Video Highlights
This video recaps the SEC Oversight Hearing, held by the House Financial Services Committee, on April 18, 2023. Highlights include:
The SEC’s dismal track record at preventing fraud, maintaining fair markets as well as averting market crashes;
The real reason why Gensler won’t confirm whether ETH is a security or a commodity;
The weaponization of the SEC to choke off capital to politically inconvenient industries;
Gensler’s allegiance to legacy finance;
Gensler’s overreach should be a bipartisan issue;
Decentralizing the SEC.
This video is 20 minutes long. If you don’t have 20 minutes to watch it, feel free to read the transcript below.
Video Transcript
Welcome to another episode of the Decent Millionaire podcast. I am your host Dara Albright.
For those who don’t know, the Decent Millionaire is short for decentralized millionaire and it is representative of the decent wealth creating potential as well as the decency that decentralization will bring to humanity.
For those visiting us for the first time today, Decent Millionaire is the place where we discuss everything related to decentralization, web3 and Participate2Earn Economics – including, of course, the unfolding regulatory landscape for decentralized assets.
That brings me to today’s topic. Last week, on Capitol Hill, the House Financial Services Committee, held a Hearing entitled: “Oversight of the Securities and Exchange Commission” where the SEC chairman Gary Gensler was brought in to answer questions regarding his flagrant disregard for law and jurisdictional boundaries as well as for his brazen abuse of enforcement power – particularly when it comes to decentralized and digital assets.
In case you are wondering why you should care at all about this at all, let me briefly explain how Mr. Gensler’s actions directly impact everyone – not just cryptocurrency investors.
The SEC is the federal agency that oversees our markets for stocks and bonds. The SEC was established by congress, during the great depression, in response to the 1929 stock market crash. I guess the government needed to look like it was doing something to help alleviate the severe economic pain as well as to prevent future crashes and economic declines. Unfortunately though, the SEC accomplished neither. It didn’t shrink the bread lines nor, as history has revealed, did the SEC ever prevent future stock market crashes from happening.
The reason for the SEC’s failure is simple. It never sought to address what actually caused the crash and ensuing depression in the first place. Instead, it was created to focus on policing fraud. Now, that would have been fine had the market crashed because of fraud. But it did not. It crashed because of over-leverage (essentially, the market crashed in 29 (not unfamiliar to today’s crashes) because it was one big giant credit bubble where 80% of household appliances were bought on installment credit and stock in the companies that sold these leveraged products were being bought with you guessed it: more leverage. Back then, not only were consumers putting little to no money down to buy products, they were putting only 10% down to invest in the companies that made those products. This was never going to be sustainable.
So instead of tackling the actual problem which was an inflating debt bubble being fueled by paying for goods, services and investment products with thin air, our government simply established another 3-letter enforcement agency that succeeded mostly in creating a host of new problems.
Congress mandated the SEC to do 3 things: The first mandate is to protect investors from fraudsters. Congress never gave the SEC authority to protect investors from risky investments. That is a huge distinction. The SEC does not have the authority to judge the merit of an investment product. Its job is simply to make sure that companies that trade on public markets are compliant with respect to disclosure. The second mandate is to maintain fair, orderly, and efficient markets. Markets that are accessible to some and not to others is not considered fair by any stretch of the imagination. And, the third mandate is to facilitate capital formation or to enable businesses access the capital they need to innovate, to grow and to create jobs. Those are the SEC’s 3 roles.
Now, if you are an retiree who lost your life savings to Bernie Madoff, or a fintech or crypto innovator who is being harassed by the SEC, or if you run a business that is having a hard time raising capital, or if you are a retirement saver concerned about diminishing 401k returns despite the substantial fees you are paying to maintain those plans, then you are experiencing the SEC’s failures first-hand.
The present SEC regime is literally obstructing capital formation by slowwalking qualifications. Worse, it is stonewalling qualifications for some industries altogether. This SEC is picking winners and losers by allowing favored industries and companies to raise capital (like big banks) while preventing other, politically inconvenient, industries (like fintechs, crypto) from doing the same. Worst of all, the SEC is weaponizing its power against America’s innovators and job creators. The SEC is thwarting the very innovation that will save our economy and allow all Americans to create, amass and maintain wealth.
