Entirely Overdetailed Notes from the Congressional Hearing Testimony of SEC Chairman Gary Gensler

On Tuesday, April 18, 2023, Securities and Exchange Commission (“SEC”) Chairman Gary Gensler was brought in to testify before the United States House of Representatives Committee on Financial Services. The hearing was to “examine the regulatory developments, rulemakings, and activities that the SEC has undertaken in the period since the last hearing on October 5, 2021” including the definition change to “exchange” that “potentially [expands] the SEC’s authority over digital asset trading platforms.”

I watched the entire 4+ hour hearing so you don’t have to. While topics such as climate risk disclosures and treasury markets were discussed at the hearing, this article will focus on the testimony related to digital assets’ regulation under the current SEC. Directly before the hearing, all the Republicans on the House Financial Services Committee signed a letter to Chair Gensler stating in part “Without clear rules of the road, your push for firms to ‘come in and register’ is a willful misrepresentation of the SEC’s non-existent registration process. The only entity to blame for the lack of registrants is the SEC itself.”

Interestingly, while many Republicans pressed Chair Gensler on what they saw as failing to effectively guide the crypto industry into a viable path for compliance, only a few Democrats supported the SEC’s regulation by enforcement against crypto companies. Most Committee Democrats instead either questioned Chair Gensler’s crypto enforcement tactics or stayed silent on the issue while supporting Chair Gensler’s efforts at investor education or climate disclosure mandates. It is unclear if this is an important distinction hinting at more bipartisan support for the industry as European and Asian countries are noticeably increasing industry market share through providing regulatory clarity to the detriment of US firms. It could also just be that these Committee Democrats don’t feel as strongly about digital asset issues (pro or con) and instead wanted to use their five minutes on issues which are more important to them.  

Committee Chair Patrick McHenry’s (R-NC 10th District) Opening Statement

Mr. McHenry’s five-minute opening statement began with a discussion of digital assets. You can watch that opening statement here. He criticized the SEC’s failure to provide clarity to digital asset issuers, while asking for additional resources to bring enforcement actions against those issuers. “Regulation by enforcement is not sufficient nor sustainable. Your approach is driving innovation overseas [and] is endangering American competitiveness.” He further said that Chair Gensler appears to be advancing his own personal agenda at the detriment to the SEC’s statutory mission of encouraging efficient capital formation.

Ranking Member Maxine Waters’ (D-CA 43rd District) Opening Statement

Ms. Waters focused her opening statement on the recent economic collapse of Silicon Valley Bank and Signature Bank, and other financial harms which she says this hearing fails to focus on and instead focuses on Republicans’ promise to “do a big number on the SEC and Chair Gensler” and this is the start of that process. She stated that the SEC’s rulemaking reforms are not being rushed, but are instead long overdue. She also applauded the “forceful action the SEC has taken and dedicated more resources to go after crypto criminals.”

Ann Wagner (R-MO 2nd District) Opening Statement

Ms. Wagner’s 1 minute allocated opening statement was spent stating that the rulemaking by the SEC is rushed and frenzied the likes of which hasn’t been seen since the financial collapse in 2008. She focused on the fact that the SEC is empowered through Congressional mandates and that Chair Gensler’s actions overstep those mandates.

Brad Sherman (D-CA 32nd District) Opening Statement

Mr. Sherman thanked Chair Gensler for “standing up to the crypto bro billionaires” and emphasized that capital formation requires investment protection to be efficient.

Chair Gensler’s Opening Statement

In his prepared opening remarks, Chair Gensler began with discussing the history of U.S. securities laws and the role of the SEC in protecting investors and promoting capital markets. He went on to highlight the importance of updating the rules and regulations to adapt to changes in technology, markets, and business models.

Chair Gensler emphasized that most crypto tokens are considered securities, and thus, crypto intermediaries dealing with them must register with the SEC. The statement also highlights those crypto markets are not exempt from securities laws and labeling oneself as a “DeFi platform” does not provide an excuse for noncompliance. He stated that the digital asset market has high levels of noncompliance, which jeopardizes investor protection and public trust in capital markets. The SEC aims to protect investors by applying the same laws to crypto markets as in other securities markets and he claimed the SEC has spoken to crypto market participants through enforcement actions and rule proposals.

