Why Gary Gensler is in the Crosshairs of Crypto Enthusiasts

The Crypto Community’s Fixation on Gary Gensler

The entire crypto community is fixated on Securities and Exchange Commission Chair Gary Gensler.

Critics contend that he is too sweeping in his characterization of cryptocurrencies. They allege that he is deceiving earnest entrepreneurs by encouraging them to “register” with the knowledge that his system is designed for them to fail. They contend that he is aware that new regulations are required, yet he chooses to impose impractical regulations to stifle the industry. Additionally, under his leadership, the SEC initiated legal action against Coinbase, claiming that several major coins, which include Polygon’s MATIC (MATIC) and Solana’s SOL (SOL), are securities mainly due to the capital-raising activities associated with their issuance, regardless of their importance for the functioning of the networks.

The Cost of Gensler’s Stance

It’s not just those who are pessimistic who are making this observation; the campaign is having a hefty cost for the United States. Investment in the crypto sector in the U.S. has declined this year in comparison to the European Union, and America is losing its advantage. It is essential to act quickly.

The cynical reason for Gensler’s stance is political. Gensler taught a course on blockchain at MIT and has been heard discussing how not all tokens are securities, so he is aware of the complexities of digital assets. But he is feigning ignorance to back the objectives of Massachusetts Senator Elizabeth Warren, who has put together a “anti-crypto army” and has been assigned by President Joe Biden to set out crypto policy. If Biden wins the presidency again, Gensler may be in line for the role of Treasury secretary.

In reaction, legislators are amassing with bills suggesting to dismiss him. Congressmen Warren Davidson and Tom Emmer presented the “SEC Stabilization Act”, which recommends eliminating Gensler and reorganizing the agency to make it less political.

It would not be wise to take a stance against Gensler, as his views are not necessarily unlawful under current legislation.

The EU’s MiCA Regulation

The U.S. approach to securities law is based on the Howey test, which inquires whether purchasers have an “expectation of profit from the endeavors of others.” It is important to note that the expectations of buyers may be swayed by the issuer, but are not completely in their power. They might also be impacted by prevailing market trends, collective opinion, or even caprice. The advantage of this system is that it is difficult to manipulate. However, the downside is a “Schroedinger’s cat” paradox, in which the very act of observation by third parties decides whether a token is a security or not. This impedes capital formation by imposing an immense risk on entrepreneurs and users that is beyond their control.

The EU is keeping a close eye on your finances, but it still outperforms the US when it comes to cryptocurrency.

The EU’s Markets in Crypto-Assets (MiCA) legislation brings this paradox into focus. The legislation acknowledges that not all utility tokens are financial instruments and sets out specific requirements for disclosure and conduct that legitimate projects can adhere to. The EU determines whether a token is a security based on aspects that the issuer has control over, such as the instrument’s structure and how it is promoted. This is why MiCA permits utility tokens without difficulty, whereas the U.S. has difficulty in defining them.

Three key points to take away from the European Union’s MiCA Regulation.

This discrepancy is crucial. For instance, think of a situation where you are an entrepreneur issuing a governance token for a protocol that allows token holders to vote on modifications to open-source software. In the EU, by following MiCA, you can create a clear white paper and do your best to challenge any mischaracterizations. In the US, you can do the same, but there is no assurance that it is sufficient. If malicious actors have conditioned customers to anticipate profits from tokens in general, you may be stuck. As each new wave of technology is taken advantage of by bad actors such as Sam Bankman-Fried, there will always be malicious individuals who condition buyers when capital formation is essential for propelling society forward.

Firing Gensler may bring short-term relief due to the U.S. paradox, yet it would not necessarily address the underlying issue of a lack of clarity and flexibility. There is no certainty that Gensler’s successor will come to a different decision.

The Only Way to Solve the Problem

The only way to solve the problem in its entirety is to create new laws that redefine the United States’ definition of a security or establish a separate structure for digital asset issuers and exchanges. Unless we see real attempts to do this, a sword of Damocles will always be looming over the American crypto industry, always one election or chairperson away from being destroyed.