The American crypto community has long considered Gary Gensler one of its sworn enemies. Over the past few years, the chairman of the Securities and Exchange Commission (SEC) has repeatedly spoken about the dangers of cryptocurrencies and the need for heavy regulation of the industry.
And after the crash of FTX in November, Gensler stepped up his cryptocurrency aggression. While Congress hasn't made much progress in enacting a regulatory framework for cryptocurrencies, Gensler has used its own powers to crack down on the industry. Over the past few months, the SEC has charged several major crypto companies with violating securities laws.
Many cryptocurrency insiders are now complaining that Gensler's actions are holding back innovation and crowding out crypto firms. Others, however, argue that Gensler's approach will weed out bad actors and help legitimize a highly stigmatized and risky industry. Whatever happens next, Gensler's actions mark a watershed moment for the cryptocurrency.
“This definitely feels like a crypto-bomb moment,” said Kristin Smith, CEO of the crypto lobby group Blockchain Association. “When lawyers analyze this space, they really think a lot about whether the United States is the right place for some of the foundations of this crypto business.”
At the heart of this battle lies the debate over whether cryptocurrencies should be considered securities or commodities. Securities are regulated by the Gensler Securities and Exchange Commission, which has a reputation for being a stricter regulator than the CFTC, the commodities regulator. Many cryptocurrency leaders, including FTX's Sam Bankman-Fried when she was still in power, argued that most cryptocurrencies are commodities and lobbied hard for the CFTC to regulate their industry.
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On the other hand, Gensler considers most crypto products to be securities. Since January, this structure has been used to accuse several large crypto companies, including Gemini, Genesis and Kraken, of failing to register financial products with the SEC. These three companies offered return programs in which investors received interest on the money they invested. While the companies have given the products different names, Gensler argues that they all share the same mechanism, which should be subject to SEC jurisdiction.
Gensler issued a warning to all of these programs. "You have to really grab everyone's attention in this market," he told CNBC. “Whether you call it a loan, a dividend, an income, or an annual interest rate, it doesn’t matter… they should strive for compatibility.”
Genesis went bankrupt after the FTX crash and still owes $900 million to investors who invested their money in Gemini Earn. Gemini co-founder Tyler Winklevoss tweeted that the SEC's actions were "counterproductive" to help users get their money back and called the complaint a "sudden parking ticket."
Gensler set his sights on payback programs a year after one such product was instrumental in the collapse of the entire crypto market. Last year, the Anchor crypto protocol promised investors an amazing 20% return if they put their money into the Terra-Luna ecosystem. Many critics, even industry insiders, say the Terra-Luna model is not viable and will almost certainly collapse last May.
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Two weeks ago, Gensler accused the creators of this ecosystem, Terraform Labs, and founder Do Kwon of securities fraud, saying they were misleading and defrauding investors. “This case shows how far some crypto companies will go to avoid complying with securities laws,” Gensler wrote in an accompanying statement.
While the SEC has been against cryptocurrencies, other government agencies have also been against the industry. Last week, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a joint statement warning banks about liquidity risks in stablecoins. In early February, the White House released a statement warning about the risks associated with cryptocurrencies. And the New York City Department of Financial Services announced that it has ordered Paxos, the world's third-largest US dollar stablecoin issuer Binance, to stop issuing new units of the cryptocurrency.
All of this means that crypto companies of all stripes, from miners to exchanges to lenders, are likely to be more careful when doing business in the US to avoid the risks of regulatory action. Many decentralized finance (DeFi) companies are already offering products to investors overseas, limiting US users, and this trend could intensify.
“In general, interest from investors looking to fund development in this area is definitely declining,” said Smith of the Blockchain Association. "Builders should think twice before starting something here in the States."
Smith says the SEC is using a no-residue approach to influence crypto companies, including staking providers, exchanges and centralized service providers, and venture capitalists. “If you look at the whole spectrum, it really hits all of those areas,” Smith said of Gensler. "And the credit industry has been hit the hardest. Today, it's somewhat gone. "Almost all of these service providers have been suppressed or gone out of business."
This week, several cryptocurrency enthusiasts tweeted that the Securities and Exchange Commission (SEC) closed a $75 million cryptocurrency fund run by EveryRealm as part of a campaign. However, Jesse Stein, the company's head of asset management, disputed this description in an interview with TIME magazine. Stein says that while EveryRealm decided in February not to promote an investment proposal that would include virtual real estate in blockchain-based spaces like Sandbox and Decentraland, the decision had nothing to do with the SEC’s approach to cryptocurrencies.
“The SEC has not contacted us or done anything to force us to close this proposal or influence our interest in implementing it,” Stein said.
Stein says he has no plans to slow down his blockchain investment, and he does welcome Gensler's approach to cryptocurrencies. “Our company doesn’t care because we tried to make everything as up-to-date as possible,” he says. “If the SEC continues to move in this direction and the market is fully regulated, if these projects are really viable, you will see an influx of institutional capital. I think it will ultimately be a positive thing for the industry.”
Meanwhile, Smith and the Blockchain Association are weighing their options regarding Gensler's latest regulatory action. Several crypto firms have been in legal battles with the SEC for months or years over a similar fiasco, including Ripple and Grayscale.
“We are working with our legal team and outside lawyers to try and figure out if there are any actual reversals that we need to make in the courts,” says Smith. "We think this fight is worth it."