This week, reports emerged that Gary Gensler, the former chairman of the Commodity Future Trading Commission (CFTC) is set to be President-elect Joe Biden’s choice to take over the Securities and Exchange Commission (SEC). This is good news for the digital assets industry. From my experience with Gensler, whether the subject is digital assets, swaps or market structure, I can attest that he is thoughtful and broad-minded about the future of crypto-assets and that he understands the role enlightened regulators can play in boosting innovation. I can also promise he will not simply be a cheerleader.
Comprehension
First of all, he gets it. He has clearly devoted himself immersively to understanding the space on many levels – technology, policy, economics and otherwise. He has testified on digital currencies policy and regulation before Congress, taught blockchain and digital currencies at MIT Sloan School of Management, and participated in numerous public and private discussions in the U.S. and internationally (some of which I’ve participated in and had exchange of views). He will step into the job shovel-ready, as well-informed and engaged with digital assets as one could possibly hope for the chair of a U.S. financial regulator to be.
Market structure
I think it is highly likely that he will make market structure a high priority. Unlike previous SEC chairs, who had enforcement or M&A backgrounds, Gensler’s background is in markets and financial technology as well as policy.
Arriving at the CFTC in 2009 following the financial crisis, he led major reform of the over-the-counter (OTC) derivatives market under the 2009 G20 Pittsburgh accord, and he helped draft the Dodd-Frank Wall Street Reform and Consumer Protection Act, which reorganized the financial system. The CFTC passed over 65 rules in response to its Dodd-Frank mandate.
The industry was not always happy with the outcomes, to put it mildly. There were plenty of complaints that the CFTC’s reforms would irreparably harm the swaps market.
However, the U.S. swaps market remains broadly speaking vibrant, liquid and trusted, and performed with efficiency and resilience even in March 2020, at the height of the COVID-19 pandemic. This will reinforce his conviction that investors and other stakeholders trust well-regulated markets.
See also: Gary Gensler – Even if a Thousand Projects Don’t Make It, Blockchain Is Still a Change Catalyst (2019)
Gensler was mindful of the hold enjoyed by swaps market incumbents, and sought to enable challengers and insurgents (within a strong regulatory framework). In crypto, the “incumbents” are a largely different population, but these dynamics could be repeated.
Gensler will have strong mandates and expectations from the progressive side of the aisle . Accordingly, we can expect strong focus on investor protection to balance out promotion of capital formation using crypto-assets, and a need to ensure crypto does not become a side-door or back-door to circumvent regulatory frameworks.
I expect we will see much greater clarity on market structure and infrastructure for crypto assets – the regulatory clarity that will promote adoption and investor confidence – and I would be shocked if there are not things that make the industry howl.
ETFs
Under Gensler, I think we will see the SEC green-light retail bitcoin exchange-traded funds (ETF) finally. I anticipate he will review closely, and be persuaded by, data regarding the underlying liquidity of the spot market and the integrity of selected source marketplaces where price discovery and formation are occurring.
The outlook could evolve from “I don’t want anything bad to happen on my watch” to “how can these be offered safely to American investors”? Oversight of the underlying spot market could involve a greater role for the SEC as well .
The role of the Strategic Hub for Innovation and Financial Technology (or FinHub) could also be enhanced. This office, overseen by Valerie A. Szczepanik, was recently elevated to report directly to the SEC Chair (thus aligning it with LabCFTC’s 2019 elevation). Chair Gensler may use FinHub not just for engagement but to drive stronger convergence of development and execution of policy across internal silos.
International cooperation
How will things play out internationally?
During Chair Gensler’s CFTC tenure (ending in 2014), relationships with other national regulators were strained, to put it mildly. International regulators with long memories have already asked me about this, worried that Gensler tried to impose the U.S. approach to swaps on other jurisdictions, and that we might expect more of the same.
I don’t think international conflict will be a hallmark of his approach to crypto regulation. I believe we can expect strong international collaboration and cooperation. Crypto-assets regulation is very different than the international swaps market.
First of all, the Biden Administration is widely expected to embrace multilateralism with regard to international policy and engagement. For the SEC Chair to take a different approach would strike a markedly different tone.
Second, the CFTC under Chair Gensler’s leadership was either the first jurisdiction, or among the first jurisdictions, to adopt OTC reforms after the financial crisis. Much of the international friction arose because the U.S. went first, and CFTC rules, guidance and interpretations were given extraterritorial effect to fill a vacuum and deter regulatory arbitrage. Recent CFTC rule-makings on cross-border issues have referred to changed circumstances now that other G20 and non-G20 jurisdictions have largely (though not completely) implemented the 2009 Pittsburgh reforms (the SEC being among the last to do so, having completed its framework for security-based swaps trading just last month).
The global landscape of crypto-assets regulation in 2021 is far different from OTC swaps circa 2011. Although there is not a one-size-fits-all approach by any means, many jurisdictions have implemented rigorous and innovative crypto-assets regulatory frameworks already. Others, such as the EU, have comprehensive proposals under consideration.
Moreover, there are numerous international workstreams under the aegis of the FSB, BIS, FATF, G7, G20, OECD, IMF, CPMI, IOSCO and others. Although gaps and differences remain, as does potential for regulatory arbitrage in the global digital finance landscape, Chair Gensler will not encounter the regulatory vacuum he found in swaps. That said, we should not expect the SEC to be reticent to promote its perspective on international regulatory framework, or to be reluctant to advocate greater harmonization.
Nor does he have a clear statutory mandate for action with regard to crypto-assets from Congress that he did under Dodd-Frank because Congress has not adopted any crypto-assets legislation. In the absence of legislation or other oversight, he may well have considerable latitude.
Spot markets
Here’s a major unanswered question. Will Gensler seek, and obtain, a mandate from Congress for the SEC to regulate and supervise the spot (or cash) market for crypto-assets that are not securities, and to oversee the markets that offer trading?
Currently there is no U.S. federal regulator that supervises trading of crypto-assets like bitcoin and Ethereum that have been deemed not to be securities. The CFTC has enforcement authority. For example, if there is fraud or manipulation in the spot market that causes distortions (or worse) in the derivatives markets that it does directly regulate. But that is not the same as regulatory or supervisory authority.
FinCEN, at the Treasury Department, has authority from an AML/BSA perspective, but again these do not equate to supervision for market integrity, business conduct and safety and soundness. The SEC and CFTC do that for their respective regulated exchanges and other markets. This leaves a major regulatory gap in the US federal framework.
Will Gensler seek this type of authority from Congress? Will Congress grant it and provide the necessary resources? Will that be the “price of admission” for retail bitcoin ETFs? If this happens, it won’t be overnight.
Outlook
Having shaped the structure of the global swaps market, Gensler will likely embrace the opportunity to drive the regulatory structure of the crypto-assets market.
Of course, an SEC Chair cannot act unilaterally. He will need votes from his fellow Commissioners and support from other stakeholders to execute his vision or agenda. Non-crypto priorities may take precedence, starting with the pandemic as well as other policy initiatives of the new administration that will demand resources and attention. That said, Gensler has demonstrated his ability to drive an independent agency to execute on multiple fronts simultaneously.
Like everything else in crypto, this should be interesting, unpredictable and full of twists and turns. The regulatory certainty the industry gets may not be the exact flavor it seeks.
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