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Inside Gary Gensler’s SEC Campaign to Rein Within the Crypto Industry

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In March, eight months before his cryptocurrency empire imploded, Sam Bankman-Fried joined a video call with Gary Gensler, a longtime financial regulator who now leads the Securities and Exchange Commission.

The meeting didn’t go well. Mr. Bankman-Fried, the chief executive of the Bahamas-based crypto exchange FTX, wanted approval from the S.E.C. to supply cryptocurrencies in america without the specter of a superb for violating securities rules.

Mr. Bankman-Fried was joined on the decision by FTX staff in addition to business partners on the stock exchange IEX, who began walking Mr. Gensler through a PowerPoint presentation. At concerning the second slide, Mr. Gensler cut them off and launched right into a roughly 45-minute lecture on his vision for crypto regulation, stopping any further discussion, three people accustomed to the conversation said.

Now Mr. Gensler, 65, is facing off with Mr. Bankman-Fried again. FTX collapsed in epic fashion this month after a run on deposits left it owing $8 billion. The S.E.C. and the Justice Department have opened investigations, specializing in whether Mr. Bankman-Fried illegally lent billions of dollars of his customers’ funds to a hedge fund he owned, Alameda Research, which traded heavily on the FTX platform.

It’s a well-known position for Mr. Gensler, who has fined a series of crypto corporations and promoters for securities violations since he became chairman of the S.E.C. in April 2021, with penalties as high as $100 million. A figure whom crypto insiders like to hate, Mr. Gensler is looking for to ascertain the S.E.C. as the first overseer of the loosely regulated and freewheeling industry, creating strict guardrails that might bring it under tighter government scrutiny.

“People love a nemesis,” said Sheila Warren, who runs the Crypto Council for Innovation, an industry lobbying group. “He definitely has drawn a few of that, almost seemingly deliberately.”

However the collapse of FTX has raised questions about Mr. Gensler’s effectiveness. Mr. Bankman-Fried gained access to the halls of power in Washington, at the same time as he ran an offshore company that promoted dangerous trading and dipped into its customers’ accounts to fund other investments. After the March meeting with Mr. Bankman-Fried, Mr. Gensler’s staff stayed in touch with the group that had joined the decision, going backwards and forwards on possible structures for a totally regulated exchange, 4 people accustomed to the conversations said.

“Reports to my office allege he was helping SBF and FTX work on legal loopholes,” Representative Tom Emmer, a Minnesota Republican who serves on the House Financial Services Committee, tweeted on Nov. 10 of Mr. Gensler. “We’re looking into this.”

Mr. Gensler declined to reply questions on his handling of FTX.

Under his leadership, though, the S.E.C. has made crypto a priority, nearly doubling its enforcement team to 50 members. In February, the agency levied a $100 million superb on the crypto lending company BlockFi over registration failures; BlockFi suspended operations this month in consequence of its ties to FTX. In line with public filings, the agency can also be investigating the method by which Coinbase, the biggest U.S. crypto exchange, chooses which cryptocurrencies to supply.

“There have been lots of entrepreneurs that grew up on this field and selected to be noncompliant,” Mr. Gensler said in an interview last month on the S.E.C. headquarters in Washington. “We might be a cop on the beat.”

The sudden collapse of the crypto exchange has left the industry stunned.

  • A Spectacular Rise and Fall: Who’s Sam Bankman-Fried and the way did he change into the face of crypto? The Day by day charted the spectacular rise and fall of the person behind FTX.
  • A Symbiotic Relationship: Mr. Bankman-Fried’s built FTX partly to assist the trading business of Alameda Research, his first company. The ties between the 2 entities at the moment are coming under scrutiny.
  • Wall Street Seeks to Profit: Brokers are offering FTX customers pennies on the dollar for the bankruptcy rights to their funds trapped on the platform.
  • A Company in Disarray: The brand new chief executive of FTX, who helped manage Enron after its collapse, said that he had never seen “such a whole failure of corporate control.”

Mr. Gensler’s central claim is straightforward: For all their novel attributes, most cryptocurrencies are securities, like stocks or other investment products. Which means the developers who issue cryptocurrencies must register with the U.S. government and disclose details about their plans. In Mr. Gensler’s view, exchanges like Coinbase and FTX, where customers buy and sell digital coins, also needs to should obtain S.E.C. licenses, which include increased legal scrutiny and disclosure obligations.

The crypto industry has fought the federal government’s efforts to categorise digital assets as securities, arguing that the legal requirements are overly burdensome. Even before FTX’s collapse, the controversy was reaching an inflection point: A federal judge is predicted to rule in the approaching months in a lawsuit brought by the S.E.C. that charges the cryptocurrency issuer Ripple with offering unregistered securities. A victory for the federal government would strengthen Mr. Gensler’s hand, establishing a precedent that might pave the best way for more lawsuits against crypto corporations.

A former Goldman Sachs partner, Mr. Gensler became one of the crucial aggressive financial regulators in Washington after the 2008 recession. As chairman of the Commodity Futures Trading Commission, an agency that regulates the financial markets, he helped perform the 2010 Dodd-Frank Act, which aimed to guard consumers and rein in Wall Street.

After he left the C.F.T.C. in 2014, Mr. Gensler became fascinated with crypto, which was exploding into the mainstream. On the Massachusetts Institute of Technology, he taught a lecture course called “Blockchain and Money” and appeared optimistic about crypto’s potential to rework financial markets. He still refers to Satoshi Nakamoto, the mysterious figure who invented Bitcoin, as “Nakamoto-San,” a gesture of respect.

