“That’s Our 2 Satoshis” — Why the Politics of Crypto Are Different This Time

Jeff Dorman, CFA
Apr 24, 2023
Thats Our 2 Satoshis LogoThis week's edition is written by Noelle Acheson. She is the author of the Crypto is Macro Now newsletter, which looks at the deepening overlap between the crypto and macro landscapes. Previously she was head of research at CoinDesk and more recently Genesis Trading, and before falling down the crypto rabbit hole, she did time as an e-commerce entrepreneur and tradfi fund manager and analyst.
This week's appearance by SEC Chair Gary Gensler before the House Financial Services Committee was his first in over a year and his first since the current Congress took over. The political shift quickly became obvious. The tone was markedly hostile, with the agency's approach to digital assets a key point of contention.

Like most congressional hearings, the event was primarily about making political points and grandstanding for the cameras. But it felt significant in that it revealed the scale of Republican dissatisfaction with Mr. Gensler's administration, suggested several topics that will likely become campaign platforms, and publicly weakened the SEC Chair's credibility, which, in turn, could prompt some modifications to the agency's approach.

Usually, the public doesn't care too much about financial regulation. However, the rhetoric witnessed this past week suggests that politicians may start to ensure they do. No longer is it just about financial disclosures and settlement rules; it is rapidly becoming about individual freedom and U.S. pride.The full video makes for compelling, although occasionally frustrating, viewing. Here are some of the key highlights:

  • Ahead of the hearing, around 30 elected representatives signed a letter "blasting" Mr. Gensler for misrepresenting the digital asset platform registration process—something the crypto community has complained about for some time, but the message's tone and the public posts of the signatories signal a notable escalation.
  • As the hearing kicked off, Chairman of the House Financial Services Committee Rep. Patrick McHenry (R-N.C.) came out swinging. Mr. McHenry highlighted, among other things, the inconsistency with which Mr. Gensler throws out crypto enforcement actions and asks for extra budget yet refuses to clarify the application of securities laws to digital assets and their service providers.
  • Mr. McHenry pointedly asked Mr. Gensler several times if ETH was a security, and each time, Mr. Gensler attempted to trot out the standard Howey definition without answering the question.
  • Mr. McHenry also attempted to get Mr. Gensler to acknowledge the unclear rules. Still, Mr. Gensler insisted they were sufficiently clear, but he couldn't say anything about any specific asset.
  • Mr. Gensler endured a fierce takedown by House Majority Whip Tom Emmer (R-M.N.), who highlighted the SEC's inconsistency in both its reach (Mr. Gensler has often said that the rules cover the industry adequately; he has also said that he needs additional congressional authority to be able to cover the industry) and its approach (they say firms just need to register, but there is no applicable registration process).
  • Rep. Warren Davidson (R-O.H.) pointed out that Mr. Gensler's SEC approved the pre-IPO documents of Coinbase, which described in detail its staking procedures and other operations, allowing retail investors to purchase shares. But 2 years later, the SEC sent a Wells notice to the company, implying concerns about the legality of some unspecified listed digital assets, the staking service, the crypto wallet, and other business areas, even though these had previously not raised any objections.
  • After reciting a litany of failures, Mr. Davidson introduced a bill to remove Mr. Gensler from office.

To be fair, the hearing wasn't all about perceived SEC failures and shortcomings. For example, some committee members praised Mr. Gensler for his bold approach to reforming securities clearing and for "standing up to crypto bro billionaires" (did he, though?) And many Republican critiques were not about the agency's crypto approach but about its move into policing the environmental impact of listed companies and other initiatives that would add to the compliance burden of smaller businesses.

The political nature of the questions was quite clear, however, with Republicans against and Democrats supporting the current SEC leadership. Mr. Davidson's bill proposing the firing of Mr. Gensler is unlikely to progress, but it loudly trumpets that the battle is getting more intense. Given the broad range of hot issues likely to dominate the rapidly approaching 2024 election campaign, it's a curious battle to pick. In any political competition, the opposition finds a weakness and attempts to escalate it to the public consciousness to score points and shift citizens' perception of the incumbents. That digital assets are a key protagonist of the current positioning is a strong message for the Republicans to send. What's more, they're not pulling their punches. This isn't just about financial oversight or administrative inefficiency. Nor is it just about the functioning of capital markets. Most voters don't care too much about that. Some of the statements made clear that this is about much bigger issues.

One is patriotism. Mr. Emmer was not the only one to remind Mr. Gensler that his actions are encouraging U.S. businesses to change jurisdiction, but he went as far as accusing the SEC Chair of "pushing American firms into the hands of the CCP," referring to the Chinese Communist Party. That pushed some hot buttons, especially since Mr. Gensler did not have a memorable rebuttal to any of the allegations.

Another is individual freedom. Mr. Emmer and others brought up the politicization of capital formation, but the mic drop belongs to Mr. Davidson with the following quote that we are likely to hear again: "You can't just exclude retail investors from markets and claim it's for their own good."

There is still quite a while until the U.S. election, and a lot can happen in the interim. It's unclear how much the current administration will dig in and back Mr. Gensler in his digital asset approach. A recent report on the crypto ecosystem from the White House Council of Economic Advisers was not exactly encouraging. The administration may be loath to give the Republicans what could look like a win. Or, it could be that Mr. Gensler's bosses decide that this is not a hill to die on, especially as the noise of high-profile suits involving the SEC gets louder and if the SEC starts losing.

Either way, digital assets are likely to continue forming part of the political discourse. This will broaden awareness as observers choose their sides, either sticking to party lines or switching sides as the ideological divide widens. 
 A bigger takeaway is that the digital asset ecosystem is moving from a market niche to a political platform. This week, crypto entrepreneur Ryan Selkis announced the launch of a $100 million multi-entity pro-crypto political campaign. The industry has many influential protagonists who will either join or form similar initiatives. 

Uncertainty is never comfortable, but we can take a moment to appreciate the attention, even if it's not the type the industry had hoped for. As Oscar Wilde famously said, "There is only one thing in the world worse than being talked about, and that is not being talked about." While I'm not sure I fully believe that, it does shed light on the importance of where the ecosystem is on this journey.

To see it take up so much of politicians' time, whatever the stance, is a sign that the industry has a seat at an ever-bigger table. Politics change, and regulators come and go. Meanwhile, crypto keeps on building.

The information presented is for general educational purposes, based upon publicly available sources believed to be reliable, but unverified. This communication is in no way a solicitation or an offer to sell securities or investment advisory services.Statements in this communication may include forward-looking information and/or may be based on various assumptions. These statements and other views or opinions expressed are those of the author, who is not affiliated with Arca, and are made as of the date of this publication. 


And That’s Our Two Satoshis!
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