The SEC’s irrational fear of Bitcoin

The SEC’s irrational fear of Bitcoin

“The Commission has no basis for the position that investing in the derivatives market for an asset is acceptable for investors while investing in the asset itself is not.” This statement to the Securities and Exchange Commission (SEC) by lawyers representing Grayscale Investments should be manifest. Grayscale seeks approval for a Bitcoin Exchange Traded Product (ETP) that reconciles to Bitcoin’s global price.  Thus far, the Commission has only approved Bitcoin ETP futures (derivatives) not those tied to the “spot” (asset) market.

The Commission distinguishes Bitcoin from other assets because it is globally traded and outside a federal regulatory framework. Its irrational fear of the global Bitcoin marketplaces puts applicants in an impossible position where denial of spot ETPs is preordained.

SEC arguments against a BTC ETP don’t work

The Commission avers spot ETP applicants have failed the anti-fraud and market manipulation provisions of Section 6(b)(5) of the Exchange Act. It sets out two ways they could theoretically meet this burden: (1) entering into “a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets” or (2) “establish[ing] that the underlying market inherently possesses a unique resistance to manipulation beyond the protections that are utilized by traditional commodity or securities markets,” although “[s]uch resistance . . . must be novel and beyond those protections that exist in traditional commodity markets or equity markets[.]”

As Grayscale argues, after four years and multiple denials the Commission still not established metrics for markets of “significant size” or what “novel” investors protections would pass muster.  

Applicants have tried various approaches. For market size, they have suggested tying prices to the Chicago Mercantile Exchange (CME) market where futures ETPs trade to no avail.

SEC BTC ETP standards are impossible

For the “novel” and “beyond traditional markets” standard applicants have proposed various solutions, all lacking sufficient “novelty”:  

[Exchanges have argued] among other things that index pricing would be based on the CME’s manipulation-resistant CF Bitcoin Reference Rate, that “the geographically diverse and continuous nature of bitcoin trading render it difficult and prohibitively costly to manipulate the price of bitcoin,” and that “[f]ragmentation across bitcoin platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform” make it especially resistant to manipulation. But the Commission has found in every instance that the justifications are insufficient to satisfy Section (6)(b)(5): the Commission’s “unique,” “inherent” and “novel” protections standard evidently cannot be satisfied.

Commissioner Hester Peirce is a lonely dissenting voice

SEC Commissioner Hester Pierce in a now-famous dissent from the 2018 Winklevoss Bitcoin Trust on Bats BZX Exchange, Inc. (“BZX”) spot ETP denial argued the Commission’s focus on the global Bitcoin market misread its mandate.  

The Commission erroneously reads the requirements of Section 6(b)(5). The disapproval order focuses on the characteristics of the spot market for bitcoin, rather than on the ability of BZX—pursuant to its own rules—to surveil trading of and to deter manipulation in the ETP shares listed and traded on BZX. . . . Section 6(b)(5), however, instructs the Commission to determine whether “[t]he rules of the exchange” are, among other things, “designed to prevent fraudulent and manipulative acts and practices [and] to promote just and equitable principles of trade,” and “are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers.” It says nothing about looking at underlying markets, as the Commission often has done in its orders.

The SEC showed its cards in that denial by complaining “a substantial majority of Bitcoin trading occurs outside the United States, and even within the United States, there is no comprehensive federal oversight of Bitcoin spot markets.”

Bitcoin’s global reach and non-security status prevents the kind of draconian federal oversight the Commission insists on as a matter of course. Game over.

BTC ETP denials have several negative externalities

The SEC’s de facto position has several negative effects for investors and the agency itself.