Patrick McHenry (R-NC 10th District)

Mr. McHenry’s questions began with a discussion of Ethereum (“ETH”), which is the second largest cryptocurrency by market cap. Mr. McHenry brought up the fact that former SEC Director of Corporate Finance William Hinman gave a speech that claimed ETH was not a security. Mr. McHenry also stated that current CFTC Chair Rostin Behnam has testified in front of Congress that ETH is a commodity.

Mr. McHenry then directly asked what Chair Gensler thinks ETH is: a commodity or security? You can watch Chair Gensler refuse to answer that question here. Gensler and others at the SEC have previously said Bitcoin is not a security, so Mr. McHenry did not believe Chair Gensler’s statement that “he cannot comment on any particular digital asset” is a legitimate excuse because Chair Gensler has commented on particular digital assets like Bitcoin. Mr. McHenry pressed Chair Gensler if he believes the second largest digital asset is a commodity or a security, but Chair Gensler refused to provide a direct answer. 

Mr. McHenry ended his allotted time by criticizing Chair Gensler for failing to provide clarity for even the second largest cryptocurrency, and that level of uncertainty does absolutely nothing to protect investors.

Maxine Waters (D-CA 43rd District)

Ms. Waters first asked Chair Gensler to explain a security vs a commodity. Chair Gensler said that the commission has addressed this issue as to the Howey test on “investment contracts” in the 100+ actions the SEC has litigated on the investment contract issue.

Ms. Waters asks if the SEC has the authorities and laws needed to protect investors in the digital asset space. Chair Gensler says the SEC does have the legal authority under existing laws and the SEC is currently exercising those powers. He says in his 40 years in the financial industry he has never seen a field that is so non-compliant with laws written by Congress as the crypto industry.

Vice Chair French Hill (R-AR 2nd District)

Mr. Hill started with the President’s working group recommendation that Congress should enact a regulatory framework on stable coins, and asks if Chair Gensler agrees with that recommendation. Chair Gensler says he is concerned that stable coins could undermine money market funds, and the CFTC/SEC’s authorities to go after fraud and manipulation.

Chair Gensler pointed out that a stable coin issuer (Circle) had billions held in Silicon Valley Bank, which Mr. Hill agreed was a terrible decision. Both Mr. Hill and Chair Gensler ignore the financial realities that many banks refuse to service digital asset businesses, which resulted in such a high concentration of assets in a limited number of banks.

Nydia Velázquez (D-NY 7th District)

No crypto discussion.

Pete Sessions (R-TX 17th District)

No crypto discussion.

Brad Sherman (D-CA 32nd District)

Mr. Sherman says his proposed solution to current uncertainty is legislation that defines all intangible assets as a “security” which would include all crypto.

Later, Mr. Sherman states, and Chair Gensler agrees, that any exchange which sells crypto asset securities are securities exchanges and need to register as such. Mr. Sherman then asked Gensler to “shut down” non-compliant exchanges.

Frank Lucas (R-OK 3rd District)

No crypto discussion.

Stephen Lynch (D-MA 8th District)

Mr. Lynch started his questioning by taking umbrage with Republicans criticizing the SEC for lack of rulemaking for crypto while also criticizing the SEC’s number and pace of rulemaking elsewhere.

Mr. Lynch asks about 130 enforcement actions taken by the SEC under Chair Gensler’s term, and Chair Gensler states that the SEC has either settled or been “quite successful” throughout. Chair Gensler also says that those decisions lay out “rules of the road” and that every enforcement action is a result of vote of the five member commission and a written charging document.

Chair Gensler claims there is guidance and clarity out there for crypto, it just isn’t the clarity that the industry wants. “This is a field that, in the main, is built up around non-compliance.”

Chair Gensler states there are risks of “non-compliant” crypto exchanges comingling assets and exchanges trading against customers without the proper disclosures.

Bill Posey (R-FL 8th District)

Mr. Posey asks if, prior to FTX collapse, Chair Gensler had any concerns about the exchange. Chair Gensler says he has had general concerns with the entire industry throughout his time as SEC Chair.

