Title: What Has Cryptocurrency Expert Gensler Done Since Taking Office as Chairman of the U.S. SEC?

Author: Chenglin Pua

2021 was the year when cryptocurrency broke into the mainstream. Many cryptocurrencies continued to surge in 2021, and the new SEC chairman appointed in April this year has made the industry excited, believing that the new chairman will introduce cryptocurrency-friendly policies.

The Bitcoin futures ETF launched on October 19 may also be related to the support of this new SEC chairman. But is that really the case?

Gary Gensler, born on October 18, 1957, is a U.S. government official and former investment banker who has served as the chairman of the U.S. Securities and Exchange Commission (SEC) since April this year.

Unlike previous SEC chairmen, Gary is a professor who studies blockchain and cryptocurrency and has a deep understanding of finance and blockchain technology.

Introduction to Gensler

Gensler has an impressive resume. In 1979, Gensler joined Goldman Sachs, becoming one of the youngest partners in the company at the age of 30. In the 1980s, he served as a top mergers and acquisitions banker, advising media companies on behalf of Goldman Sachs. He then moved to Tokyo, entering the trading and finance sector, where he oversaw the company's fixed income and currency trading. During his time at Goldman Sachs, the team led by Gensler provided advice for the most lucrative television deal in history for the National Football League (NFL), securing a $3.6 billion television sports broadcasting rights deal.

After leaving Goldman Sachs 18 years later, he was nominated by President Bill Clinton and confirmed by the U.S. Senate as the Assistant Secretary of the Treasury. From 2009 to 2014, Gensler served as the 11th chairman of the Commodity Futures Trading Commission (CFTC) under President Barack Obama. Gensler also served as the chief financial officer for Hillary Clinton's 2016 presidential campaign. He is a professor of global economics and management practice at the MIT Sloan School of Management and a senior advisor for the cryptocurrency program at the MIT Media Lab. He focuses on the intersection of finance and technology, conducting research and teaching on blockchain technology, cryptocurrencies, fintech, and public policy.

In 2021, President Joe Biden nominated Gensler to be the 33rd chairman of the SEC. On April 19, 2021, the U.S. confirmed Gensler's term for five years, until 2026. In June 2021, he succeeded SEC acting chair Allison Lee, becoming the new SEC chairman.

Gensler's Past Views on Cryptocurrency

Gensler serves as a professor at MIT's business school and as a senior advisor for the MIT Media Lab's cryptocurrency project. One of the courses he taught at MIT's business school was on blockchain and money, focusing on the development of Bitcoin and the impact of blockchain on the financial industry.

In April 2018, at a forum hosted by MIT Technology Review, Gensler stated that blockchain technology is beneficial for the entire financial industry; however, the cryptocurrencies, exchanges, and initial coin offerings (ICOs) based on this technology are still unregulated, lacking existing laws and regulations to oversee the industry.

At that time, Gensler believed that purchasing tokens is an investment behavior; in other words, the tokens sold in ICOs are essentially similar to stocks, so they must comply with the Securities Act and register with the SEC, being obligated to regularly provide financial information to regulators. Gensler primarily used Ethereum and Ripple as examples, emphasizing that these tokens are more similar in nature to traditional securities.

At a blockchain business summit held in 2018, Gary Gensler expressed that blockchain technology has the real potential to change the financial world; although many technological and business challenges remain to be overcome, this innovation can reduce costs and risks in the financial system. He is an optimist about blockchain and hopes to see this technology succeed.

At that time, ICOs were rampant globally, and Gary Gensler believed that although ICOs lack the traditional characteristics of stocks or bonds, investors clearly hope to achieve potential appreciation through the efforts of promoters and development teams. These are all long-standing standards defined by U.S. securities law.

At the 2018 CHAINSIGHTS Global Summit held in New York, Gary Gensler shared his unique insights on blockchain and the cryptocurrency industry. He believed that the cryptocurrency market is large and highly volatile, and that Bitcoin, Ethereum, and Ripple are essentially securities. Furthermore, the development of cryptocurrencies needs to clarify two issues: first, the real risks in the cryptocurrency field; second, the protection of public investors' rights.

Gary Gensler also suggested that ICOs and other tokens must comply with securities, commodities, and derivatives laws. In the face of new technologies like blockchain, market participants, investors, entrepreneurs, technology developers, regulators, and political leaders should all play a role in effective regulation.

Gary Gensler also expressed his views on cryptocurrency exchanges. He stated that exchanges have millions of customers globally, and like traditional securities and derivatives exchanges, crypto exchanges provide trading matching services and orders to customers, as well as a wide range of market-making, consulting, and custody services. However, cryptocurrency exchanges have some significant differences from traditional exchanges. Crypto exchanges provide direct access to customers rather than access through intermediaries.