  • It’s discriminatory: Grayscale claims blanket denials of spot ETPs combined with acceptance of futures ETPs lack legal basis and expose the Commission to challenges under the Administrative Procedures Act.
  • It embroils the Commission in merit review: As Grayscale asserts, “The Exchange Act does not authorize the Commission to regulate the suitability of an asset class, such as Bitcoin, or particular securities, such as BTC shares, relative to competing assets and securities.”
  •  It suppresses institutional participation: Commissioner Peirce: Spot ETP denials “discourage new institutional participants from entering this market” and delays market maturation because “potential institutional investors may reasonably conclude that the Commission will continue to repress market forces for the foreseeable future.”
  • It denies Bitcoin exposure less tech savvy investors: Some people do not not have the time, desire, wherewithal, or risk tolerance to purchase Bitcoin from an online exchange.
  • It denies investor choice: Commissioner Peirce: Commission denials, “preclude investors from accessing Bitcoin through an exchange-listed avenue that offers predictability, transparency, and ease of entry and exit.” The futures market provides a less attractive product as CoinDesk’s Michal Casey explains, “On an annualized basis, if investors held shares in a Bitcoin futures fund that had rolled over every month for the past year, they’d have ended up with a cumulative cost of 28% relative to the spot market.”

So long as the SEC views the nearly 13-year-old Bitcoin with undue suspicion it will likely keep denying spot ETP applications.

By Jossey PLLC

A version of this post first appeared on the blog of the Competitive Enterprise Institute on December 17, 2021, https://cei.org/blog/the-secs-irrational-fear-of-bitcoin/

Web 3.0 requires new regulatory thinking

“A digital economy is not simply an industrial economy on the internet.” The Blockchain Innovation Hub at the Royal Melbourne Institute of Technology in Australia recognizes a truth governments worldwide have not. Web 3.0, the approaching next internet phase with unprecedented methods of commerce, is unique in history. The Industrial Revolution transition is analogous. Changes of this magnitude require governments to reevaluate their economic oversight role. Web 3.0 will challenge old models of what constitutes a firm, a security, and a commercial transaction. The Royal Melbourne Institute provides some worthwhile proposals to welcome this new cyber world.   

In the future, shareholders will run companies directly through smart contracts coded into decentralized applications—no management required. Cars will pay each other to pass or change lanes. Houses will rent out spare bedrooms upon predefined criteria. Computers will sell extra file storage to the continuously, to the highest bidder. And people will buy, share, and exchange value in myriad forms without any impeding central authority.

Web 3.0 threatens government dominance over the economy

Thus far wary governments have reacted in two ways. The more authoritarian ilk seek to capture the new technology whilst eliminating private competition. For instance, China began researching digital money in 2014. It plans to force exclusive use at the cost of privacy, freedom, and political dissent.

Western democracies seek to force Web 3.0 innovations into compliance with familiar legal structures with which they share little. The administrative state’s paternalistic for-your-own-good dictates contradict the bottom-up-individual-empowered future. Risk aversion defines this approach as SEC Commissioner Hester Peirce conveyed in a recent speech,
“Regulators . . . tend to be skeptical of change because its consequences are difficult to foresee and figuring out how it fits into existing regulatory frameworks is difficult.” Overly cautious officials create confusion and uncertainty whilst forcing firm capital into legal departments.

SEC is the Web 3.0’s biggest enemy

Nowhere has government ineptness been more prominent than Ms. Peirce’s agency, the Securities and Exchange Commission. Chair Gary Gensler began his term calling for an active policy agenda and vigorous crypto prosecutions. The Commission’s legal basis for these prosecutions is the Supreme Court’s interpretation of ‘investment contract’ arising from a 1940s dispute over orange groves.  

Orange groves as analog to code that can serve as currency, gateway keys, representations of physical objects, and countless other functions makes no sense. Nonetheless, through dated legal interpretations, the government has forced or threatened the shutdown of platforms the were or could have benefited the masses. The commission’s litigation against Ripple has exposed its abusive tactics. But unless Congress limits what constitutes ‘investment contracts’ or removes it from the definition of security completely, the commission will continue its war on innovators.

Unfortunately, the SEC is hardly an outlier. The Commodities and Future Trading Commission and IRS have also moved to limit Web 3.0’s potential. Their allies in Congress have urged them forward.

SEC should learn from Oz

Brighter minds at the Royal Melbourne Institute of Technology have suggested a better way which embraces innovation and discards the staid bureaucratic mindset. US policy makers should heed their proposals lest Oz surpass America as the future’s preferred home.