Chair Gensler testified that he directed staff to look into “a wide range of crypto intermediaries” but did not answer if this included looking into FTX and SBF prior to the exchange’s collapse.

Emanuel Cleaver (D-MO 5th District)

No crypto questions.

Blaine Luetkemeyer (R-MO 3rd District)

No crypto questions.

Jim Himes (D-CT 4th District)

No crypto questions.

Bill Huizenga (R-MI 4th District)

Mr. Huizenga started with a discussion of the SEC’s proposed environmental impact disclosure rule issues and the SEC’s failure to provide responsive documents upon request by Mr. Huizenga. Mr. Huizenga then criticized the SEC for failure to provide anything other than publicly available documents when Congress asked for additional documents such as the staff recommendation memo regarding bringing charges against FTX and SBF.

Joyce Beatty (D-OH 3rd District)

No questions about crypto, but Gensler did say that it was “interesting” how the banking failures were all interconnected with crypto markets with the failing banks providing services to digital asset companies.

Ann Wagner (R-MO 2nd District)

No crypto questions.

Sean Casten (D-IL 6th District)

No crypto questions.

Andy Barr (R-KY 6th District)

Mr. Barr started by questioning Staff Accounting Bulletin (“SAB”) 121, which requires all public companies (including banks) include crypto assets custodied for clients on their balance sheet. Custodied assets of all types have always previously been treated as off-balance assets. This means banks cannot provide digital asset custody at scale, which means market participants need to resort to offshore places (like FTX in the Bahamas) without access to institutional grade custody services.

Mr. Barr criticized the SEC’s “cop on the beat” claim because nobody at the SEC knew, prior to the collapse, that FTX was a multi-billion-dollar company running on QuickBooks. 

Ayanna Soyini Pressley (D-MA 7th District) 

No crypto questions.

Roger Williams (R-TX 25th District)

No crypto questions.

Bill Foster (D-IL 11th District)

Mr. Foster asked Chair Gensler if the only way to prevent wash trading of digital assets is by knowing the identities of the people controlling the digital wallets those assets are being traded from. Chair Gensler says the identities of the traders needs to be, at minimum, known by exchanges serving them so the SEC can obtain that information from those exchanges. 

Majority Whip Tom Emmer (R-MN 6th District)

Mr. Emmer’s questioning was by far the most passionate and pointed on the digital asset issues. He tweeted clips from his questioning on his official Twitter account, and it is probably worth watching those clips here.  Mr. Emmer started by asking if it is more difficult now for digital asset participants to get access to traditional financial products than two years ago? Emmer answered for Chair Gensler saying “the answer, sir, is yes.” Mr. Emmer says the SEC has played an obvious role in that.

Mr. Emmer then asked how many new rules have been proposed for crypto so it can come into compliance. Mr. Emmer answered for Chair Gensler: “The answer is zero.” Mr. Emmer asked how many enforcement actions have been brought against digital asset companies. Mr. Emmer answered for Chair Gensler: “The answer is about 55.”

Mr. Emmer then stated that Chair Gensler was Chairman of the SEC when FTX collapsed, and Chair Gensler met with FTX at least twice. Gensler was also the Chairman when Terra/Luna collapsed.

Mr. Emmer chided Chair Gensler, stating that Chair Gensler’s public statements are not regulations, and the SEC has failed to provide any clarity on how staking services can come in to register after the Kraken enforcement action.

Mr. Emmer then asked if Chair Gensler agrees: “The SEC needs additional Congressional authority to prevent [digital asset] transactions, products, and platforms from falling between the regulatory cracks.” Gensler refused to provide a yes/no answer. Mr. Emmer stated that this is a quote that Chair Gensler provided in a 2021 interview. Mr. Emmer asks when was Chair Gensler lying: when he gave that quote, or when he told Ms. Waters earlier in the hearing that the SEC had all the Congressional authority it needed to regulate digital assets?

Mr. Emmer then asked if it concerns Chair Gensler that the SEC’s actions are driving the industry overseas. Chair Gensler says they are only trying to drive the industry towards compliance.

Mr. Emmer stated that FTX was domiciled abroad as is Binance, but American consumers had access to both. Thus, Chair Gensler cannot say that pushing the industry abroad is going to protect American consumers when there are multiple examples of it doing the opposite.

