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Gensler’s history hints at what’s coming next in the crypto crackdown

He’s enemy No. 1 among crypto watchers. And this week, Securities and Exchange Commission Chair Gary Gensler has angered them even more.

The latest crackdown – against Paxos and Kraken – appeared to be a reaction to the collapse of FTX, which blindsided regulators, investors and politicians alike. But to really understand this past week and the commission under Gensler, look to the derivatives markets.

As chair of the Commodity Futures Trading Commission from 2009 to 2014, those financial instruments had a major image problem. Giant banks’ practice of gambling with complex derivatives had almost brought down the US economy, and Congress passed a raft of legislation to reform the practices of too-big-to-fail firms.

Somehow, the relatively sleepy CFTC, founded in the ‘70s to worry about soybeans and pork bellies, was given the authority to create the rules for most of the $400 trillion over-the-counter swaps market.

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For a smaller and under-resourced agency, it was a tall order. But the CFTC had the man for the job – the brilliant banker-turned-public servant Gensler.

Under Gensler, a Goldman Sachs alum and former Treasury advisor, the CFTC rolled out almost all of its new swaps rules in just four-and-a-half years.

The political climate was just right for his aggressive approach, with the economy still in the shadow of the financial crisis. Gensler by all accounts had a lot of support from Congress at that point, and left the CFTC covered in glory — depending on whom you ask.

Kinetic energy

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After his term at the CFTC, Gensler was a faculty member at the MIT Sloan School of Management. He also spent some time advising Hillary Clinton, as chief financial officer of her 2016 presidential campaign. His economic platform for the campaign showed his belief in strict financial regulation.

Washington insiders say that Gensler has strong ties to the Democrat establishment and to progressives like Senator Elizabeth Warren, who is emphatically in favour of stricter controls on crypto

On joining the SEC in 2021, it was clear almost immediately that he would be pursuing the same kinetic strategy that he had at the CFTC.

The SEC under Gensler has published proposal after proposal under an ambitious regulatory calendar, targeting swathes of the securities markets. US Treasuries, especially, are coming under more scrutiny. He has also tackled “greenwashing” in finance, the controversial practice of payment for order flow, and begun a major overhaul of the regulations governing dark pools in the US.

The sheer volume and breadth of these proposed rules has left market participants fuming. They say the comment periods on these proposals are too short, especially given how radical some of them are. They say the commission is overstepping its authority under the law, failing to conduct proper cost-benefit analysis before launching a proposed rule.

Some, like the national securities exchanges, have even pushed back with litigation.

Political support

Republicans have cried foul as might be expected, but even Democrats have joined in. Gensler apparently doesn’t quite have the same levels of political support as he did just post-crisis. Washington insiders told DL News that Gensler has strong ties to the Democrat establishment and to progressives like Senator Elizabeth Warren, who is emphatically in favour of stricter controls on crypto. But others, such as Democratic Senator John Hickenlooper, have criticised a lack of rulemaking on digital assets by the SEC.

The crypto industry might have been forgiven for expecting Gensler to be a sympathetic ear when he joined the commission, as he taught a highly-regarded course on blockchain while at MIT.

But Gensler is clear that his role is to carry out the SEC’s mandate — investor protection and orderly markets — and that crypto, as a new and largely unregulated asset class, is a risk.

Unlike the swaps or institutional securities markets, crypto’s customer base is largely retail: ordinary people who might not fully understand the risks to which they are exposed.

Gensler is approaching crypto in the same way that he is approaching traditional securities markets. The difference is that he doesn’t have regulations as his tools because there aren’t any, and so he is using what is to hand.

Whatever the case may be, crypto lawyers and DC insiders say the US regulatory agencies — and not just the SEC — are fully staffed now and inspections are back in full force after being curtailed by the pandemic.

This week was only the beginning of the crackdown. Expect another onslaught in weeks to come.