These proposals include:

  • A new classification for management-less crypto firms known as Decentralized Autonomous Organizations (DAOs). Limited Liability DAOs would exempt token holders from liability in the same manner as principals in Limited Liability Companies.
  • Treating stablecoins pegged to fiat currency as ordinary currency without any special compliance features.
  • Safe Harbors for innovation to shield nonfraudulent activity provided they meet certain requirements.
  • Avoiding state-level licensing schemes like New York’s Bit License.
  • Simplifying tax reporting.  

As the Institute states, “Transitioning to a digital economy is not simply placing our existing industries on the internet. It is a much deeper process of enabling and facilitating new business models and organizational structures, such as automation and decentralization.” To those creating the future economy this seems manifest. But only direct limitation of bureaucratic discretion will force government actors to agree.

By Jossey PLLC

A version of this post appeared on the blog of the Competitive Enterprise Institute on September 3, 2021, https://cei.org/blog/web-3-0-requires-new-regulatory-thinking/

Gary Gensler’s ‘Insane’ Crypto Policy

Gary Gensler’s ‘Insane’ Crypto Policy

Does crypto currency need new regulatory disclosure mandates from Washington in order to be of service to consumers? No, but that is what Securities and Exchange Commission Chair Gary Gensler is seeking. Gary Gensler’s crypto policy is insane.

As stated in a speech on August 3, Mr. Gensler indicated he wants to double down on the same tried-and-failed approach his predecessor used. From disclosure-heavy mandates to investor-protection obsession, everything Mr. Gensler proposes is a regulatory version of insanity – doing the same things but expecting different results. 

Under the guise of technology neutrality, Mr. Gensler seeks to force the crypto industry to heel to the SEC. As he stated, “I think former SEC Chairman Jay Clayton said it well when he testified in 2018: ‘To the extent that digital assets like [initial coin offerings, or ICOs] are securities — and I believe every ICO I have seen is a security — we have jurisdiction, and our federal securities laws apply.’” Indeed, one would be hard pressed to find a crypto innovation over which he doesn’t want to exert control. Stablecoins? Check. Exchanges? Check. DeFi? Check.

That hasn’t gone well so far.

SEC botched crypto policy from the start

By any account, the Commission’s crypto policy has been a mess. Former Chair Clayton seemed perpetually perplexed by such new technologies, finally appointing a crypto ‘Czar,’—career bureaucrat Valerie Szczepanik—in 2018. A year later she and Corporation Finance Director William Hinman produced a widely panned 13-page crypto “framework.” The document was so impenetrable, SEC Commissioner Hester Peirce compared it to a highly abstract Jackson Pollock painting.

The other major Clayton-era guidance came from a 2018 speech where Mr. Hinman declared ether—the currency for the second biggest crypto blockchain—was not a security. Given Ethereum’s size, success, and potential, the crypto world cheered. But in the closely watched Ripple litigation, the Commission has now disavowed that finding.

Other than these two instances, SEC “guidance” has largely come not from official rulemaking but from punative subpoenas and court appearances.

Gary Gensler’s crypto policy is failing retail investors

But even if the Commission was less scattershot, it’s not clear forcing the nascent industry into a Depression-era disclosure regime would protect those retail investors Mr. Gensler has in mind.

A review of recent Commission press releases reveals multiple enforcement cases against alleged fraudsters that were already beholden to Commission mandates. Empirical studies have repeatedly shown the federal disclosure regime does more to employ myriad compliance professionals than stop scam artists.

It is also telling that the least regulated way issuers can raise capital—Regulation D 506(b) (Reg D), which mandates no disclosures—is also the most successful. In 2019 it raised $1.5 trillion and outpaced the public markets—an impossibility if investors feared widespread fraud.

It’s too bad that securities law paternalistically blocks most investors from Reg D opportunities. Only 13 percent of people qualify because financial and sophistication thresholds limit eligibility. And they tend to cluster in America’s elite zip codes. This means the best deals go to people who need them least. Retail investors are left mostly left with post-IPO scraps. As Professor Usha Rodrigues states “Securities law . . . in theory, as in practice, marginalizes the average investor without acknowledging that it does so, let alone justifying it.” Under Mr. Gensler’s crypto leadership, SEC marginalizing will continue and where opportunities for wealth creation are greatest (perhaps in all of history).

