by TThe US crypto community has long considered Gary Gensler to be one of its greatest enemies. In recent years, the chair of the Securities and Exchange Commission (SEC) has often spoken about the dangers of cryptocurrencies and the need for strict regulation of the industry.
And since the FTX crash in November, Gensler has only stepped up his aggression against cryptocurrencies. While Congress has made little progress in enacting crypto regulation, Gensler has used his own powers to crack down on the industry. Over the past couple of months, the SEC has charged several major crypto companies with violating securities laws.
Many crypto insiders are now complaining that Gensler’s actions are stifling innovation and driving crypto businesses overseas. Others, however, argue that Gensler’s approach will weed out bad actors and help legitimize a heavily stigmatized and high-risk industry. Regardless of what happens next, Gensler’s actions represent a key turning point for crypto.
“It definitely feels like a moment of crypto-carpet bombing,” says Kristin Smith, the CEO of the Blockchain Association, a crypto lobby group. “As lawyers analyze this time, they are thinking very hard about whether or not the US is the right place to base some of these crypto operations.”
Federal attack
At the heart of this battle is the debate over whether cryptocurrencies should be considered securities or commodities. Gensler’s securities are regulated by the SEC, which has a reputation for stricter regulation than the Commodity Futures Trading Commission (CFTC), the commodities watchdog. Many cryptocurrency leaders, including FTX’s Sam Bankman-Fried when he was still in power, have argued that most cryptocurrencies are commodities and pushed adamantly for the CFTC to preside over their industry.
Read more: Crypto goes to Washington
Gensler, on the other hand, sees most crypto products as securities. Since January, he has used this framework to charge several major crypto companies, including Gemini, Genesis, and Kraken, with failing to register financial products with the SEC. These three companies offered return programs, in which investors earned interest on the money they deposited. While the companies gave the products different names from each other, Gensler argues that they were all similar mechanisms that should fall under the SEC’s purview.
Gensler sent a warning to all similar programs. “That should really alert everyone in this market,” he told CNBC. “Whether you call it lending, earning, yield, APY, that doesn’t matter. … They should be looking to comply.”
Genesis collapsed after the FTX crash and still owes $900 million to investors who put their money into Gemini Earn. Tyler Winklevoss, co-founder of Gemini, tweeted that the SEC’s action was “counterproductive” to helping users get their money back and called the complaint a “fabricated parking ticket.”
Gensler’s targeting of yield programs comes a year after one of those products played a major role in the collapse of the entire crypto market. Last year, a crypto protocol called Anchor promised investors a whopping 20% return if they put their money into the Terra-Luna ecosystem. Many critics, even those in the industry, said that Terra-Luna’s model was unsustainable and that it almost certainly collapsed last May.
read more: What we can learn from the fall of Terra
Two weeks ago, Gensler accused the creators of that ecosystem, Terraform Labs and founder Do Kwon, of securities fraud, saying they misled and defrauded investors. “This case demonstrates the lengths to which some crypto companies will go to avoid compliance with securities laws,” Gensler wrote in an accompanying statement.
Ripple effect
While the SEC is leading the charge against crypto, other government agencies have also turned against the industry. The Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Controller of the Currency (OCC) issued a joint statement last week warning banks about the liquidity risks of stablecoins. The White House released a statement warning of the dangers associated with encryption earlier in February. And New York’s Department of Financial Services announced that it had ordered Paxos, the issuer of the world’s third-largest stablecoin, Binance USD, to stop minting new units of the cryptocurrency.
All of this means that crypto organizations of all stripes, from miners to exchanges to lenders, will likely become much more deliberate about doing business in the US, lest they risk regulatory action. Many decentralized finance (DeFi) companies already offer products to overseas investors while restricting US users, a trend that could escalate.
“Overall, the interest of investors looking to fund development in the space is definitely waning,” Smith tells the Blockchain Association. “Developers should think twice about starting something here in the United States.”
Smith says the SEC is taking a “no-stone-left-left” approach, affecting crypto companies, including betting providers, exchanges and central service providers, as well as venture capital investors. “If you look across the spectrum, he’s really working to touch all these spaces,” Smith says of Gensler. “And the lending space is affected the most: it is more or less non-existent today. Almost all of these providers have faced enforcement action or are shutting down their operations.”
This week, many crypto enthusiasts shared a claim on Twitter that the SEC had shut down a $75 million crypto metaverse fund managed by EveryRealm as part of its crackdown efforts. However, Jesse Stein, the firm’s head of asset management, disputed that characterization in an interview with TIME. Stein says that while EveryRealm had decided in February not to proceed with an investment offering that featured virtual real estate in blockchain-based worlds like Sandbox and Decentraland, the decision had nothing to do with the SEC’s approach to crypto.
“The SEC has not contacted us or done anything to force us to close this offering or affect our interest in going forward with it,” Stein says.
Stein says he has no plans to slow down his blockchain-based investments, and that he actually welcomes Gensler’s approach to crypto. “Our company doesn’t mind at all, because we’ve tried to make everything as compliant as possible,” he says. “If the Securities and Exchange Commission continues to move in this direction and the market becomes fully regulated – and if these projects are really sustainable – then you will see institutional capital coming in. I think at the end of the day, it’s going to be a net positive for the industry.”
Smith and the Blockchain Association, meanwhile, are weighing their options against Gensler’s latest flurry of regulatory action. Some crypto companies have been locked in legal battles with the SEC for months or years over similar errors, including Ripple and Grayscale.
“We’re working with our legal team and outside counsel to try to figure out if there’s any preemptive pushback we should be doing in the courts,” Smith says. “We think this is a fight worth fighting.”
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