When asked on CNBC about the implosion of crypto exchange FTX, Securities and Exchange Commission (SEC) Chairman Gary Gensler turned the focus away from the individual company scandal and pointed his finger at the crypto community. “This is a field that is significantly noncompliant” with SEC rules, he said. Gensler will likely sound similar notes when he addresses the U.S. Treasury Market Conference this afternoon.
But when it comes to following the securities law, it’s really Gensler who is “significantly noncompliant” with what the law allows and what the law requires. He has exceeded his powers to pursue agendas such as environmental, social, and governance (ESG) mandates and going after legitimate cryptocurrencies such as XRP and LBRY in arbitrary enforcement actions in which no fraud was alleged—seemingly at the expense of the SEC’s core function of protecting investors from fraud and deception. SEC Commissioner Hester Peirce’s comment that pursuing ESG mandates “distracts us” from “other important work to do,” applies to the many initiatives Gensler has pursued that did not involve fighting fraud and that exceeded the SEC’s authority
By contrast to those actions that exceeded the agency’s jurisdiction, SEC clearly had authority to investigate and bring enforcement actions against alleged fraud against FTX’s investors, if not its retail customers. Though FTX was not a publicly traded company, the SEC has clear authority to deal with a company’s fraud against private shareholders. For instance, it brought investor fraud charges in 2018 against executives of Theranos, the private “unicorn” medical device firm that is now being compared to FTX because both had dynamic young founders who put a veneer of glib talk around questionable claims.
The SEC had clear jurisdiction to deal with FTX’s alleged secret lending of at least $4 billion to Alameda Research—its sister firm also run by CEO Sam Bankman-Fried—and its alleged overvaluing of its native token by billions of dollars. For laws beyond securities fraud that FTX may have violated, the SEC could have referred its investigative findings to the Federal Trade Commission and Department of Justice.
It’s not like there were no warnings that something funny may have been going on at the empire of Bankman-Fried. Short seller Marc Cohodes tweeted on August 1, tagging the SEC, that “something is very wrong at FTX.” Cohodes also told the Hedgeye TV webcast on October 11: “Nothing here fits. Everything reads like it’s a complete scam. This thing is dirty and rotten to the core.” Given short sellers’ track record of predicting implosions at Enron, the subprime mortgage market, Chinese stocks, (and now possibly ESG-themed companies), the SEC should have given these warnings its clear attention.
But the SEC has been busy, as Gensler has pointed out on CNBC and elsewhere. Unfortunately, it’s the kind of “busy” that burdens legitimate entrepreneurs and doesn’t protect investors from fraud. One highlight of Gensler’s tenure has been a pending “climate disclosure” rule, which would require public companies to extensively calculate climate-related data on their operations on a micro level not relevant to most investors’ bottom lines. As CEI Senor Fellow Richard Morrison (along with other groups) pointed out in comments submitted to the SEC, “What the agency is now proposing is to impose substantive environmental regulation thinly disguised as financial reporting. That does not protect investors.”
Also not protecting investors—and limiting investor opportunities—are the SEC’s enforcement actions against cryptocurrencies with lengthy track records in which no fraud was alleged. Accelerating a problematic “regulation by enforcement” trend started by Gensler’s Trump-era predecessor Jay Clayton, Gensler’s SEC has stretched its authority over “securities” to go after cryptocurrencies that clearly don’t fit the legal definition, in that they don’t convey shares in a company or a promised investment return. As a result, Americans lack access to legitimate cryptocurrencies such as Ripple’s XRPthe object of punitive actions by the SEC now being challenged in court—that are widely available in other countries and have many practical uses.
There’s also the SEC relentless pursuit of LBRY, the cryptocurrency created as a token for use on the Odysee video-sharing platform, on charges that it is an unregistered “security.” A single judge at a federal district court New Hampshire ruled recently that the SEC had authority to regulate LBRY as a security, but the ruling is subject to appeal and has limited impact on federal courts in other parts of the country.
Yet in the CNBC interview, Gensler boasted about the LBRY case as a “big win,” even though the ruling was at a low-level court and the case did not involve fraud in any way. As CoinTelegraph notes, “The SEC sought a permanent injunction against the sale of the tokens [and] disgorgement of all funds received with interest and civil penalties.” Importantly, the publication adds that the SEC “did not allege fraud or charge any individuals in the case.”
The SEC has also blocked nearly all crypto-based exchange-traded funds, even though those come with built-in investor protections and reduce the risks of holding individual cryptocurrencies through venues such as FTX.
The current haphazard regulation of cryptocurrencies by the SEC and other government entities shows that we don’t necessarily need more regulation, but rather the right kind of regulation for cryptocurrency, which in some case means updating laws and in other cases means lowering the barriers to safer alternatives for investors who want exposure to the crypto sector.
What Americans don’t need is unfocused regulation that resembles the Sarbanes-Oxley and Dodd-Frank Acts, which were rushed through Congress following financial scandals. As my CEI colleagues and I have written, these disastrous laws don’t tackle the problem and curtail opportunity for honest entrepreneurs and middle-class consumers and investors. The decentralization and privacy from cryptocurrency and blockchain offer untold benefits to Americans. Regulators should not rob Americans of these benefits because of the misdeeds of a few miscreants in this sector.