Regulation
Why the Securities and Exchange Commission Lost the War on Cryptocurrencies
NEW YORK, NY – FEBRUARY 7: Dan Roberts, Brad Garlinghouse and Andy Serwer attend the Yahoo… [+] All Markets Financial Summit: Cryptocurrencies in New York City. (Photo by Eugene Gologursky/Getty Images for Yahoo Finance/Oath)
Getty Images for Yahoo Finance/O
From banning “non-compete” clauses to demanding “net neutrality” to hyperinflation of taxpayer-funded infrastructure costs with extravagant union giveaways, the Biden administration has overseen a process of massive expansion of the regulatory state. But amid this regulatory incontinence, which sows uncertainty, suppresses innovation, and retards investment and growth, there are encouraging signs that U.S. Congress, courts, and business leaders are fed up with executive-mandated government.
Take, for example, the escapades of the Securities and Exchange Commission. Since he took office, Biden’s approach to cryptocurrencies and related technologies has been to delegate and defer to an activist SEC and its crusading chairman, Gary Gensler. President Gensler describes the cryptocurrency industries as “full of hucksters, swindlers, [and] scam artists,” which, apparently, exempts him from proposing and promulgating concrete rules, in compliance with the statute, to be followed by the sector. Instead, Gensler believes that crypto companies do not deserve such regulatory clarity, choosing to keep them out of balance through a “regulation through enforcement” – aggressively sue crypto companies for non-compliance with securities laws without ever articulating what “compliance” requires.
In the absence of clear legal pathways, companies in the digital assets sector have put their innovations and expertise to good use friendlier shores. Governments in countries such as the United Kingdom, the European Union, Singapore and the United Arab Emirates have already established regulatory frameworks, and their economies are sure to reap the benefits of the resulting financial and related technological innovations.
Meanwhile, other companies have chosen to remain in the United States and figure out how to gather and deploy the resources necessary to bring some sanity back to the national regulatory environment. Indeed, the politics around the issue have begun to change. Last week, political allies like Senate Majority Leader Charles Schumer (D-NY) and former House Speaker Nancy Pelosi (D-CA) also voted to rein in Gensler’s broad claims for regulatory authority over resources digital.
On May 21, with the support of 12 Democrats including Schumer, the Senate voted 60-38 to overturn Gensler’s controversial proposal. Personnel Accounting Bulletin No. 121 (SAB21) – an SEC guidance document that makes it very difficult for financial institutions to provide custody services for cryptocurrencies. Last October, the Government Accountability Office had already done so governed that Gensler had circumvented the statutory rulemaking process with SAB21 by failing to notify Congress as required by the Congressional Review Act.
Then, on May 22, with the support of 70 Democrats including Pelosi, the House approved the proposal with 279 votes in favor and 136 against Financial Innovation and Technology for the 21st Century Actknown as FIT21, which removes all doubts that digital assets are commodities subject to regulation by the Commodities Futures Trading Commission and not securities subject to regulation by the SEC. This very issue had been addressed in the courts in the cases brought by the SEC against CoinBase AND Corrugation laboratories.
Last July, Judge Analisa Torres of the Southern District of New York governed that the XRP token, which Ripple uses in its cross-border payment products, is not a security when traded on public exchanges. Ripple CEO Brad Garlinghouse was also in attendance targeted personally by the SEC in the lawsuit, accused of “aiding and abetting” what turned out to be legal sales of XRP. “I’ll be honest, it was a pretty dark time,” Garlinghouse previously recalled thousands of cheering supporters celebrating Ripple’s legal victory from the December 2020 night it learned it was being sued for hundreds of millions of dollars
Shortly after the Torres ruling, the SEC fallen it was the case against Garlinghouse, but the ordeal seemed to strengthen his resolve to take the fight far beyond the courtroom. THE victory it certainly contributed to the effort to pass FIT21 and burnished Garlinghouse’s heroic profile among a grassroots army of cryptocurrency supporters, who have rallied not only to fight the SEC but to influence the 2024 election.
As recent court decisions and legislative developments have begun to provide greater regulatory clarity, the experience has brought Garlinghouse and other industry leaders together to recognize the stakes and support the campaigns of candidates who believe in crypto and blockchain technologies. Ripple is a major funder of Fairshake PAC, a political action committee that formed one of the greatest treasures of the 2024 election campaign.
“Team Ripple is putting a stake in the ground,” Garlinghouse wrote on X in December when the news arrived of the large sums raised by Fairshake and two affiliated PACs. Their first big target was Rep. Katie Porter (D-CA), a rising Democratic star and staunch Gensler ally who was running for Senate in Ripple’s home state of California. She faced a onslaught of negative ads it’s over a distant third in the primaries.
Fairshake has expanded its playing field to other races across the country, supporting allies on both sides but putting significant pressure on Democratic Senate candidates in Ohio, Montana and other swing states. Schumer and Pelosi’s change in tone in last week’s votes suggests the PAC approach could work in Washington. The White House seems to be too backing away by the threat to veto FIT21.
Republicans are paying attention, too. Presumptive presidential nominee Donald Trump is courtship crypto companies, highlighting the Biden administration’s mistreatment of the industry. In an election year where margins of victory may be slim, neither party can risk alienating an economically vital and increasingly engaged constituency.
Despite the personal ambitions of zealous regulators and the damaging battles they wage, American innovation is difficult to quash. Determined entrepreneurs like Garlinghouse find ways to overcome and circumvent hastily erected obstacles. Eventually the markets do their job and the economic benefits of new technologies take hold. That was true of the Internet three decades ago. See how it becomes a reality for blockchain technology as the future develops.