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Gary Gensler’s ambition to regulate the “Wild West” of cryptocurrencies is on a collision course with something he can’t regulate: more than seven decades of case law.
That was the consensus among securities lawyers with whom I spoke following Gensler’s pronouncement last week that high on his ambitious agenda as chair of the Securities and Exchange Commission is to make the booming cryptocurrency market safe for even your grandmother.
Of course, we all want to make the world a better place, and with something as new as crypto, there has to be a lot of funny stuff going on. However, even the most well-intended utopian goals of the left, whether it’s our beleaguered Gov. Cuomo imposing strict COVID lockdowns on religious activities, or Gensler’s idealized version of capitalism, always answer to a higher authority.
In Cuomo’s case, he butted up against the US Constitution, which remained sacrosanct during a pandemic as the Supreme Court ruled. For Genlser, it’s decades of securities law, including the landmark Securities Act of 1933 that prescribes what he can or cannot do as SEC chair.
The upshot, according to experts, is that a sweeping crackdown on all things crypto is something he really can’t do.
You would think Gensler would know this upfront. President Biden plucked him out of the highest echelons of academia, MIT no less, where he lectured on financial issues including the nascent and burgeoning market for digital coins that could become an alternative to the US banking system.
Gensler was a longtime Wall Street executive and partner at Goldman Sachs, and worked in government including as the chair of the Commodity Futures Trading Commission (CFTC). In other words, Gensler has real-world knowledge of the markets.
He’s also not a lawyer. And while it has become fashionable to denigrate lawyers, Gensler holds a job that demands knowledge of court precedent and law to prevent unfair prosecutions and wild goose chases.
Even worse, Gensler is also blinded by a deeply progressive ideology that seeks to control every inch of business, which he perceives as evil and unsafe territory for the average investor.
How much evil is in the $2 trillion crypto market is a matter of debate. Its proponents will tell you the real evil resides in the unholy alliance between the banking system and the Federal Reserve, which uses Wall Street to create money out of thin air, thus debasing our currency.
Cryptocurrencies are a way to preserve value by allowing people to transact business seamlessly through a “blockchain” network that circumvents the fraud, abuse and costly middlemen of the traditional banking system.
Who gets to regulate what goes on inside the blockchain and the broader crypto world is still a matter of debate, securities lawyers tell me. Certainly, the CFTC has some say because cryptos are more closely aligned with commodities than they are with, say, stocks or bonds. Maybe the Treasury Department, since the blockchain is an alternative to the banking system and cryptos compete with dollar-based transactions.
But securities lawyers told me that the uber-regulator for crypto certainly isn’t the SEC, which can only regulate so-called securities — a stock or a bond or some type of financial instrument that resembles either.
It doesn’t matter that cryptos can be traded like a stock. Baseball cards can be traded like a stock. Stocks and bonds represent an underlying investment i.e., a company’s profits or losses. In most cases, cryptos, like baseball cards, don’t, which is why you never see the SEC bringing cases when kids (or anyone else) rip people off when they trade them.
I placed a call to Gensler’s people to help me better understand how he plans to broadly crack down on something so new and, at least according to the experts, something that appears largely outside his jurisdiction. As this column goes to press, he still has not responded.
So I asked a top securities lawyer, who spoke to me on background — presumably because he still hopes to talk Gensler out of a wild goose chase.
His response: “He will try and bring a lot of cases but he has limited authority.”
As SEC chair, can’t Gensler just deem digital currencies a security, and let the games begin? The SEC under Jay Clayton did just that when it brought a case against a company called Ripple Labs for issuing digital currency that the commission claimed were unregistered securities.
“No,” the securities lawyer said. “There are 75 years of case law to prevent that.”
Good point. The Ripple case is hardly a slam-dunk, with the courts still weighing whether the SEC overstepped its jurisdiction in filing the lawsuit in an area of commerce possibly better regulated by Gensler’s old shop, the CFTC.
Smart and sleazy financial types have and will cobble together fraudulent crypto derivatives to create an investment product that could fall within the SEC’s purview, so I’m sure Gensler will find some way to bring cases.
Nevertheless, his big, broad crackdown on the Wild West of crypto trading will probably have to wait for an act of Congress to give him powers that exceed current law, which he said he is seeking as well.
Nothing like putting the cart before the horse.
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