So, last week, Gensler finally came to Capitol Hill to answer for some of his actions. In case you missed it. I am going to recap the hearing here for you today. Because every single American needs to understand the extend of Gensler’s overreach and how the SEC today is confiscating our wealth and destroying our children’s future.
So let’s dive in with some observations from the hearing that I think are extremely telling.
Observation #1: Gensler is intentionally keeping all cryptocurrency rules vague. And until legislation is signed into law that firmly establishes the rules for cryptocurrencies, the Gensler is going to keep on pretending that all cryptocurrencies and all blockchain assets fall under his jurisdiction and the SEC will keep on abusing its enforcement power.
At the hearing, Gensler refused to classify Ether as either a security or a commodity. Upon being asked directly by Congressman McHenry – chair of the house financial services committee – whether Ether is a security or a commodity, Gensler went into some rant about the ’33 Act, websites in the middle, and some nonsense about twitter. The only thing clear from Gensler’s babble, was his refusal to answer the simple question of whether Ether is a security or a commodity. Although Gensler either couldn’t or wouldn’t clarify whether Ether is a security or commodity, in the same breath, he claimed that the securities rules for digital assets are clear. It was almost comical.
Okay, so why is this so important? Well if Gensler states that Ether is a security, then you are going to see some high profile and lucrative cryptocurrency platforms rushing to move overseas. We are already seeing this, but upon confirmation, it will happen at unprecedented levels. Plus, we’ll see ETH, the 2nd largest crypto take a significant market cap hit and that will probably anger some of Gensler’s pals like JP Morgan, who as it was discovered last year, owns critical Ethereum infrastructure. That’s a story for another day.
But, if Gensler states that Ether is a commodity, then the SEC will instantly lose a number of its lawsuits as well as much of its settlement leverage. So, essentially, it is in Gensler’s best interest to remain vague – no matter how much it impedes economic growth. This should frighten every single American as such tactics are very, very dangerous to any democracy. Free nations set rules and then enforce those rules equally. Free nations do not intentionally keep rules vague so that it can pick and choose which individuals or companies it wants to hit with an enforcement action.
This brings me to Observation #2: Gensler’s enforcement initiatives go beyond even enforcing vague rules. They are far more dubious than that. There was one point during the hearing (about 54 minutes in) where Gensler was asked, how many of his 130 enforcement actions against cryptocurrency entities has the SEC won? Gensler responded by boasting that many of the SEC’s enforcement actions resulted in settlements which Gensler acknowledged were considered an agency “success”. By placing settlements in the success column, Gensler is esentially representing that the SEC’s enforcement goals are not about obtaining a winning legal opinion, rather they are a tactic being used to coerce a settlement that will be used by the SEC to bully even more companies into settlement. People settle lawsuits for a variety of reasons – mostly because of the expense, the time constraints and, quite frankly, the aggravation – not because they did something wrong. There is a word for frivolous lawsuits - used to obtain a settlement – it’s called extortion! It is chilling that a federal agency is able to harass innovators and legally extort under the guise of investor protection.
Observation #3 – At the Hearing, Gensler admitted that no one regulating cryptocurrencies at the SEC has any hands-on cryptocurrency experience. Under questioning from Congressman Steil, Gensler was asked whether Gensler or anyone on his senior staff own digital assets or a digital wallet. Gensler responded by saying that he does not own any crypto assets and that he is not aware of anyone on his senior staff with crypto holdings. Congressman Steil then used this as an opportunity to point out the absurdity in regulators regulating a product that they have no firsthand knowledge of. Gensler then thought he was helping his case by stating that he taught a Blockchain & Money course at MIT as well as multiple crypto finance courses. Steil responded by highlighting the absurdity in teaching a course about a product he never owned or used. Gensler then responded by saying that all of his security holdings are digital because they are held by a broker in digital form. This is laughable! Holding securities in digital form is very different from owning a digital wallet. This is the difference between centralized finance and decentralized finance. Gensler has to know this. If he doesn’t, then he has no business whatsoever in regulating crypto or teaching any crypto courses. It also makes you question the quality of education provided by a university that hires professors to teach technologies that they’ve never even used.