Mr. Emmer ended by stating “You say the crypto market is rife with non-compliance however existing SEC rules makes no sense for blockchain based companies and following them would actually kill these businesses. Your regulatory style lacks flexibility and nuance and as a result you have been an incompetent cop on the beat. Doing nothing to protect everyday Americans and pushing American firms into the hands of the [Chinese Community Party].”

Josh Gottheimer (D-NJ 5th District)

Mr. Gottheimer stated he believes the SEC has issued little formal guidance to facilitate digital assets to come into compliance with SEC rules, and has instead largely used enforcement actions instead of formal rulemaking. Mr. Gottheimer asked if Chair Gensler intends to follow the advisory committee’s suggestion to issue formal rules for the digital asset industry in the “appropriate manner instead of just enforcement.” Chair Gensler said they are constantly considering a wide wage of rulemaking.

Barry Loudermilk (R-GA 11th District)

Mr. Loudermilk stated that people are moving to blockchain, because centralizing financial information creates a “one-stop-shop for the bad players to come and get information about individuals.” This centralizing of information is an issue Mr. Loudermilk has with the SEC’s proposed consolidated audit trail rules.

Gregory Meeks (D-NY 5th District)

Mr. Meeks says the New York Department of Financial Services has created bit-license regime, which he views as a success. Mr. Meeks says he is concerned that his New York constituent are saying the SEC’s current enforcement against the digital asset industry is driving US companies overseas. Chair Gensler says the only companies being driven overseas are the ones refusing to comply with the law.

Alex Mooney (R-WV 2nd District)

No crypto questions.

Ritchie Torres (D-NY 15th District)

Mr. Torres started his allotted time by stating the lesson from FTX is that offshore over leveraged deregulated companies are the greatest risk to American consumers. One would think that is where the SEC would focus their efforts. But instead the SEC has done the opposite, targeting onshore regulated entities like Paxos and Coinbase instead of targeting offshore deregulated exchanges/issuers like Binance and Tether.

Warren Davidson (R-OH 8th District)

Mr. Davidson started his allotted time with questions regarding if Chair Gensler coordinated his responses in advance with Senator Warren (referencing emails showing SEC officials coordinated with Massachusetts Senator Elizabeth Warren’s office on questions and testimony ahead of a 2021 hearing on cryptocurrency markets).

Chair Gensler stated that the SEC reviews companies’ documents prior to allowing public investors to invest in that company in the form of an IPO to ensure that company is complaint with applicable laws and regulations. Mr. Davidson says if that is true, it doesn’t make sense that the SEC allowed pension funds and individuals to invest in a publicly traded company (Coinbase) that Chair Gensler now believes is engaging in illegal activities. Mr. Davidson stated that all of Coinbase’s current activities were laid out in Coinbase’s S-1 prior to their IPO. Chair Gensler pushes back, saying he never said that any individual company (like Coinbase) is doing something illegal (except in actions by the SEC) but instead was speaking in generalities in all statements.

After Chair Gensler again refused to answer if ETH is a security, Mr. Davidson stated “they have been in place since 2015. You say in your statements that the rules are clear, just come on in. You can’t even answer the question.”

Chair Gensler stated that he stands by SAB 121 making it financially unfeasible for banks to serve as digital asset custodians.

Mr. Davidson ends with his proposed legislation to remove the Chair position of the SEC and instead replaces with a director who reports to the five commissioners where all authority will reside. Former chairs of the SEC will be ineligible for this position. 

Sylvia Garcia (D-TX 29th District)

No crypto questions.

John Rose (R-TN 6th District)

No crypto questions.

Wiley Nickel (D-NC 13th District)

No crypto questions.

Bryan Steil (R-WI 1st District)

Mr. Steil asked if Chair Gensler owns any digital assets or has a digital wallet. Chair Gensler says he has never owned Bitcoin or any other digital asset, and that ethical rules prohibit his staff from having a digital wallet or owning crypto assets.

Mr. Steil criticized Chair Gensler on the fact that most individuals on the SEC’s staff have bought and sold stocks, but none currently own the digital assets they are now regulating. Chair Gensler taught courses at MIT on crypto in finance, but has never used the product he taught about.

