Why the Securities and Exchange Commission lost the war on cryptocurrencies

From banning non-compete clauses to re-requiring “net neutrality” to hyperinflating the cost of taxpayer-funded infrastructure with extravagant union donations, the Biden administration has overseen a massive expansion of the regulatory state. But amid this regulatory intemperance that is sowing uncertainty, stifling innovation, and delaying investment and growth, there are encouraging signs that Congress, the courts, and American businesses are fed up with government by executive order.

Take, for example, the escapades of the Securities and Exchange Commission. Since taking office, Biden’s approach to cryptocurrencies and related technologies has been to delegate and defer action to SEC activist and its crusade chairman, Gary Gensler. CEO Gensler Depicts Cryptocurrency Industry as ‘Full of Traders, Scammers, and (and) Fraudsters,”, which, in his opinion, exempts him from proposing and announcing specific rules, consistent with the Act, that the industry should follow. Instead, Gensler views crypto companies as unworthy of such regulatory transparency, choosing to throw them off balance with a “regulation through enforcement” approach – aggressively suing crypto companies for failing to comply with securities laws, without ever specifying what “compliance” requires.

In the absence of clear, legal paths, digital asset companies have moved their innovations and expertise to friendlier shores. Governments in places such as the UK, European Union, Singapore and the United Arab Emirates have already established regulatory frameworks, and their economies are sure to benefit from the resulting financial and related technological innovations.

Meanwhile, other companies have chosen to stay in the United States and figure out how to acquire and deploy the resources needed to bring common sense to the domestic regulatory environment. Indeed, the politics around this issue have begun to change. Last week, even political allies such as Senate Majority Leader Charles Schumer (D-NY) and former House Speaker Nancy Pelosi (D-CA) voted to rein in Gensler’s expansive demands for regulatory power over digital assets.

On May 21, with the support of 12 Democrats, including Schumer, the Senate by a 60-38 vote repealed Gensler’s controversial Employee Accounting Bulletin No. 121 (SAB21) – an SEC guidance document that makes it very difficult for financial institutions to provide custody services for cryptocurrencies. Last October, the Government Accountability Office had already ruled that Gensler bypassed the statutory rulemaking process under SAB21 by failing to notify Congress as required by the Congressional Review Act.

Then on May 22, with the support of 70 Democrats, including Pelosi, the House passed by a 279-136 vote the Financial Innovation and Technology for the 21st Century Act, known as FIT21, which removes any doubt that digital assets are commodities to be regulated by the Commission Commodity Futures Trading Committee, not SEC-regulated securities. This very issue was the subject of lawsuits brought by the SEC against Coinbase and Ripple Labs.

Last July, Judge Analisa Torres of the Southern District of New York ruled that the XRP token, which Ripple uses in its cross-border payments product, does not constitute a security when traded on public exchanges. Ripple CEO Brad Garlinghouse was also personally targeted by the SEC in the lawsuit, accused of “aiding and abetting” what turned out to be the legal sale of XRP. “I’ll be honest, it was a pretty dark time,” Garlinghouse recalled in front of thousands of jubilant Ripple supporters that December 2020 evening when he learned he was being sued for hundreds of millions of dollars

Shortly after Torres’ ruling, the SEC dropped its case against Garlinghouse, but the ordeal seemed to strengthen his resolve to take the fight far beyond the courtroom. The victory certainly provided momentum for efforts to pass FIT21 and cemented Garlinghouse’s heroic profile among the grassroots army of cryptocurrency advocates who have mobilized not only to fight the SEC, but also to influence the 2024 elections.

As recent court decisions and legislative changes have begun to provide greater regulatory clarity, the experience has brought together Garlinghouse and other industry leaders to recognize what’s at stake and support the campaigns of candidates who believe in crypto and blockchain technologies. Ripple is one of the main funders of Fairshake PAC, a political action committee that has amassed one of the largest war chests for the 2024 election campaign..

“Team Ripple is investing in the ground,” Garlinghouse wrote in December on X, as news broke of the massive sums raised by Fairshake and two of its affiliated PACs. Their first major target was Republican Katie Porter (D-Calif.), a rising Democratic star and staunch Gensler ally who was running for Senate in Ripple’s home state of California. She faced an onslaught of negative ads and finished a distant third in the primary.

Fairshake has expanded his scope to other races across the country, supporting allies in both parties but putting significant pressure on Democratic Senate candidates in Ohio, Montana and other swing states. Schumer and Pelosi’s change in tone in last week’s votes suggests the PAC approach may work in Washington. Even the White House appears to be backing down from the threat of vetoing FIT21.

Republicans are also paying attention. Presumptive presidential candidate Donald Trump is courting cryptocurrency companies while highlighting the Biden administration’s mistreatment of the industry. In an election year where margins of victory may be slim, neither side can risk alienating an economically vital and increasingly engaged electorate.

Despite the personal ambitions of zealous regulators and the devastating turf battles they wage, American innovation is difficult to suppress. Determined entrepreneurs like Garlinghouse find ways to get around hastily erected obstacles. Eventually, the markets will take their course and the economic benefits of new technologies will become apparent. This was the case with the Internet thirty years ago. See how this becomes true for blockchain technology as the future unfolds.