Gary Gensler Testifies Before The House Financial Services Committee

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To investors,

SEC Chairman Gary Gensler testified in front of the House Financial Services Committee for four hours yesterday. His message was consistent — many crypto companies and projects are violating regulatory rules and need to come into compliance.

This is a position that Gensler and his team at the SEC has continued to repeat in various interviews, speeches, and materials on their website. Many of the Republicans on the Committee took issue with this position. To say the questions and testimony got heated at moments would be an understatement.

For example, Representative Patrick McHenry persistently asked Gary Gensler to explain whether Ethereum, the second largest digital asset, was a security or a commodity. Gensler would not directly answer. This could be because Gensler does not know how to categorize it, does not want to categorize it, or believes it is valuable to refrain from answering.

Either way, the fact that the Chairman of the SEC did not answer with “yes” or “no” highlights the frustration that many people in the industry have. The actual answer is almost less important than an agreement from regulators on a single answer. If the conclusion is “yes, Ethereum is a security,” then market participants understand how to proceed. If the conclusion is “no, Ethereum is not a security,” then market participants understand how to proceed. But the lack of clarity is tough for everyone.

Another interesting moment is when Rep Bryan Steil asked Gensler whether he owned any bitcoin or cryptocurrencies. Gensler said “no.” Steil went a step further and asked Gensler whether he has ever owned digital assets, including during the time he was teaching crypto courses at MIT. Gensler said no to this as well.

This answer highlights the challenge of regulating innovation. It is hard to understand something without using it. The idea that we have regulators who are actively making rules for something that they have never used seems confusing. Additionally, to have professors at universities teaching courses about technologies they have never used highlights the absurdity of academia.

One of the most explosive parts of the testimony was when Rep Tom Emmer pressed Gensler on the fact that China’s CCP is planning to open their banking apparatus to US-based crypto firms in an effort to capitalize on our country’s hostile posture towards the industry. Gensler continued to stick to his talking points that various crypto companies are operating outside the rules and should come into compliance.

Regardless of whether you agree with Gensler or not, this exchange highlights the fact that bitcoin and cryptocurrencies are going to thrive globally with no regard for US securities law. The United States has a choice to make — do we want this innovation to happen in the US or elsewhere? The rules we create and apply to the industry will determine that answer.

Lastly, Rep Warren Davidson revealed that he is putting forward legislation to remove the Chairman of the SEC and restructure the entire organization. The new structure would create the role of Executive Director who reported directly to the board. Davidson’s argument is that the current structure, along with Gensler’s body of work, has created more harm than good.

It remains to be seen whether there will be support for Davidson’s proposed legislation. A complete restructuring of an integral organization like the SEC would be difficult and controversial. But there have been much bigger, more complex things that have occurred so never say never.

I want to leave you with one more thought this morning — SEC Chairman Gary Gensler was grilled for four hours yesterday. Most of the viral video clips and various media coverage was focused on the questions coming from our public officials, rather than on specific answers from Gensler. In some way, that is a win for Gensler and the SEC. They didn’t necessarily make any mistakes during the testimony.

Gensler stuck to his view that the existing securities law covers these new technologies. He believes majority of the crypto companies and projects are violating regulations and they need to come into compliance. There are millions of people who disagree with him, but ultimately it may not matter — Gary Gensler and the SEC are the ruling body. They have the ability to create enforcement actions and impose their view of the world on the market.

Many people throughout the crypto market continue to call for “clarity.” I am quick to remind them that clarity simply means you will know what the rules are, but it does not mean you will get the rules that you want. That is an important distinction.

Hope everyone has a great day. I’ll talk to you tomorrow.

-Pomp

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