Gary Gensler should make his crypto policy less insane

Instead, Mr. Gensler should change course and approach crypto with a measure of humility and cooperation. This would include:

  • Ditch the 2019 Framework.
  • Acknowledge the Commission’s role in creating the uncertainty surrounding crypto’s security status.
  • Ask Congress to update the definition of security to clearly define what digital assets fall under the Commission’s ambit and which do not.
  • Drop all prosecutions against nonfraudulent crypto issuers and impose a moratorium against further prosecutions until Congress updates its definitions.
  • Direct all crypto prosecutions against alleged fraudsters.

SEC regulators should want to give honest innovators certainty and breathing space. A more circumspect approach would also put major crypto policy questions back to Congress to decide and allow everyday Americans to explore the ingenuity crypto has to offer. And it may make the SEC less ‘insane.’

By Jossey PLLC

This post originally appeared in Coindesk on August 9, 2021, https://www.coindesk.com/gary-genslers-insane-crypto-policy

SEC discovery tactics questionable in Ripple case

SEC discovery tactics questionable in Ripple case 

The Securities and Exchange Commission (SEC) has gotten away with questionable investigation and litigation methods for years. The Commission’s Enforcement Division tactics are so well known they have earned a particular kind of lore among securities lawyers, described by one as “like living in hell without dying.” But in the SEC’s epic battle against cryptocurrency company Ripple and two of its executives, the agency’s go-to tactics are finally being challenged.

In April, U.S Magistrate Judge Sarah Netburn ordered the SEC to produce documents, including certain internal and external communications, along with a log of privileged documents, that could reveal potentially sensitive or embarrassing information about SEC crypto legal uncertainty in the midst of dozens of prosecutions. Of the high-profile nonfraud crypto cases—KikTelegramLBRY, and the current case involving Ripple—the Ripple litigation is the first time a court has forced the SEC’s own actions to the fore.

The implications are huge—for crypto companies and perhaps for all facing securities investigations.

SEC discovery tactics questionable from the start 

This drama started on December 22, 2020, when then-SEC Chairman Jay Clayton, on his last day, greenlit the lawsuit against Ripple and two of its executives, accusing the firm of selling unregistered securities in the form of its cryptocurrency, XRP, which Ripple began selling in 2013.

The company and its individual defendants claim the SEC failed to provide constitutionally required fair notice about XRP’s status in form of due process. After years of crypto prosecutions, this is a potential problem the SEC is only now having to confront.

As Commissioner Hester Peirce stated:

Given the power and reach of the Commission, due process is of paramount importance. The rules should be clear, so that individuals know in advance the actions that constitute violations. In enforcing the rules, the SEC should be even-handed and sensible. An unwavering commitment to due process is particularly important in light of the continued growth in the volume and complexity of the securities rulebook.

Following due process principles is rarely costless, comfortable, or convenient for a regulator, but doing so speaks volumes of the agency’s integrity and helps to bolster the agency’s standing in the markets, the courts, and the minds of the American people. In short, an agency that adheres to basic principles of due process will be more effective at carrying out its mission.

Defendant lawyers turn tables on SEC 

Defendant lawyers, naturally, requested internal and external communications between staff and commissioners regarding XRP and non-security cryptocurrencies Bitcoin and Ether. In a change from other crypto cases, Judge Netburn ordered the SEC to produce documents including certain internal and external communications along with a log of privileged documents. The Commission is not handling it well.

The SEC refused, telling the judge brazenly that she didn’t understand how the SEC worked and that any information defendants sought could be obtained on their website: 

The Court further indicated a lack of familiarity with how the SEC operates and required the parties to meet and confer about “whether” the SEC should produce or enter onto a privilege log memos or other official documents “expressing the agency’s interpretation or views” as to XRP, Bitcoin and ether. Id. at 53:2-13 (emphasis added). As detailed below, the SEC expresses its interpretations and views in a number of ways, all of which are public. These agency interpretations and views are subject to the Order, but internal emails and memos expressing SEC staff interpretations and views are not.

