A Tale of 2 SEC Commissioners

Last week, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler and Commissioner Hester Peirce issued two public statements that show radically different understandings of the application of securities law to crypto.

While Commissioner Peirce has proven constructive and shown a willingness to improve regulatory shortcomings, Chairman Gensler has been anything but, and instead has displayed a flair for political theater and subtle intimidation.

The two have radically contrasting approaches to leadership.

Rodrigo Seira is special counsel at Paradigm. He was previously outside counsel to Cooley LLP and a founding member of DLX Law.

Gensler’s critiques

On Tuesday, Oct. 24, Chair Gensler delivered a speech in Washington D.C. that harshly criticized the crypto industry and accused its participants of intentionally violating securities laws. His remarks were delivered at the Securities Enforcement Forum, to a crowd of lawyers who are in the business of representing clients in front of the SEC.

To put the scene in context, Bloomberg’s Zeke Faux was there giving away free copies of his new book, “Number Go Up” (which is highly critical of crypto), and coffee mugs with the logo of the bankrupt crypto exchange FTX had adorned the center of every table. Those mugs were filled with mints, a cheeky gesture by the event organizers given former FTX CEO Sam Bankman-Fried’s ongoing trial.

At one point during his remarks, Gensler asked every lawyer in the room who represents crypto clients to raise their hand, and then ridiculed the claim that any project with a lawyer could claim to be decentralized. Sitting in the crowd, I couldn’t help but feel that Gensler’s statements that crypto lawyers should weigh their client advocacy against an overriding “public interest” were meant to intimidate lawyers from representing crypto clients.

Peirce’s recognition

Three days later, SEC Commissioner Peirce issued a statement in response to the crypto project LBRY announcing it was shutting down as a result of an agency enforcement action. In stark contrast to Gensler’s comments, Peirce’s statement recognized the work the SEC needs to undertake in order to provide a viable framework for crypto in the U.S.

She also highlighted the negative impact that the current enforcement-only approach has on investors and showed empathy for the entrepreneurs trying to make sense of the regulations.

One of the SEC’s core missions is to protect investors. Yet against the backdrop of several crypto projects imploding resulting in large losses to U.S. consumers, Chairman Gensler seems to abdicate all responsibility for allowing this harm to occur during his watch. In his view, these “problems” are simply the result of “wide-ranging non-compliance” by the crypto industry. If only crypto projects would come in and register using “a form on our website” there would be no harm.

Of course, the problem is that it’s impossible for crypto projects to comply with the current SEC regulations. SEC registration entails a host of regulations that apply to crypto assets, the entity that registers them and other participants in the ecosystem, all which make the functioning of most crypto protocols impossible. The history of failed projects that have attempted to register is proof of this fact.

Moreover, the existing securities framework was designed to regulate securities instruments that differ fundamentally from crypto assets, and as a result current registration forms rely on a set of disclosures that are inadequate for crypto’s unique aspects and leave investors vulnerable.

Gensler’s SEC

Early in his tenure at the SEC, Chair Gensler recognized the existing regulatory gap and called on Congress to update the regulations. But the political climate changed, and with it Gensler’s recognition of the problem and his willingness to act. Therefore, despite repeated industry attempts to get clarity and the agency updating the disclosure framework for other types of instruments, Gensler’s SEC has done nothing to provide a viable regulatory framework for crypto.

Instead, Chair Gensler has been intransigent and focused on running a media campaign that includes highly produced “office hours” videos, charging celebrities like Kim Kardashian and timing enforcement actions to conflict with congressional hearings on crypto in order to steal headlines.

Much to her credit, Commissioner Peirce has been steadfast in her recognition that the current SEC framework does not work for crypto. And unlike the Chair, she doesn’t shift the blame to the industry for not making sense of absurd regulations.

In her statement on LBRY, she highlighted the impact the current SEC approach to regulating crypto has on entrepreneurs, who confront an unclear regulatory landscape and are forced to shut down their projects if they happen to draw the short straw and face an SEC enforcement action.

She also questions whether this enforcement-only approach benefits the consumers the SEC is tasked with protecting; consumers who are left holding tokens of a now defunct project.

Peirce’s accountability

But she doesn’t stop at just diagnosing the problem. The role of regulators is to identify policy issues and attempt to address them. Showing the type of self-reflection, accountability and humor that defines the best leaders, Commissioner Peirce holds herself responsible and has been actively working to address the existing regulatory gap.

To that end Commissioner Peirce introduced a proposed safe harbor for token issuances, which was reworked and re-introduced to account for community feedback. Her statement on LBRY ends by repeating her plea for the crypto community to send her ideas about how the SEC might “right its course on crypto and innovation more broadly.”

This is a plea that the crypto community and those focused on keeping innovation on America’s shores should take seriously. Let’s empower regulators like Commissioner Peirce and make sure that by the time she’s tending to her bees in 2028, she can do so with a sense of satisfaction for the work we did together.