Securities and Exchange Commission Chair Gary Gensler appeared before the U.S. House Financial Services Committee, weathering criticism from lawmakers during a hearing on oversight of the financial markets watchdog. Gensler again took heat over his approach to regulation of the digital asset industry, his purported intransigence with disclosures to the committee, and the SEC’s denial of spot bitcoin exchange-traded products (ETPs).
The hearing covered the full spectrum of the SEC’s mandate in financial markets and oversight, but naturally, given the timeliness of the debate and House Committee Chair Patrick McHenry’s (R-NC) open support for the industry, digital assets were very much on the agenda.
McHenry opened the proceeding with a critique of Gensler’s “crusade against the digital asset ecosystem and unresponsiveness to Congress.”
He then went on to voice concerns about the SEC chair’s “efforts to choke off the digital asset ecosystem, which has created real harm for consumers and our markets.”
“You said the law is clear, yet your actions have created more confusion and lasting damage,” continued McHenry. “You’ve also said your goal is consumer protection, yet your actions have pushed legitimate digital asset activities outside of regulated financial institutions, where consumers are best protected.”
McHenry also attempted to contrast his own committee’s “bipartisan” efforts to progress digital asset legislation with Gensler’s regulation by enforcement approach, which McHenry stated had “been on a losing streak” in the courts, a reference to the Ripple Labs and Grayscale (NASDAQ: GBTC) decisions of the past year.
However, despite McHenry’s repeated mentioning of bipartisan support for various bills and legislation, the partisan divide in the room could not have been more pronounced on the eve of a possible Republican-forced government shutdown.
A substantial part of several Democrats’ time was spent questioning Gensler on the negative effects of the Republican-led shutdown.
A shutdown happens when Congress fails to pass funding legislation that is signed into law by the president. Government funding expires on October 1, the start of the federal fiscal year, and a shutdown will effectively begin at 12 a.m. if Congress cannot pass a funding plan that the president signs into law.
Republicans in the House, fueled by hard-right demands for cuts, have forced a confrontation over federal spending, leading to the impending impasse.
After kicking off her comments with a blistering attack on “extreme MAGA Republicans” who are about to force the shutdown, Committee Ranking Member Maxine Waters (D-Ca) asked Gensler how it would impact the SEC.
Gensler noted that, if and when the government shutdown happens, the SEC will be down to a “skeleton staff” of around seven to eight percent of its capacity, with everyone else being furloughed.
“Normal oversight of the markets, given this, will not be possible,” said Gensler.
The topic came up several times more throughout the hearing, mainly broached by Democratic members keen to get on the record the damage a shutdown would cause, in general, and specifically to the SEC’s ability to do its work.
Outside of government shutdowns, Rep. Waters had an entirely different take on the SEC to the Republican committee chair, telling Gensler that he was “doing exactly the job the American people want.”
Amongst her broad-ranging praise for the work of the regulator under Gensler’s leadership, Waters stated that “the SEC is very much implementing the priorities that I and my Democratic colleagues championed when we were in charge, and is shaping up to be the most pro-worker, pro-investor, pro-small business SEC since FDR created the agency.”
In reference to McHenry, who said that his patience was wearing thin with Gensler’s lack of cooperation and transparency, the ranking member concluded her opening remarks with a parting salvo at the Republican-forced shutdown, saying, “my patience is wearing thinner than the chairman’s,” before pointedly slamming her notes shut and yielding her time.
Much of the committee’s time was spent discussing topics other than digital assets, but the subjects of spot-bitcoin ETPs, regulation by enforcement, and ongoing court cases all came up, as well as an unusual exchange about Pokémon cards.
BTC and spot-bitcoin ETP
McHenry’s first actual question to Gensler, after monologuing on his disapproval, was about BTC.
The Committee chair asked Gensler why he did not think BTC was a security. After some back and forth, which included McHenry stating, “I’m asking you to answer my question now…This is not supposed to be hard,” Gensler responded that BTC “does not meet the Howey test, which is the law of the land when it comes to defining a security.”
However, during the hearing, he also reiterated that “without prejudging any one token, the vast majority of crypto tokens likely meet the investment contract test.”
The discussion of BTC led to a questioning of the SEC’s reluctance to allow spot-bitcoin ETPs onto the market.
Rep. Wiley Nickel (D-NC), who along with three colleagues sent a letter to the SEC Chair on Tuesday citing the recent Grayscale decision and urging the agency to “immediately” approve the listing of spot-bitcoin ETPs, used his question time attempt to get an answer from Gensler.
“Now that the SEC has the court’s decision in hand, rejecting your rationale for denial, does the SEC plan to approve the current pending spot bitcoin ETF applications?” asked Nickel.
Gensler simply replied that the agency was “still taking this under advisement.”
Court cases
In terms of the Grayscale decision—in which the court found that the SEC hadn’t provided a sufficient reason to deny Grayscale Investment’s application to list a spot-bitcoin ETP—Gensler was reluctant to say too much, this was the same with regards to other ongoing cases.
“While I’m happy to discuss the SEC’s work, I will not be able to comment on any active, ongoing litigation,” said the SEC chair in his opening remarks.
He stuck to this policy throughout, declining to answer a question from Rep. Stephen Lynch (D-Mass.) about the SEC’s other much-publicized legal ‘loss’ in its case against Ripple Labs, where a judge ruled the company hadn’t violated federal securities law in selling XRP to retail investors.
Regulation by enforcement, or ‘harassment’
On the SEC’s alleged and somewhat controversial regulation by enforcement approach to the digital asset industry, Rep. Tom Emmer (R-Minn.) accused Gensler of being an “impartial regulator” and described the agency’s policy as “regulation by harassment.”
“Instead, it’s clear that you are working to consolidate your own power even though it means crushing opportunities for everyday Americans and, frankly, the financial future of this country,” said Emmer.
Gensler, for his part, maintained that “given that most crypto tokens are subject to the securities laws, it follows that most crypto intermediaries have to comply with securities laws as well.”
“Congress could have said in 1933 or in 1934 that the securities laws applied only to stocks and bonds. Yet Congress included a long list of 30-plus items in the definition of a security, including the term investment contract,” said Gensler. “These laws have been on the books for decades.”
Pokémon cards
One of the more left-field interactions of the day came when Rep. Ritchie Torres (D-N.Y.) asked Gensler if buying a Pokémon card could qualify as a security transaction and, therefore, be subject to securities laws, presumably hinting at the non-fungible token (NFT) market. Gensler asserted that it would not.
Torres followed up by asking, “if I were to purchase a tokenized Pokémon card on a digital exchange via blockchain — is that a security transaction?”
To this, Gensler said, “I’d have to know more.”
Crypto scams
Fraud and scams were also on the agenda, with Waters concerned about “gross violation of the law” in the digital asset space. These were concerns Gensler shared, reiterating his much-used line that the digital asset space is “rife with fraud and manipulation and scams.”
“Given this industry’s wide-ranging noncompliance with the securities laws, it’s not surprising that we’ve seen many problems in these markets,” said Gensler. “We’ve seen this story before. It’s reminiscent of what we had in the 1920s before the federal securities laws were put in place.”
Thus, said the SEC chair, “we have brought a number of enforcement actions—some settled, and some in litigation—to hold wrongdoers accountable and promote investor protection.”
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