(Incidentally, when convenient, the SEC discards even statements available on its website, like a former director’s pronouncement that Ether was not a security).

Magistrate Judge unhappy with SEC discovery tactics  

The judge, not accepting the SEC’s recalcitrance, again ordered the SEC to produce certain internal and external documents along with a log of documents it was withholding based on privilege claims.

Has that transpired? Nope. According to defendant lawyers, two months since the initial order, SEC lawyers have not produced a single internal document or external-response document, but told the judge the ordered discovery was “irrelevant and needless.”

SEC lawyers are also refusing to produce other discoverable documents, like communications from the Office of Investor Education and Advocacy or from its financial technology email inbox, [email protected]. Defendant lawyers have now requested a third hearing, and that motion is pending, but the judge may decide three strikes is enough.

The SEC’s questionable tactics don’t stop there. While accusing Ripple lawyers of “gamesmanship,” “harassing” the SEC, and seeking invasive materials, prosecutors sought eight years of personal bank statements and attorney-client-privileged legal advice from defendants.

New SEC Chair on board with SEC discovery tactics 

New SEC Chair Gary Gensler hasn’t commented on the legal team’s conduct or its adherence to SEC rules. The SEC’s Canon of Ethics warns: “The power to investigate carries with it the power to defame and destroy.” Its stated values include integrity (“We inspire public confidence and trust by adhering to the highest ethical standards”), accountability (“We embrace our responsibilities and hold ourselves accountable to the American public”), and fairness (“We treat investors, market participants, and others fairly and in accordance with the law”).

But Gensler has had plenty to say about crypto enforcement intentions. In congressional testimony, he signaled a looming new wave of crypto prosecutions, lamenting that the SEC has only managed 75 thus far. The SEC also touts its performance in this regard during the past pandemic year—namely, only a meager decline in prosecutions but still a record uptick in penalties. That includes $1.2 billion it disgorged from Telegram, which forced the company to shutter its blockchain project.

The SEC’s actions do not serve the public interest. Instead of protecting consumers, regulators trample constitutional rights, foist millions in legal fees on companies trying to offer innovative consumer products and, ultimately, disadvantage the U.S. economy vis á vis global competitors. 

Hopefully, Judge Netburn in the Ripple case will start holding the SEC accountable to its own ideals and mission, which has veered so far from what is fair and decent.

By Jossey PLLC via www.thecrowdfundinglawyers.com 

For more perspectives on the ongoing SEC v. Ripple case, listen to this podcast of a panel of the Federalist Society featuring CEI Senior fellow John Berlau.

 

DeFi regulation, just say no

DeFi regulation, just say no

A new form of consumer finance could upend the entire banking and finance system that’s plagued by expensive fees, limited “bankers hours,” public mistrust, bailouts and insider government favors.

But Congress and the U.S. Securities and Exchange Commission (SEC) may kill the movement – decentralized finance, or DeFi – in the name of our own protection. Regulators should prosecute fraud, but also acknowledge the limits of their effectiveness and allow DeFi to mature without the burden of governmental compliance.

People are on the verge of cutting out the middleman in finance. Just as Bitcoin decentralized money transfers, DeFi could decentralize all of finance, from lending, borrowing and exchanging to more exotic forms of interest collection.

DeFi applications are not banks, they shouldn’t be regulated like them

DeFi eschews heavily regulated, fee-collecting intermediaries to allow peer-to-peer money flows. In just three years, it has grown from an idea on Meetup to a $50 billion industry. Yet DeFi’s astounding growth has also attracted opportunists looking to fleece naïve newcomers. Hackers and rug pullers – developers creating new products and then absconding with the loot – have plagued the growing industry. According to one source, fraudsters stole $83.4 million between January and April this year.

