In the 1970s, nearly half a century before he'd grow powerful enough to strike fear into the entire U.S. cryptocurrency industry, Gary Gensler was the 112-pound coxswain of the University of Pennsylvania crew team.
Unlike runners and cyclists, rowers (such as actual regulation-following Olympic rowers Cameron and Tyler Winklevoss) move backwards. The coxswain, who doesn't touch the oars himself, faces forward to tell his teammates what pace to hit, guide their progress, and make sure the boat doesn't sink.
Now, eight months into Gensler's stint as chair of the U.S. Securities and Exchange Commission, the country's crypto industry is either headed for the rocks or glorious victory. And no one can quite tell where Gensler is guiding it.
Crypto had its biggest year ever in 2021.
What began as a wave of price increases in late 2020 thanks to the economic environment of the pandemic turned into a tidal swell in 2021, leaving Decrypt with a surplus of candidates for our Person of the Year.
The most obvious may have been Elon Musk, the Tesla/SpaceX CEO who has used his thumbs to tweet Dogecoin into a multi-billion dollar asset. He pushed Bitcoin prices ever higher by prodding his electric car company to buy $1.5 billion in BTC in February, the largest single crypto purchase by a publicly traded company ever. Musk was TIME’s choice for Person of the Year.
Sam Bankman-Fried, the wunderkind now known purely by the acronym SBF, brings the same devotion to crypto trading and online gaming as Musk does to tweeting. The FTX founder sleeps on an office bean bag chair so he can be closer to his computer, and this year turned his DeFi prowess into an exchange empire with the funds to shell out millions on long-term sports marketing sponsorships.
And then there’s Nayib Bukele, the populist president of El Salvador. Bukele, a raging Bitcoin bull, wasn't content to leave his country's monetary policy to the Federal Reserve, as it had done since adopting the U.S. dollar as the national currency in 2001. So he drafted a law, pushed it through the Legislative Assembly, and made Bitcoin legal tender in his country. Almost overnight, Salvadorans became Bitcoiners, whether they wanted to or not.
But Gary Gensler could sink all their portfolios with a few deft strokes—and without ever grabbing an oar. He has quickly become the most important person for the future of the crypto industry—that's why he's Decrypt’s Person of the Year.
Optimism quickly soured
All the way back in June 2018, half a lifetime in crypto years, Gensler's predecessor Jay Clayton declared that Bitcoin is not a security but instead acts like a sovereign currency. Ethereum and others? He was less sure.
“A token, a digital asset where I give you my money [in exchange for] providing a return… that is a security and we regulate that," Clayton told CNBC. "We regulate the offering and trading of that security.”
Sounds straightforward, right? But the crypto industry wasn't so sure that laws from the first half of last century were flexible enough to handle 21st-century asset classes. Moreover, the SEC's sister agency, the Commodity Futures Trading Commission, was calling dibs on some coins and tokens while half a dozen other federal agencies—charged with everything from taxing capital gains to preventing money laundering—made haphazard pronouncements about crypto regs. All the while, Congress mostly focused on other issues.
It was a regulatory mess. Nearly across the board, crypto projects pleaded ignorance as to how to proceed, complaining that the SEC wouldn't give them clear guidance.
The crypto faithful thought Gensler would be the guy who could fix the mess.
The crypto faithful thought Gensler would be the guy who could fix the mess.
After all, Gensler, with a resume that included Goldman Sachs, the U.S. Treasury Department, and the CFTC, was well-versed in the technology. He even taught a course on blockchain and Bitcoin at MIT while he waited for a call back up to the Big Show: government. In lectures, he demonstrated fluency in smart contracts, decentralization, and the major tensions between legacy systems and a Web3 world.
Finally, someone who understood.
Gary goes back to Washington
Ripple General Counsel Stu Alderoty tells Decrypt that "the industry was cautiously optimistic" that Gensler would engage in dialogue given his familiarity with the subject matter. (Alderoty had reason to hope; Ripple executives have been fighting the SEC over XRP tokens since last December.) Anthony Scaramucci, in a Decrypt interview back in March, was confident Gensler would approve a Bitcoin ETF before the end of the year. (It would take seven more months, and it would be only a futures ETF.)