As a result, customers' crypto funds are held by the exchanges, typically stored in digital wallets rather than in banks or brokerage firms. This means that as long as regulation is inadequate, cryptocurrency exchanges can easily "run away," absconding with funds and causing losses for investors.

In December 2019, Gary Gensler published an article on the blockchain media site Coindesk titled "Even if a Thousand Projects Don't Make It, Blockchain Is Still a Change Catalyst." The article took an objective stance on cryptocurrencies but also pointed out the disconnection between the current state of the crypto financial market and regulation. For example, many exchanges have begun providing trading services to retail investors without full compliance, and illegal activities such as fraud and market manipulation continue to emerge. Based on his previous articles and ideas, it is clear that his appointment as SEC chairman will undoubtedly promote regulation in the U.S. crypto market.

Articles Written by Gary Gensler

Source: Coindesk

Notably, in this article, Gensler emphasized that Libra (now renamed Diem) is likely to be classified as a security and thus subject to the same regulations as other investment products. Facebook's attempt to launch its own token will inevitably face strict regulation and some level of scrutiny from the SEC.

Regarding taxation, Gensler specifically highlighted that the privacy and anonymity of crypto assets pose significant challenges for regulators in checking tax evasion. Last year, the IRS announced that taxpayers need to report crypto assets, including Bitcoin, for tax purposes.

Although Gensler is relatively rigorous in the formulation of cryptocurrency laws, he generally maintains a supportive attitude.

In a U.S. Congressional hearing in July 2018, a congressman claimed that cryptocurrency projects are Ponzi schemes with no value. Gensler countered that gold also has no intrinsic value; its value is assigned by people. He also suggested that cryptocurrencies could be viewed as digital rare metals with certain value.

Public Perception at the Time

After Gary Gensler was elected SEC chairman, Ripple's CEO Brad Garlinghouse tweeted: "Congratulations Gary Gensler! We are ready to work more closely with the SEC leadership and the Biden administration to pave the way for blockchain and crypto technology innovation in the U.S."

Brad Garlinghouse congratulating Gary Gensler on his election as SEC chairman on Twitter

However, in December 2020, the SEC had already initiated a lawsuit against Ripple. The SEC claims that Ripple (the token issued by the company) is an unregistered security that has been illegally sold in the U.S. since 2013. Therefore, it sued Ripple and its CEO Brad Garlinghouse and co-founder Chris Larsen.

Cao Yin, managing director of the Digital Renaissance Foundation, told Chain News: The main reason the U.S. government appointed Gary is that he was previously the chairman of the CFTC and has extensive experience in the financial derivatives market, making him suitable for some of the current regulatory requirements of the SEC. Therefore, this appointment does not indicate a significant change in the U.S. government's regulatory attitude toward the cryptocurrency industry.

Gary Gensler took office during a period of soaring Bitcoin prices, and many people turned their attention to Bitcoin or other cryptocurrencies. As Bitcoin gains increasing popularity in the U.S. market, products such as Bitcoin futures, Bitcoin options, and Grayscale Trust have already begun trading in the U.S. securities market. Additionally, U.S. retail investors have been purchasing Bitcoin directly through exchanges like Coinbase and Kraken or via Square and PayPal.

Exchanges Registering and Complying with Regulations and Laws

In September 2021, the SEC warned Coinbase not to launch lending products, or it would face a lawsuit from the SEC. These products allow customers to deposit their cryptocurrencies into lending products and earn interest. Coinbase announced on September 8 that it would delay the launch of the lending product. The SEC believes such products should comply with existing securities laws, even though they are becoming increasingly common worldwide.

The SEC has also initiated an investigation into Circle (an international blockchain payment technology company). In August 2021, Circle reported that it was under investigation by the SEC. On October 4, Circle mentioned in its S-4 filing to the government that it had received a subpoena from the SEC, requesting "documents and information regarding certain assets, customer plans, and transactions." Circle emphasized that they are "fully cooperating" with the SEC's investigation. The documents did not specify the scale and details of the investigation.

In June, Circle announced the launch of Circle Yield, a service that allows businesses to earn interest by collateralizing cryptocurrencies. Circle had officially announced its "reverse merger" plan in July this year, aiming to go public in the U.S. stock market through a merger with a SPAC company, with a valuation of up to $4.5 billion.

On September 22, Gensler, in an interview, called for cryptocurrency exchanges to register with the SEC and warned that if they do not do so, they will face enforcement actions from the SEC. He pointed out that the SEC will continue to file enforcement cases against cryptocurrency exchanges that refuse to register with regulators, expressing concern that a lack of oversight will ultimately harm U.S. investors' interests.