Sen. Elizabeth Warren (D.-Mass.) fired off a letter asking SEC Chairman Gary Gensler what more Congress could do to empower the commission to rein in DeFi. Mr. Gensler needs no persuading. He has repeatedly made requests for additional authority to bring non-security cryptocurrencies under the SEC’s ambit. Dan Berkovitz, a commissioner at the SEC’s sister agency, the Commodities Futures Trading Commission (CFTC), recently agreed. While praising financial intermediaries, he described DeFi as a “bad idea, and “Hobbesian,” and questioned its legality.

The message from the Biden administration and its appointees is clear: Without us, scams will proliferate and retail investors will get hosed.

DeFi regulation is favored by all the wrong people

Bringing a nascent industry under the government’s thumb does have benefits for politicians and regulators. It provides politicians steady campaign contributions and lobbying perks. Regulators get employment, prestige and often lucrative post-public service landing spots. Industry incumbents use the rules to keep barriers to entry high.

But big government hasn’t been great at preventing fraud. Since the federal government started regulating the financial sector in earnest in the 1930s, the government’s track record has been downright dismal. A landmark study by future Nobel laureate George Stigler showed the rates of return in the 1950s mirrored those of the pre-SEC 1920s, dispelling the myth that 1920s Wall Street was rife with fraud and abuse.

Decades later, two scholars lamented, “[Ex]amination of the securities violations…reveals that no amount of technical exemption requirements will hinder the fraud artists from their endeavors…Fraudulent and deceptive schemes have unfortunately continued unabated and independent of formal registration or exemption requirements.”

Even Congress’s own research arm, the Congressional Research Service, is skeptical the SEC framework can remedy market manipulation.

Prosecutors should focus on fraud not DeFi regulation

Regulators should focus on prosecuting fraud and allow the industry to grow past its infancy without smothering it first with massive federal disclosure mandates. Many scams and rug pulls had glaring red flags, like anonymous developers and promises of outlandish returns like 10,000 percent interest. The market will weed these scammers out.

As the industry matures, industry gatekeepers will develop standards that imbue credibility. These standard setters will include trade associations, code auditors, insurance markets and standards bodies that provide reputation scores to counter the proliferation of bad actors.

Regulators should prosecute scams harshly. Federal courts have buttressed CFTC jurisdiction to prosecute crypto fraud. Politicians will score points and regulators will avoid blame by taking the path that gives them the most power and control. But some humility on the limits of their effectiveness would be welcome.

Previous attempts to rein in finance’s bad actors fell flat. The notorious Dodd Frank financial regulation law passed after the 2008 financial crisis has utterly failed. The push to regulate DeFi will, as well. At best, it will send DeFi underground.

Regulators should allow DeFi to flourish as it upends the decades-old order and renders entrenched industry players irrelevant. Suffocating DeFi in the name of investor protection will kill its promise and continue the entrenchment of massive industry insiders as overlords of the U.S. financial system.

By Jossey PLLC via www.thecrowdfundinglawyers.com

A version of this article first appeared in Coindesk on July 23, 2021 https://www.coindesk.com/washington-should-let-defi-succeed

SEC Chair Gensler is harming retail investors

SEC Chair Gensler is harming retail investors

In a rush to protect retail investors, new Securities and Exchange Commission Chair Gary Gensler is promoting ill-considered policies that will undermine everyday investors. That means business as usual at the SEC, continuing a pattern of failing to trust retail investors while favoring established players.

Whether it’s app-based trading, cryptocurrencies, or reckless tweets, politicians have fretted this year about tech-savvy predators conning retail investors, and now Gensler is charging in. During recent congressional testimony and other public appearances, Mr. Gensler claimed that legal gaps threaten investors. Thus the Commission must “freshen up” rules, promote an “active policy agenda,” and urge new congressional action.

That doesn’t bode well.

SEC Chair Gensler continues the Commission’s insular ways

Mr. Gensler’s protective instincts continue a pattern of mistrust of technology and outsiders that harms those the Commission is most keen to protect. For example, the private markets cater to accredited investors the Commission believes can “fend for themselves” without mandated and costly disclosures. This market aggregates around $1.5 trillion per year; all the risk and rewards go to the already well-off. It’s why one wealthy investor’s $300,000 Coinbase investment morphs into $680 million, while “protected” investors scrounge for public-market scraps.

