The GOP-led House Financial Services Committee (HFSC) finally got its chance to question Gary Gensler, chairman of the Securities and Exchange Commission (SEC). Unfortunately, what should have been a golden opportunity to gain some much-needed clarity on the future of crypto regulation turned into something of a confusing mess.
The Republican members of the committee had sent an open letter to Gensler shortly before the hearing began, laying out some of the complaints they’d use the hearing to reiterate. These included:
- The fact that the regulatory framework for cryptocurrency participants is “neither compatible with the underlying technology nor applicable.”
- That there is no “path that allows digital asset trading platforms to register.”
- National securities exchanges “can only list securities that have been offered in compliance with the securities law” which “makes the current NSE framework ill-suited for digital asset trading platforms.”
However, this was as organized as they got. As is often the way with Congressional hearings, individual representatives shuffled in shortly before their time to ask their questions and shuffled out shortly after their questions were concluded, as though nothing else important was happening in the room.
This approach meant that many questions were asked repeatedly.
Some members also seemed confused about the nature of blockchain technology. For example, Representative Loudermilk from Georgia used his time to critique the SEC’s proposal for a central audit trail. He attempted to contrast it with the decentralized nature of blockchains, suggesting that centralizing the transaction information was clearly inferior.
Loudermilk apparently fails to understand the default public nature of all transactions on the largest blockchains.
Representative Davidson from Ohio then used the opportunity to reiterate his intention to introduce a bill that would fundamentally restructure the SEC. Unfortunately, Davidson has so far failed to provide a draft of the bill or adequate information for it to be assessed.
Predictably, the GOP and Dems can’t agree
The hearing also laid bare the opposing views that Republicans and Democrats hold on a number of issues.
For example, Republicans repeatedly cited how the SEC has a three-part mission:
- Protect investors
- Maintain fair, orderly, and efficient markets
- Facilitate capital formation
Fundamentally there is a disconnect between the two parties on what that third part of the mission should look like. The Republican members repeatedly stated that regulations are harmful to that process, along with rules and environmental disclosure.
On the other hand, Gensler and the Democrats believe that it’s important for the capital market to be regulated if it is to continue to be the venue of choice for capital formation.
Many Republican representatives (when they’re not worried about the number of rules or the regulatory morass that has slowed their donors) are also deeply concerned that the SEC’s new rules requiring certain public companies to estimate their greenhouse gas emissions are going to fundamentally destroy our economy. West Virginian Representative Mooney worried that if coal companies had to disclose how much they contributed to greenhouse gas emissions, then no one would want to invest in them.
Many of the Republican representatives were truly terrified of the effects of requiring public companies to make this type of disclosure, with some even suggesting the SEC was exceeding their statutory authority.
One of the more serious issues that Gensler was pressed on was SEC Staff Accounting Bulletin 121 which dictates that companies that custody cryptocurrencies need to hold them on a balance sheet. The representatives were mostly worried about the effect this would have on banks, which generally don’t have custodied assets on their balance sheets. This is also an issue that has been raised by the American Bankers Association.
Complicating this is the fact that banking regulators have communicated their expectation that any banks holding crypto assets be very aware of the risks.
Is ether a security? Gensler didn’t say
Despite multiple members trying to get Gensler to give his opinion on whether or not ether was a security, he refused to say. However, he did suggest, rather confusingly, a number of things that might make something a security. These included a website, a Twitter account, and a group of entrepreneurs.
He also repeatedly suggested that he thinks the impact of artificial intelligence (AI) is going to be much larger than crypto — though also seems to think that robo-advisors are AI. He also took the opportunity to state that he has “never seen a field that’s so non-compliant with laws” and suggested that crypto firms will have “no choice” but to comply.
Though as Matt Levine has noted, there still seems to be a gap between what the SEC claims to believe and what it’s been willing to enforce.
All in all, the hearing came across as a massive missed opportunity, with large parts of it unfocused and rarely addressing anything that would lead to a meaningful shift in the regulatory framework.