So when Mr. Gensler took over the S.E.C., the crypto industry hailed him as an enthusiast who understood the technology’s potential. Bitcoin “is in good hands,” one enterprise investor tweeted.

But it surely soon became clear that Mr. Gensler would take a hard-line approach. In July 2021, he met with a bunch of industry representatives, including the leader of the Blockchain Association, a outstanding crypto trade group. He bluntly informed her that almost all of the organization’s members were probably violating federal rules, two people accustomed to the meeting said.

Just a few days later, Mr. Gensler called crypto “the Wild West” while speaking at a national security conference in Washington.

Slightly than devise latest rules for crypto, Mr. Gensler has focused on enforcing the present ones as broadly as possible. In July, the S.E.C. filed an insider-trading lawsuit against a former Coinbase worker, saying seven of the digital currencies listed on the exchange were unregistered securities. The subsequent month, Coinbase revealed in a public filing that the agency had sent the corporate investigative subpoenas requesting information on its listing process.

Behind closed doors, Mr. Gensler has been equally aggressive. “I’ve heard about other groups getting in and getting in arguments,” said Perianne Boring, the founding father of the Chamber of Digital Commerce, a crypto advocacy group. “You desire to have a fight, you’ll be able to have one.”

In crypto circles, mentioning Mr. Gensler’s name elicits quivers of fury. A Twitter account for the crypto company LBRY once called him “a demon wearing human flesh.”

“I used to be hopeful that an M.I.T. professor who had studied cryptocurrency would have some semblance of fairness about him and never be a whole sociopath,” said Jeremy Kauffman, chief executive of LBRY, which the S.E.C. sued last yr.

The premise for Mr. Gensler’s claim that cryptocurrencies are securities is a legal evaluation referred to as the Howey Test, which the Supreme Court outlined in 1946. Under the framework, a financial product is deemed a security when it offers the prospect to speculate in a “common enterprise” with the expectation of making the most of the efforts of others.

Over many years, the courts have ruled that securities law applies to a wide selection of economic products, including contracts for the sale of chinchillas. Mr. Gensler has publicly stated that Bitcoin just isn’t a security, because no central group or individual controls it. But he has hinted that Ether, the second-most-popular digital currency, could be a security and has repeatedly argued that a whole bunch of smaller tokens should fall under the S.E.C.’s jurisdiction.

“It’s just straightforward,” he said within the interview last month. “The principles are on the books already.”

The crypto industry has countered that the S.E.C. is attempting to shoehorn digital currencies into an outdated framework. In July, Coinbase submitted a 32-page petition to the S.E.C., making the case that existing registration rules don’t cleanly apply to crypto exchanges.

Throughout the agency, Mr. Gensler’s approach has sometimes led to frustration, two people accustomed to the S.E.C. said. In meetings, staff members have identified the issue of extending federal securities law to cover crypto exchanges, one person said. Other S.E.C. employees have complained that Mr. Gensler hasn’t moved aggressively enough, one other person said, with exchanges like Coinbase and FTX having avoided significant fines.

FTX’s collapse has unleashed a latest level of scrutiny. Screenshots of Mr. Gensler’s public meeting schedule, which show multiple sessions with Mr. Bankman-Fried, have circulated on Twitter, where crypto fans who once said Mr. Gensler was overly aggressive have now accused him of cozying as much as a criminal. (Mr. Bankman-Fried has not been charged with any crimes.)

They argue that an S.E.C. cope with FTX would have granted the exchange a “regulatory monopoly,” allowing Mr. Bankman-Fried to dominate the cryptocurrency market while other businesses were shut out. (Some details of Mr. Gensler’s meetings with FTX were previously reported by Fox Business.)

But much of the criticism has been opportunistic, said Lee Reiners, a crypto expert who teaches at Duke University Law School.

“If you happen to don’t like him, you don’t like the present S.E.C., then in fact you’re just going accountable him, whatever the facts,” Mr. Reiners said. “If Sam Bankman-Fried tried to get a gathering with the S.E.C., and Gary Gensler said absolutely not, I’ll never consult with you, the Republicans would’ve gone ballistic prior to the collapse.”

In public remarks shortly after FTX imploded, Mr. Gensler argued that too many crypto corporations performed multiple financial roles at the identical time — like running an exchange and making trades, an apparent reference to the close relationship between FTX and Alameda.

“Why we regularly separate these items out is in order that the general public is best protected concerning the inherent conflicts,” he said. “It’s really necessary to make sure that that this field is available in, gets registered, gets regulated.”

Much of Mr. Gensler’s agenda may ultimately hinge on the ruling within the Ripple suit, which the S.E.C. filed in December 2020. Before the filing, Ripple’s signature token, XRP, was the third most precious cryptocurrency; it has dropped down the rankings for the reason that S.E.C. labeled it a security.

The consequence may even draw attention in Congress, where a slate of crypto-related bills was introduced this yr. When Mr. Gensler testified in front of the Senate Banking Committee in September, he was grilled by Republican senators, who said the S.E.C. was offering insufficient legal guidance to crypto corporations that desired to comply with federal law.

“Not liking the reply from the S.E.C.,” he shot back, “doesn’t mean there isn’t guidance.”

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