Brittany Pettersen (D-CO 7th District)

No crypto questions.

William Timmons (R-SC 4th District)

No crypto questions.

Steven Horsford (D-NV 4th District)

No crypto questions.

Dan Meuser (R-PA 9th District)

No crypto questions.

Rashida Tlaib (D-MI 12th District)

No crypto questions.

Scott Fitzgerald (R-WI 5th District)

No crypto questions.

Juan Vargas (D-CA 52nd District)

No crypto questions.

Young Kim (R-CA 40th District)

No crypto questions.

Al Green (D-TX 9th District)

No crypto question.

Andrew Garbarino (R-NY 2nd District)

No crypto questions.

Mike Flood (R-NE 1st District)

Mr. Flood questioned the wisdom of SAB 121 which requires custody of digital assets be held on balance sheets and took issue with Chair Gensler not responding to Mr. Flood’s letter to the SEC on this issue.

Chair Gensler refused to answer if the SEC consulted banking regulators prior to issuing SAB 121. Chair Gensler would only say that the SEC consulted with big four accounting firms for that SAB.

Michael Lawler (R-NY 17th District)

Mr. Lawler asked if the SEC deserves any culpability in the collapse of FTX and its resulting harm to American consumers. Chair Gensler said that they are going to be a vigorous cop on the beat against non-compliance in crypto industry. Chair Gensler refused to answer on if the SEC deserved any culpability at all for FTX specifically.

Mr. Lawler also asked why the SEC didn’t take any action prior to FTX’s collapse regarding the $4 billion lent from FTX to Alameda. Chair Gensler refuses to answer with specifics because it involves an ongoing prosecution.

Zach Nunn (R-IA 3rd District)

No crypto questions.

Monica De La Cruz (R-TX 15th District)

No crypto questions.

Erin Houchin (R-IN 9th District)

Ms. Houchin started by questioning Chair Gensler’s moving statements regarding how “a vast majority” of digital assets are securities and how “everything but Bitcoin” is a security. Chair Gensler says he has been consistent in his view regarding the amount of digital assets which are securities vs. something else and any inconsistencies are the result of the media misquoting him or taking things out of context.

Ms. Houchin pointed out that Chair Gensler said in earlier testimony that a key goal of the SEC is to maintain the US capital market dominance, but in an industry that is largely borderless like crypto a key factor in maintaining dominance is a working regulatory framework that US doesn’t have. Europe now has that framework with MiCA. Ms. Houchin asked if his push of US firms overseas aligns with his congressional mandate to facilitate fair and efficient capital formation in the US.

Chair Gensler responded: “We have a clear regulatory framework built up over 90 years. It’s just a bunch of…intermediaries in this market that think they have a choice. They don’t have a choice. They’re non-compliant generally and they need to come into compliance.”

Andy Ogles (R-TN 5th District)

Chair Gensler is asked about the SEC’s responsiveness to request by Congressional officials for details into the agency’s investigation of FTX. Chair Gensler says it is important to keep the SEC’s investigative file confidential because there are things in there that are private and not included in public and important information about those charges.

Mr. Ogles says that Congress oversees the SEC, so the SEC should be able to produce all requested documents to the individuals that oversee the SEC. If Homeland Security can figure out a way to get Congressional members documents while maintaining their confidentiality, then the SEC can as well. Multiple committee members have stated the SEC’s responses to congressional requests for information have been inadequate.

Ralph Norman (R-SC 5th District)

No crypto discussion.

Byron Donalds (R-FL 19th District)

Mr. Donalds stated that Congress has never given the SEC a framework on regulating digital assets. Mr. Donalds asked where the SEC is pulling their authority on this topic from? Chair Gensler disagreed with that. Mr. Donalds responded: “We disagree a lot, Chairman. Because we’re not giving you authority. You’re just taking it.”

Mr. Donalds asked if the SEC has the manpower to actually regulate the digital asset industry with all the turnover under Chair Gensler’s leadership and the SEC’s other responsibilities. Chair Gensler disagrees with the high turnover rate, but Mr. Donalds says the Office of Personnel Management disagrees with Chair Gensler.