Gensler was saying the right things. In a confirmation hearing before the Senate Banking Committee, Senator Mike Rounds (R-SD) asked about cryptocurrencies. Gensler responded by calling them a "catalyst for change." He then walked the line to assure he'd promote innovation while ensuring consumers are protected.
"Bitcoin and other cryptocurrencies have brought new thinking to payments and financial inclusion, but they’ve also raised new issues of investor protection that we still need to attend to,” Gensler said. Rounds voted to advance the nomination out of committee.
But by August, Representative Patrick McHenry (R-NC), the ranking Republican on the House Financial Services Committee, was accusing Gensler of a "power grab over digital asset exchanges," after the SEC chair told Senator Elizabeth Warren (D-MA), a prominent crypto critic, that "regulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending"—including DeFi platforms, which remove third parties from the transactions. In other words, Gensler was saying, it wasn't just the tokens themselves that regulators should be looking after—but the platforms on which they're traded and borrowed.
"There's a lot of lending going on. There's a lot of trading going on," Gensler said of the DeFi sector in October. "And without protections, I fear that it's going to end poorly."
Gensler wants to be the one designing those protections. (The chairman's representatives did not respond to multiple interview requests for this profile.)
This fall, Bloomberg reported that Gensler had spent a considerable amount of time convincing the Treasury Department to affirm the SEC's authority over stablecoins, the dollar-pegged tokens that provide an easy bridge from fiat currency to decentralized financial trading. This despite the fact that stablecoins aren't designed to increase—or decrease—in value. Nonetheless, Gensler is making the case that they should fall under his agency's jurisdiction.
"The aggression and the effort of the SEC under Gary Gensler to make a regulatory land grab that all things crypto must end up at the doorstep of the SEC seems to be the modus operandi," said Alderoty, echoing McHenry's words.
Not everyone agrees that Gensler will overstep. And crypto trading platforms—from publicly traded spot exchange Coinbase to rapidly-growing derivatives exchange FTX—have floated a one-regulator proposal. Why not the SEC?
"I think if the SEC wanted to, they probably have flexibility within their authority to find the right framework," Kristin Smith, executive director of the D.C.-based lobby group, the Blockchain Association, tells Decrypt. "And I think what will be interesting is: Does that happen next year or does it not?"
Smith, who marshals an advocacy group that counts both decentralized finance projects Aave and Uniswap as members alongside protocols like Solana and exchanges like Binance, still feels optimistic on Gensler.
"We agree with some of the things that he wants to see, like investor protection and market integrity. I think those are values and goals that most participants in the industry share," she says. "I think where we continue to differ with him is the sort of idea that the laws are super clear."
Joon Kim, general counsel and board member of the Mina Foundation, which promotes the growth of a lightweight blockchain protocol and coin of the same name, wishes the SEC would focus less on punishing industry actors after the fact and more on setting the rules of the road.
"Gensler’s appointment signifies two things," Kim told Decrypt via email. We cannot expect any helpful guidance coming out of at least the SEC during his tenure; and we can expect more enforcement actions based on the same set of case laws used against 2017 ICO projects."
In 2017, internet projects bootstrapped by creating and selling their own tokens (“initial coin offerings”) that would eventually provide some theoretical utility on the network that the project was creating. The SEC hunted many of them down for selling what looked like unregistered security offerings based on the “Howey test,” inspired by a 1946 case regarding the sale of shares in a citrus grove. Jay Clayton told Congress in June 2018, "I believe that every ICO I have seen is a security."
That only further muddied the waters as it came shortly after SEC Director of Corporation Finance William Hinman declared that Ethereum, which was created through a 2014 ICO, had "sufficiently decentralized" to no longer be deemed a security.
Talk to enough people around crypto and you hear a lot of this: The SEC needs to roll out clearer guidelines for what constitutes a security. But also: Our token definitely isn’t a security. There's a reasonable question about whether the industry wants clarity or just more favorable conditions in which to operate.
Hailey Lennon, a partner at crypto-focused law firm Anderson Kill, says there's a perception among crypto firms that the SEC isn't easy to work with, which is why the industry doesn’t want to see it as the agency of record for crypto.