Concerns About Stablecoins

The SEC has also targeted stablecoin issuers for regulation. In September 2021, Gensler stated that he would regulate stablecoin issuers and decentralized exchanges. He also pointed out that stablecoins could pose financial stability issues, making them a priority for the SEC. Gensler stated that stablecoins pegged to the dollar are like chips in a casino, and without stronger and more effective regulation, investors will be harmed.

Stablecoins are cryptocurrencies, but their prices are pegged to the dollar, with 1 USDC/USDT equaling 1 dollar. Issuing institutions like Tether claim that every USDT issued is backed by a corresponding dollar; for instance, if they issue 6 billion USDT, they should have 6 billion dollars in reserve. However, this is not the case in reality.

According to documents released by Tether in July 2021, it shows that only a small portion is actually backed by cash. The rest is used to purchase bonds or cryptocurrencies, etc. The specific asset composition is shown in the image below.

Tether's asset composition, source: Tether "INDEPENDENT ACCOUNTANT'S REPORT"

Recently, the Evergrande debt crisis has raised concerns that Tether may hold Evergrande's bonds. In August 2021, USDC issuer Circle announced it would no longer hold commercial paper or bonds as reserve assets; starting in September, all USDC reserve assets would consist solely of cash and short-term U.S. Treasury bonds.

As the market value of stablecoins continues to rise, many expect the U.S. government to require stablecoin issuers to accept strict regulatory systems on par with U.S. banks, including requiring stablecoin issuers to formally register as banks.

Rising market value of stablecoins, source: Coingecko

Regulation of DeFi

The SEC has also turned its regulatory focus to DeFi. On September 3, the SEC officially investigated Uniswap Labs (the development team behind the leading DeFi project Uniswap). SEC enforcement officials are gathering information to study how users interact with the platform and how Uniswap markets itself. Gensler has stated that comprehensive regulation of DeFi is necessary.

On September 20, a cryptocurrency industry summit called "Mainnet 2021" was held in New York, hosted by the cryptocurrency research organization Messari. Speakers at the summit received subpoenas from the SEC. Founders of various DeFi and stablecoin projects received subpoenas from the SEC. This incident angered Messari founder Ryan Selkis, who complained on Twitter: "SEC Chairman Gensler is smart. He really understands cryptocurrency, and he wants to destroy it."

Regulating Cryptocurrency but Not Banning It

Despite implementing multiple regulatory measures in the cryptocurrency field, Gensler stated that the U.S. will not impose a blanket ban on cryptocurrencies. He pointed out that the U.S. government's focus is to ensure that the cryptocurrency industry complies with investor and consumer protection rules, anti-money laundering laws, and tax laws. This may be good news for the cryptocurrency field, as the U.S. will not eliminate the existence of cryptocurrencies, but cryptocurrencies need to comply with local financial regulations.

At the end of September, Gensler reiterated his support for futures-based Bitcoin ETFs, which would invest in futures contracts rather than the cryptocurrencies themselves. Federal Reserve Chairman Jerome Powell also agreed with Gensler's viewpoint.

Gensler's support for Bitcoin futures ETFs has also propelled the launch of the first Bitcoin futures ETF in the U.S. The ProShares Bitcoin Strategy ETF (ticker: BITO) was launched on October 19, 2021. The ETF closed up nearly 5% on its first day to $41.94. According to Elisabeth Kashner, head of ETF research at FactSet, its trading volume on the first day was approximately $981 million, making it the second most actively traded ETF debut in history.

Dissenting Voices

The SEC's attempts to regulate the cryptocurrency industry have also sparked opposition. A senior Republican in the U.S. criticized Gary Gensler's attempts to regulate cryptocurrency as overreach. Meanwhile, more defenders of cryptocurrency have intensified their opposition to several regulatory proposals from the SEC.

Tom Emmer, co-chair of a group of legislators interested in blockchain, stated, he believes Gary Gensler's attempt to expand the SEC's role in regulating cryptocurrency is overreach. Emmer told the Financial Times, "All regulatory agencies want more jurisdiction, and I can't blame them for that. But I think Gary Gensler's vision should be broader. Frankly, because of this, he has negatively impacted the opportunities that retail investors, entrepreneurs, and innovators could provide, and it could have a huge negative impact."

Hester Peirce, one of the two Republican members of the SEC, also expressed concern. Earlier this year, she told the Financial Times that she worries the new regulatory measures pushed by SEC Chairman Gary Gensler could hinder innovation.

The impending regulations have also forced many cryptocurrency asset companies to establish a series of new lobbying organizations to advocate for their positions on Capitol Hill. However, they express differing views. Perianne Boring, president of one lobbying organization, the Digital Chamber of Commerce, stated: "As the industry evolves and business models become more complex, the industry must engage more with lawmakers."