It was reported this week that Gary Gensler, former chairman of the Commodity Future Trading Commission (CFTC), will vote for President-elect Joe Biden to take over the Securities and Exchange Commission (SEC). This is good news for the digital assets industry. From my experience with Gensler, whether it is digital assets, swaps or market structures, I can confirm that he is thoughtful and open-minded about the future of crypto assets and understands the role that enlightened regulators can play in promoting innovation. I can also promise that he won’t just be a cheerleader.
Jeff Bandman is the founder and principal of Bandman Advisors and a former senior CFTC official.
understanding
First of all, he gets it. He is clearly committed to understanding space on many levels – technology, politics, economics and so on. He testified before Congress on the politics and regulation of digital currencies, taught blockchain and digital currencies at the MIT Sloan School of Management, and participated in numerous public and private discussions in the US and internationally (some of which I have participated in and exchanged have) views). He’ll be ready to go, as well informed, and as busy with digital assets as one could hope to become chair of a U.S. financial regulator.
Market structure
I think it is very likely that he will make market structure a high priority. Unlike previous SEC chairs with an enforcement or M&A background, Gensler’s background is in markets and financial technology, as well as politics.
When he joined the CFTC in 2009 following the financial crisis, he led a major reform of the OTC derivatives market under the 2009 G20 Pittsburgh Accords and helped draft the Dodd-Frank Law to reform and protect consumers on Wall Street. reorganizing the financial system. The CFTC passed over 65 rules in response to its Dodd-Frank mandate.
The industry has not always been happy with the results, to say the least. There have been many complaints that the CFTC’s reforms would irreparably damage the swap market.
However, the U.S. swap market by and large remains vibrant, liquid, and trustworthy, and continues to evolve with efficiency and resilience in March 2020 at the height of the COVID-19 pandemic. This will reinforce his belief that investors and other stakeholders trust well-regulated markets.
See also: Gary Gensler – Even if a thousand projects fail, blockchain is still a catalyst for change (2019)
Aware of the influence of the established swap companies, Gensler tried to empower challengers and insurgents (within a strong regulatory framework). In cryptography, the “incumbents” are an entirely different population, but this dynamic could be repeated.
Gensler will have strong mandates and expectations from the progressive side of the aisle. Accordingly, we can expect a strong focus on investor protection to offset the encouragement of capital formation using crypto assets and the need to ensure that crypto does not become the side door or back door to bypass regulatory frameworks.
I assume we’ll see a lot more clarity about the market structure and infrastructure for crypto assets – the regulatory clarity that drives investor adoption and trust – and I would be shocked if there weren’t any things that do Make the industry howl.
ETFs
I think we will finally see under Gensler that the SEC gives the green light to Bitcoin exchange traded retail funds (ETFs). I assume that he will closely examine and convince of data on the underlying liquidity of the spot market and the integrity of selected source marketplaces where pricing and formation take place.
The outlook could go from “I don’t want anything bad to happen on my watch” to “How can these American investors be offered safely”? Monitoring the underlying spot market could also play a bigger role for the SEC.
The role of the strategic center for innovation and financial technology (or FinHub) could also be strengthened. This office, overseen by Valerie A. Szczepanik, was recently raised to report directly to the SEC chair (in line with LabCFTC’s 2019 survey). Chairman Gensler can use FinHub not only for engagement, but also to encourage greater convergence of policy development and implementation in internal silos.
International cooperation
How will it continue internationally?
During Chairman Gensler’s CFTC tenure (late 2014), relations with other national regulators were strained to say the least. International regulators with long memories have already asked me about this, fearing that Gensler was trying to impose the US approach to swaps on other jurisdictions and that we may expect more of it.
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. The regulation of crypto assets is very different from the international swap market.
First of all, the Biden government is generally expected to embrace multilateralism in terms of international politics and engagement. A different approach by the SEC chairman would set a markedly different tone.
Second, under the leadership of Chairman Gensler, the CFTC was either the first jurisdiction or one of the first jurisdictions to adopt OTC reforms after the financial crisis. Much of the international friction arose because the US came first and the CFTC rules, guidelines, and interpretations were acting extraterritorial to fill a vacuum and prevent regulatory arbitrage. The latest CFTC rules on cross-border issues have addressed changing circumstances after other G20 and non-G20 jurisdictions largely (if not fully) implemented the 2009 Pittsburgh reforms (the SEC was among the last to do so after they have completed their) framework for trading safety-based swaps just last month).
The global landscape of regulating crypto assets in 2021 is very different from that of OTC swaps in 2011. While there is by no means a single approach, many jurisdictions have already implemented strict and innovative regulatory frameworks for crypto assets. Others, like the EU, have considered broad proposals.
I assume that the market structure and infrastructure for crypto assets will become much clearer.
In addition, there are numerous international work areas under the auspices of FSB, BIS, FATF, G7, G20, OECD, IMF, CPMI, IOSCO and others. While gaps and differences remain, as does the potential for regulatory arbitrage in the global digital financial landscape, Chairman Gensler will not encounter the regulatory vacuum he found with swaps. However, we should not expect the SEC to be reluctant to promote its perspective on the international legal framework or not advocate greater harmonization.
It also does not have a clear legal mandate from Congress to take action on crypto assets, which it did under Dodd-Frank because Congress did not pass crypto assets legislation. Without legislation or other oversight, he can have considerable leeway.
Spot markets
Here is an important unanswered question. Will Gensler seek and obtain a mandate from Congress for the SEC to regulate and oversee the spot (or cash) market for non-securities crypto assets and oversee the markets that offer trading?
There is currently no US federal regulator overseeing the trading of crypto assets such as Bitcoin and Ethereum, which are considered non-securities. The CFTC has enforcement powers. For example, if there is fraud or manipulation on the spot market that leads to distortions (or worse) in the derivatives markets that it directly regulates. However, this is not the same as a regulator or supervisory authority.
See also: Gensler to be named SEC chairman: Reuters
FinCEN in the finance department is authorized from the point of view of money laundering / BSA, but this also does not correspond to the monitoring of market integrity, business conduct, security and solidity. The SEC and the CFTC do this for their respective regulated exchanges and other markets. This leads to a large regulatory loophole in the US federal framework.
Will Gensler get that kind of authority from Congress? Will Congress grant it and provide the necessary resources? Will this be the “entry price” for retail Bitcoin ETFs? When this happens, it won’t be overnight.
outlook
Having shaped the structure of the global swap market, Gensler is likely to take the opportunity to advance the regulatory structure of the crypto-asset market.
Of course, an SEC chair cannot act unilaterally. He needs the votes of his fellow commissioners and support from other stakeholders to carry out his vision or agenda. Non-crypto priorities can take precedence, from the pandemic to other new administration policy initiatives that require resources and attention. Even so, Gensler has demonstrated his ability to get an independent agency to work on multiple fronts at once.
Like everything else in crypto, this should be interesting, unpredictable, and full of twists and turns. The regulatory security the industry is getting may not be exactly the taste it is looking for.