"Some people don't want the SEC to be a main regulator of the cryptocurrency space in the US because they don't feel like the SEC is actually exploring ways to resolve issues within the industry," Lennon tells Decrypt. "Gary Gensler has said he thinks tokens on some of these exchanges are securities. Really, any day there could be investigations or enforcement actions against many companies in the space."
That leaves the industry essentially where it was a few years ago, except with a more aggressive sheriff.
All of which adds up to a bummer: "Has it gotten worse under Gensler?" Alderoty asks. "It certainly hasn't gotten better."
The call is coming from inside the house
The crypto industry isn't alone in thinking that Gensler needs to be clearer—just as a coxswain would give very deliberate directions to his crew instead of letting them row into a rock wall and then berating them after the fact.
SEC Commissioner Hester Peirce, one of five agency leaders (including Gensler) who vote on issues such as whether to allow a Bitcoin ETF, also thinks there's room for improvement.
"Our continued refusal to provide regulatory clarity, together with a heavy reliance on our enforcement program, continues to be a problem," she told Decrypt via email. She credited Gensler's leadership on allowing a Bitcoin futures ETF, but added: "Chair Gensler has stated his willingness to work with entities to enable them to register. He can demonstrate that he is serious by taking concrete actions to build a workable regulatory framework."
Peirce's affinity for innovation, combined with a regulatory approach informed by libertarianism, has made her the darling of the industry, where she's known as "Crypto Mom." (Former CFTC chair Christopher Giancarlo is “Crypto Dad”—Gensler doesn’t have a nickname.) Most crypto vets now see her—not Gensler—as their best hope to provide a solution for the industry's aches and pains.
"I believe that Hester Peirce’s Safe Harbor V. 2.0 remains the most helpful, unadopted guidance for the industry," Mina Foundation's Kim said via email, though he added that the ideal situation is a "new federal agency, headed by someone who sufficiently understands (and hopefully appreciates) blockchain technology.” Good luck with that.
Peirce's safe harbor proposal would allow cryptocurrency projects a three-year growing period before they are subject to securities laws. If in that time they can decentralize so that they're no longer reliant on the founding team for management or promotion, they can bypass securities registration altogether.
Peirce hasn't gotten very far, either with Gensler or her remaining colleagues—though Rep. McHenry included the proposal in recent legislation.
Senator Cynthia Lummis, the Wyoming Republican known for her disavowal of U.S. monetary policy and her open embrace of Bitcoin as a store of value, is hopeful that Gensler and the Senate can work together to create better guidance for the crypto industry. Lummis was one of just three Republicans who voted to confirm Gensler's appointment on the Senate floor, citing the need for U.S. financial innovation so as to not lose ground with China.
Despite a broad feeling of disappointment within the industry about Gensler's performance thus far, Lummis tells Decrypt she wouldn't change her vote. "Over the course of the last eight months, I’ve found Gary to be a smart, committed public servant who I look forward to continuing to work with," she says.
Outside the States
But if Sen. Lummis and Commissioner Peirce are wrong, and a regulatory framework isn't on the way, don't expect the U.S.—which boasts the world's largest economy—to come out ahead.
American business leaders fear that crypto innovation will head overseas and the U.S. will lose out to countries such as Switzerland and The Bahamas, which have more favorable frameworks in place—and many crypto O.G.s like Erik Voorhees of ShapeShift and Jesse Powell of Kraken think the U.S. might have already blown it.
For some, the U.S. may not be essential. Do Kwon, the outspoken founder and CEO of Terraform Labs, which was targeted this year by the SEC over unregistered securities trading, recently said on CoinDesk TV, "I’m not particularly interested in how U.S. policy shapes around crypto, particularly algorithmic stablecoins. It doesn't really impact my life."
Ripple's Alderoty says SEC enforcement hasn't slowed down Ripple. "Since the filing of the SEC lawsuit, Ripple has not signed a single customer within the US, but we've had our strongest year ever in the history of the company in terms of our product offering and institutional customers who are themselves financial institutions and payment providers embracing our products."
He added what sounds like a threat: "When the industry talks about this innovation moving offshore, it is to be believed."
Maybe it's time for the coxswain to grab an oar.