But in fact, when given the opportunity retail investors have traversed the private markets just fine. Congress passed the JOBS Act of 2012 to open the private-market door slightly to retail investors, mainly through Title III (internet-based equity crowdfunding). Due in part to COVID online crowd-based capital raising has exploded recently both in investors and investment, without any incidents of fraud.

Equity crowdfunding’s success came despite strong Commission opposition. Commissioners then were convinced fraudsters would con everyday Americans and the Commission would get the blame. 

SEC aversion to innovation is nothing new

Commissioner Luis Aguilar stated, “I cannot sit idly by when I see potential legislation that could harm investors. This bill seems to impose tremendous costs and potential harm on investors with little to no corresponding benefit.” Then-Chair Mary Schapiro joined, attacking the crowdfunding provision as enabling “fraudulent schemes designed as investment opportunities.” The bill’s sponsor Rep. Patrick McHenry (R-NC) later described Ms. Schapiro’s actions as “being sideswiped by a regulatory body at the eleventh hour.”

In fact, the Commission has never welcomed innovation. Large companies excel at navigating the complex SEC-mandated compliance. This leaves investors with more information but less choice. It also breeds familiarity between regulators and businesses that distort priorities. In fact, massive frauds have occurred under the Commission’s nose while it racked ever higher but meaningless enforcement “wins.”  The list of boondoggles it missed despite red flags and whistleblowers could be a corporate Hall of Shame, including EnronLehman Brothers, and Bernie Madoff.

As Gensler’s fellow Commissioner Hester Peirce has stated, “Entrepreneurship and innovation do not have the happiest of relationships with regulation. Regulators get used to dealing with the existing players in an industry, and those players tend to have teams of people dedicated to dealing with regulators.

SEC Chair Gensler’s crypto ambitions

The huge new opportunities for innovation and wealth creation include app-based trading and cryptocurrency. Regarding crypto, Commission chair Jay Clayton appeared habitually perplexed, fumbling to appoint a crypto ‘czar’ and seemingly most concerned to avoid leadership on this dynamic issue. 

Yet the Commission under Mr. Gensler seems poised to take an even more restrictive approach than his predecessor. In a recent interview, Gensler refused to rule out banning so-called ‘payment for order flow.’ This mechanism allows apps to offer commission-free trading. Of course, this trading isn’t costless, tradeoffs lurk as with “free” Facebook accounts. But instead of letting users decide, Gensler opined, “transparency may not be enough.”

The news is even worse for crypto. Gensler also advocates for a new federal regime to oversee crypto exchanges and a new wave of crypto prosecutions. This is disappointing, because he has substantial crypto competence, having taught a course on ‘Blockchain and Money’ at MIT. But it does align with the federal government’s wide-ranging assault on crypto, from the Federal Reserve stating a Central Bank Digital Currency is a ‘very high priority,’ to Senator Sherrod Brown (D-OH) seeking to regulate away private currencies, to onerous digital-wallet rules, to the IRS war on gains. For years, the Commission has repeatedly blocked Bitcoin exchange-traded products.

Retail investors will bear the brunt of SEC Chair Gary Gensler’s reforms

Mr. Gensler’s would-be “reforms” will lead to costs borne most by everyday Americans. Gensler, whose net worth exceeds $100 million, won’t be affected. But he will undermine others seeking financial success through America’s still-dynamic entrepreneurial spirit. This stratifies wealth in our society while effectively discouraging innovation. 

What Mr. Gensler should do is re-focus the Commission on prosecuting wrongdoers within its midst and spare innovators his regulatory weapons. The Commission should punish fraud, but it must abstain from protecting people from technologies they embrace and risks they willingly take as with app-based trading and crypto investing. 

By Jossey PLLC via www.thecrowdfundinglawyers.com

Real Clear Markets ran a version of this article on June 22, 2021 https://www.realclearmarkets.com/articles/2021/06/22/eager_to_protect_small_investors_gary_gensler_leaves_them_scraps_782067.html