When Gary Gensler's Securities and Exchange Commission (SEC) this week filed securities charges against America's biggest cryptocurrency exchange, they were premised on a single core idea: that U.S. law already includes the necessary tools to regulate cryptocurrency assets and marketplaces. Gensler, an appointee of the Biden administration, has consistently repeated that crypto doesn't need new rules.
But legislators from both the House and Senate, and belonging to both political parties, seem to disagree. A series of recent bills show the legislative branch actively engaged in lawmaking around crypto – they clearly don't agree that the status quo is good enough. According to one legal theory based on a law known as the Administrative Procedures Act (APA), the existence of this process could undermine the SEC's current round of enforcement actions, particularly the case against Coinbase.
On June 2, just days before the SEC actions, House Financial Services Chair Patrick McHenry (R-NC) and Agriculture Committee Chair Glenn Thomspon (R-PA) released a collaborative draft bill called the Digital Asset Market Structure and Investor Protection Act. The bill has some truly excellent provisions, including a safe harbor for non-security cryptos under $75 million market cap, and for limited sales to non-accredited investors. It also aims to clarify registration procedures for crypto exchanges, and even includes a plan for "progressive decentralization" that would allow assets to transition from security to commodity status over time.
These specifics are bad for the SEC's case against Coinbase, since they address many of the precise issues the SEC claims the law already covers. But the bill's very existence may be an even bigger problem for Gensler than its details, both legally and in the court of public opinion. The bill demonstrates an ongoing process of crypto market legislation, creating at least the appearance that Gensler is trying an end-run around Congress.
Though the House bill is largely a Republican effort, Senator Cyntha Lummis (R-WY) told The Block that she and Senator Kristen Gillibrand (D-NY) are holding the reintroduction of their own crypto regulation bill to see how things go in the House. So it's not a huge stretch to say that Gary Gensler's SEC is attempting to sneak past a bipartisan process unfolding across the House and Senate. (The fact that neither version is likely to pass under a Biden administration doesn't change that.)
This could rise to the level of violating a 1946 law called the Administrative Procedures Act. The APA was crafted, over more than a decade, in an attempt to reconcile the growing administrative state with democratic principles. President Franklin Roosevelt warned at the time that the growth of bureaucratic U.S. agencies "threatens to develop a fourth branch of government for which there is no sanction in the Constitution." Broadly, the goal of the APA is to ensure that agencies like the SEC remain subordinate to democratic lawmaking processes.
There is other evidence that could further expose the SEC to charges that it is behaving not just unfairly, but undemocratically. On Wednesday, Robinhood officials testified that they had spent 16 months working with the SEC to register the company's crypto sales service as a special purpose digital asset broker-dealer. According to their counsel, a former SEC commissioner himself, they were "pretty summarily told in March … that we would not see any fruits of that effort."
That gets to the deep question about Gensler's representations over the past two years. While he has on multiple occasions repeated some version of "these companies just need to come in and register," it now appears that may simply have been a lie.
The preponderance of evidence, as argued this week by Blockchain Association Chief Policy Officer Jake Chervinsky among others, suggests Gensler's real goal is to effectively ban crypto in the U.S. In fact, Gensler's intent or mindstate seem fairly irrelevant here – the effects of his and his agency's actions, if uncontested, would ultimately be the elimination of not just crypto businesses and development, but ultimately even its practical usability by individuals, from United States soil.
Given the apparent interest of elected U.S. representatives in a more measured approach, it seems clear that Gensler's SEC is overstepping its moral authority. It will be up to the courts to determine the legalities.
– David Z. Morris
@davidzmorris
david.morris@coindesk.com
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