The Story Behind Gary Gensler’s SEC Strategy

June means hot weather and summer footwear. Flip-flops are out in full force—but they appear to be especially fashionable at the Securities and Exchange Commission.

In a newly surfaced video from 2018, Gary Gensler—who now serves as Chair of the SEC— definitively states that bitcoin, ether, litecoin, and bitcoin cash are “not securities.” It’s a far cry from his current position on the issue. As recently as February, Gensler mused in an interview with New York Magazine that “everything other than bitcoin” is a security.

Last week only added to the confusion with the release of the infamous “Hinman documents,” which serve as key evidence in the SEC vs. Ripple case. Most notably, these documents show SEC officials identifying a “regulatory gap” in securities law when it comes to classifying digital assets. The emails reflect a lack of consensus among regulators as to which cryptocurrencies are securities and why.

And yet, Gensler has taken the public position that no ambiguity exists at all: crypto platforms are, in effect, securities exchanges, and their activity falls under the sole purview of the SEC. According to Gensler, “Crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity.”

But the Hinman documents show that his own agency was grappling with the legal gray area surrounding digital assets in 2018. In that same year, Gensler himself said in a presentation to a group of hedge funds that “Three-quarters of this market is probably not securities.” Here, he was referring specifically to the big four digital assets that dominated trading volume at the time: bitcoin, ether, litecoin, and bitcoin cash.

All this raises the question: What happened?

How did Gensler make the logical jump from “Three-quarters of this market is probably not securities” to “Everything but bitcoin” is a security in just a few years? Does this evolution reflect a genuine change of mind on Gensler’s part? Or a strategic calculation to expand his political capital inside the Beltway?

Inside The Mind Of Gary Gensler

Both the timing and substance of the SEC’s enforcement actions against crypto suggest that Gary Gensler is no run-of-the-mill regulator—he’s a savvy political operator and a media maven.

From an early age, Gensler demonstrated a knack for political maneuvering inside large organizations. He became a partner at Goldman Sachs at just 30 years old, making him the youngest partner in the firm’s history at the time. After building a fortune on Wall Street, he decamped to DC, where he served in the U.S. Treasury Department as the Assistant Secretary for Financial Markets under the Clinton administration. There, he would cut his teeth in policymaking.

By Gensler’s own admission, he was a policy novice when he first came to Washington in the late ‘90s. But in a lecture from his Blockchain and Money course at MIT, Gensler describes “an old wonderful, political lawyer from Texas” who took him under his wing and taught him how to play the game.

Gensler’s mentor schooled him on the importance of effective messaging: “Young man, you know nothing about this town. You don’t get your message right, you’re not going to get to your politics. If you don’t get your politics right, you’ll never get to your analysis and your policy.”

Gensler appears to have taken these words to heart. He knows how to play the media game today perhaps better than any agency head in Washington. To use his own words, the crypto industry is teeming with “Hucksters. Fraudsters. Scam artists. Ponzi schemes.” And he has launched a PR and legal assault against the industry to drive that point home.

Catching Up With The Kardashians

How do you guarantee national headlines for a niche policy issue that few people outside of Washington care about? Suing a Kardashian is a good place to start. Gensler did exactly that last fall. The SEC charged Kim Kardashian for using her social media to bring attention to crypto platform EthereumMax without disclosing payment.

From that point on, Gensler has commanded the mainstream narrative around crypto—and Congress has been all but powerless to stop him.

Each time Congress has attempted to move the ball forward on policy, it has been sacked by the SEC. Consider a few examples:

• The same day the House Financial Services Committee announced a subcommittee on digital assets, the SEC announced it would be suing crypto giants Genesis and Gemini for allegedly selling unregistered securities.
• A month later, the SEC undercut Congress again when it issued a Wells notice to stablecoin provider Paxos. This was just two days before a House Financial Services hearing on—you guessed it—stablecoins.
• Earlier this month, the House of Representatives unveiled a discussion draft of the McHenry-Thompson bill—the most ambitious crypto legislation ever to come before Congress. But the SEC answered this move with the most ambitious litigation filed against crypto companies in the United States—twin lawsuits against Binance and Coinbase.

In short: Congress is running an empty backfield formation—and Gensler is blitzing every time. That Congress telegraphs its plays by announcing the subject of hearings well in advance gives Gensler an added advantage. He’s able to read the offense quickly and shut it down almost as soon as the ball is snapped.

SEC Smokescreen?

The question is, “Why crypto?”

Gensler oversees a U.S. capital market worth more than $40 trillion, of which digital assets would make up only a tiny fraction. And yet his crackdown on crypto is fast becoming his legacy as SEC Chair.

It’s possible that this could all be an act of misdirection. As Paradigm Policy Director Justin Slaughter tweeted, “If we’re discussing the SEC’s enforcement actions against key crypto companies, we’re not discussing the McHenry-Thompson bill. But we’re also not discussing the SEC’s failure to finish most of the rules on its very large agenda, from ESG to market structure.”

Beyond failing to deliver on ESG and market structure reforms, major banks have melted down under Gensler’s watch. Yet he has been able to avoid the media spotlight largely by pointing it toward crypto instead.

Simultaneously, he has built a rock-solid reputation among progressives as a no-nonsense regulator. House Democrats frustrated with the slow pace of financial reforms on Capitol Hill have found a useful whipping boy in crypto. Crypto has nowhere near the influence and lobbying power of traditional banks, making it an easy target for Congress and federal agencies alike. And directing the fire is Gensler.

Courting Congress

Gensler has cultivated cozy relationships with members in both the Senate and the House to increase his pull in both chambers. Ensuring greater policy coordination between the SEC and the Senate Banking Committee, he tapped Corey Frank—a former top aide to Senate Banking Chair (and notable crypto critic) Sherrod Brown—to help lead the agency’s approach to digital assets. This is in addition to his close ties with Senator Elizabeth Warren, another prominent member of the Senate Banking Committee who recently vowed to mount an “Anti-Crypto Army.” Meanwhile, Gensler has courted Democrats on the House Financial Services Committee so successfully that they have begun to parrot his talking points in internal memos and committee hearings.

If policy is like painting, then Gensler is a Picasso. The media is his brush, and Congress is his canvas.

By fortifying relationships with Democratic power players, Gensler has positioned himself well for a future promotion—be it in this administration or another one. His resume puts him in top contention as a future Treasury Secretary or as an ambassador in a prestigious European or Asian post.

And herein lies the irony: Gensler’s attack on digital assets poses an existential threat to the industry. But for him, it may well be just a stepping stone on the path to higher office.

Whether he gets his way in corralling crypto is ultimately for Congress and the courts to decide.