Observation #4 – Gensler’s allegiance is not to the American people, it is to the financial establishment. Let me repeat that. Gensler’s allegiance is not to the American people, it is to the financial establishment. Many suspected this but during the hearing Gensler pretty much confirmed our suspicions when he accused crypto of “undermining the $100 Trillion capital markets”. Gensler also accused the crypto industry of deliberately choosing to be noncompliant. In making such statements, it is clear that Gensler sees crypto as a disruption to the centralized financial power structure. He most certainly does not view decentralized finance as the innovation that is democratizing access to capital and enabling more people to create and build wealth. This begs the question, how can someone fairly regulate an industry he has such obvious contempt for? The answer is, he cannot.
Observation # 5 – Gensler seemed very defensive about any accusations that the SEC is being weaponized against certain industries based on political agendas. He kept using the term “merit neutral” over and over again. It felt like a very well-rehearsed defense to the suggestion that the SEC’s ESG disclosures were really about choking off capital to the fossil fuel industry. I would make the argument that the SEC is actually being used to choke off capital to fintech and cryptocurrency firms – the industries increasingly disrupting legacy finance.
You may have read about Operation Choke Point — an Obama era government initiative that aimed to limit certain industries’ access to U.S. banking services. Operation Choke Point would certainly explain why the SEC is responding to cryptocurrency firms that seek guidance from the SEC with litigation. Yup, that’s happening. Crypto firms that took Gensler up on his invitation to “come in and talk with us” were met with lawsuits. I really wish Congress could have dove more into this at the Hearing. Hopefully at the next oversight hearing, someone will ask Gensler, flat out, if the SEC has ever been or is now part of any Choke Point operations.
Observation #6 – Gensler really doesn’t care that he is driving US innovation to China. There was a great exchange with Congressman Emmer at the hearing where Congressman Emmer asks Gensler if Gensler is concerned about China’s ploy to open its banking system to crypto firms in an effort to seize an opportunity created by our hostile regulatory environment. Gensler responded by attacking crypto firms, calling them noncompliant.
Observation #7 – I noticed that instead of holding Gensler accountable and looking out for their constituents, certain members of congress were more interested using the hearing as an opportunity to make political speeches and blame the opposing party for not raising the debt ceiling – something completely outside the purview of the SEC. That was pretty unfortunate as this is truly a bi-partisan issue.
Observation #8 – if there is one thing that the Hearing demonstrated, it is how critical decentralization is to the future of humanity. Decentralization mitigates security risk and would have completely prevented the FTX fraud as it virtually eliminates any co-mingling of investor funds. In fact, congressman Laudermilk said it best when he said, “centralizing itself is a security risk!”
During the hearing, Congressman Warren Davidson introduced legislation to remove the Chairman of the SEC and replace the role with an executive director who reports to a board. This type of decentralization is a good start, but I am going to go one step further and suggest that the SEC be abolished altogether and replaced we-the-people. We didn’t need this centralized agency in 1933 and we certainly don’t need it in 2023 when it could readily be replaced with a Decentralized Autonomous Organization (DAO) that lets the people decide where their investment dollars should go – the people, who unlike Gensler and his senior staff, are actual users of cryptocurrencies and have firsthand knowledge of how they work. If investors get scammed, they have plenty of legal remedies at their disposal. The bottom line is, we simply don’t need some superfluous government agency, with a dismal track record of both preventing fraud and averting market crashes, interfering with our investment decisions.
Numbers don’t lie.
Taxpayers pay the SEC billions of dollars for failing.
Despite the SEC’s budget spiking faster than the overall federal budget, the SEC failed to prevent the 1987 crash which wiped out $500B in one day. It failed to prevent the dot com crash which wiped out $6.2 Trillion in household wealth. It failed to prevent the 2008 meltdown which wiped out $7.4 trillion in household wealth. It failed to prevent the $65 billion lost from the Madoff fraud. And it nothing to prevent American’s from losing 96% of their purchasing power.
We’re told that $1 invested in the S&P in 1934 would be worth $9,026.35 today. But, that is not true. In reality, if you account for the loss of purchasing power, that $1 invested in the S&P in 1934 is really only worth $400.
Do we really need the government interfering with our investment decisions? Do we really need to be funding the SEC to harass our innovators? Let me know what you think in the comment sections below. And, if you found this recap to be valuable, please feel free to share it!
What Last Week's SEC Oversight Hearing Revealed About Gary Gensler