary setbacks if onerous regulations come to pass. Gensler has reiterated his stance that many crypto companies and projects are violating regulatory rules and need to comply. This position has been repeated by Gensler and his team in various interviews, speeches, and materials on the SEC website.
While some Republicans on the Committee took issue with this position, the most contentious moment of the hearing was when Representative Patrick McHenry repeatedly asked Gensler whether Ethereum, the second largest digital asset, was a security or a commodity. Gensler refused to give a direct answer, which frustrated many in the industry who are looking for clarity on the matter. He said, “it depends on the facts and the law” and “Mr. Chair, you would not want me to prejudge" even though in February he said that all tokens except Bitcoin are securities. Despite this, Gensler has said the cryptospace has all the clarity it needs to comply. Contradict much?
Representative Bryan Steil also questioned Gensler on whether he has ever owned any bitcoin or cryptocurrencies, including during his time teaching crypto courses at MIT. Gensler said no, highlighting the challenge of regulating innovation without firsthand experience.
Another explosive moment came when Representative Tom Emmer pressed Gensler on China’s plans to open their banking apparatus to US-based crypto firms. This exchange highlights the fact that bitcoin and cryptocurrencies will continue to thrive globally, regardless of US securities law. The US will be left behind if regulations are too heavy-handed. Already, Coinbase is thinking of relocating to a different country with more favorable regulations. Both Bittrex and Coinbase have been served Wells notices which typically comes before the SEC takes enforcement action for possible violations of securities laws.
Representative Warren Davidson revealed that he is putting forward legislation to remove the Chairman of the SEC and restructure the entire organization. “Chairman Gensler, your record of failures to protect investors and abuses of power make it clear that we need to restructure the SEC," Davidson said. While it remains to be seen whether this legislation will gain support, the current structure, along with Gensler’s body of work, has created controversy and calls for change. After today, Gensler needs a Get Wells Soon notice.
Overall, Gensler and the SEC have the power to create enforcement actions and impose their view of the world on the market, regardless of the opinions of millions of people in the crypto market. While there are calls for “clarity” on regulatory rules, it’s important to remember that clarity simply means knowing the rules, not necessarily getting the rules that you want. It will take much work on the part of those in crypto to continue to educate and influence the lawmakers so reasonable regulations come to pass.
That said, Operation Chokepoint or equivalent is in progress which could cripple various aspects of crypto such a DeFi. Last year, the US tried to 11th hour in a number of onerous anti-crypto laws. The crypto community rose up to prevent this from happened so bought some time. Since then, they have tried to educate the lawmakers but it seems the US has an agenda to deal with crypto head on, to quash much of it.
FedNow which starts July 1 is a potential precursor to a US CBDC. With the US CBDC, transactions using all other stablecoins from USDT to USDC to BUSD could be made illegal. Maximums will likely be put in place for cross border transfer using CBDCs. It seems governments will not want anyone to transfer any amount cross border using USDT or USDC.Governments will stop at nothing to prevent their control from being taken away from their respective fiat currency. Capital controls have been standard throughout history. During WW II most all countries had such controls. In 1933 , FDR made it illegal to hold gold. Some think the same could happen with Bitcoin and other cryptos.
But since much of crypto via Web3 is becoming more and more decentralized, crypto will just move to a friendlier jurisdiction, much as it did after Russia and China banned various aspects of crypto.