Janet Yellen plans new crypto regulations

In a response to questions about cryptocurrencies during her confirmation hearing, incoming Treasury Secretary Janet Yellen has repeated the now familiar litany of nefarious uses for crypto – and promised her approach will not be ‘hands off.’

Asked about the benefits of digital currencies and if the US had enough safeguards in place relating to their use, Yellen said digital currencies had the potentional to "improve the efficiency of the financial system" and it was important to consider the benefits they offered.

At the same, though, she said that cryptocurrencies could be used to "finance terrorism, facilitate money laundering, and support malign activities that threaten U.S. national security interests and the integrity of the U.S. and international financial systems."

While the Trump treasury team paid almost no attention to the crypto sector, Yellen indicated the same will not be true of the Biden administration. She said the incoming adminstration would need to look closely at how to encourage the legitimate use of cryptocurrencies, at the same time as it worked to restrain their use for illegal activities. "If confirmed, I intend to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for these and other fintech innovations."

In other Biden administration news, it has been confirmed that Gary Gensler has been nominated for the role of Securities and Exchange Commission (SEC) Chairman.

Gary Gensler

The news of Gensler’s likely appointment has been met with a mixed response. Gensler has a track record of driving stricter regulations on the excesses of Wall Street, which has enjoyed a relatively low-key approach under Jay Clayton’s tenure as chairman during the Trump administration.

Cautiously optimistic for crypto

Nonetheless, the crypto sector is cautiously optimistic about the news because Gensler would be the most crypto informed person so far to head the SEC. He is a Professor of the Practice of Global Economics and Management at the MIT Sloan School of Management and he’s also the Co-Director of MIT’s Fintech@CSAIL and Senior Advisor to the MIT Media Lab Digital Currency Initiative.

Gensler spent the last four years teaching a number of technical blockchain courses at MIT. While it would be incorrect to describe Gensler as a crypto enthusiast, he is extremely well versed in the perceived risks and advantages of blockchain-based assets and the nuanced idiosyncrasies of the crypto space.

In a 2019 op-ed for Coindesk, Gensler wrote “I remain intrigued by Satoshi’s innovation’s potential to spur change—either directly or indirectly as a catalyst. The potential to lower verification and networking costs is worth pursuing, particularly to lower economic rents and data privacy costs, and promote economic inclusion.”

Gensler went on to write that “we already live in an age of digital money,” saying that cryptocurrencies and blockchain “have already prompted real change, and can continue to do so.”

Should Gensler be confirmed to head the SEC, he will take over an agency that leads much of the U.S. government’s regulatory action on the blockchain industry. This includes renewed discussion regarding the consideration of the long-awaited and much-delayed Bitcoin ETF.

In recent years Gensler has testified before Congress on several blockchain and crypto asset matters. In 2019 he submitted written testimony to the U.S. House of Representatives Financial Services Committee on Facebook’s proposed Libra stablecoin project.

Gensler’s view was that the still-unlaunched Libra token met the requirements of being a security under U.S. law. He conceded that there could be debates on whether Libra is a security, based on interpretations of the ’40 Act, the Supreme Court’s ‘Howey Test’ and the Supreme Court’s ‘Reves family resemblance Test’.

“While those debates might be interesting, they are a red herring,” wrote Gensler. “It’s unambiguous that Libra is a security as it will receive a net return based upon interest on the Libra Reserve. Looking to the economics, the Libra token is part of the same pooled investment vehicle and bears multi currency and market risk. Further, investor protection will be just as important for the proposed Libra token as it is for investors in international bond funds or in commodity ETFs. I also believe that each Authorized Reseller of the Libra token would need to be a registered broker-dealer.”

The SEC is targeting Ripple

In late December, under outgoing chairman Jay Clayton, the SEC announced it had filed an action against Ripple Labs Inc and two of its executives alleging that they had raised over USD1.3 billion through an unregistered, ongoing digital asset securities offering using the XRP token.

It’s expected that the action would continue under Gensler. In April 2018, Gensler told the New York Times there was “a strong case” that ETH and XRP, “particularly” XRP, “are non-compliant securities.”

Ripple’s Brad Garlinghouse takes shots at SEC Chairman Jay Clayton in this December 2020 tweet storm. In terms of the SEC’s action against Ripple Inc, it’s unlikely things will change much under Gensler

At the same time, Gensler said that Bitcoin was likely not a security, and that ETH had a chance to avoid being categorized as a security due to its mining becoming more decentralized. Bitcoin and ETH were later confirmed to be non-securities by regulators.

An ally for Hester Peirce?

To date, the only SEC member to express support for green-lighting a Bitcoin ETF has been Hester Peirce. A vocal supporter of the emerging crypto asset industry, Peirce acknowledges that the SEC hasn’t been as supportive as it could have been in encouraging technology innovation.

Speaking to the Forkast she said, “The SEC hasn’t done a fantastic job in getting out in front and setting clear lines for crypto and other countries have been much faster to do that. Enforcement actions can indeed provide clarity, but it’s not the right way to do it from my perspective.”

Peirce added that she hopes to work with Gensler on providing more regulatory clarity to crypto asset entrepreneurs if he joins the agency as its chairman. Peirce said she thinks Gensler shares her desire for greater clarity over whether crypto assets are subject to the agency’s rules.

A Wall Street and political veteran

Gensler spent the early part of his career at Goldman Sachs where he became a partner at the age of 30. He then moved into public service as the Assistant Secretary of the Treasury for Financial Markets (1997-1999) and then the Under Secretary of the Treasury for Domestic Finance (1999-2001).

Gensler next served as the chairman of the Commodity Futures Trading Commission (CFTC) under President Barack Obama from May 26, 2009, to January 3, 2014. While in this position Gensler championed a new set of rulings on derivatives trading designed to curb some of the excesses that contributed to the 2008 financial crisis.

If nominated, Gensler will require a simple majority vote in the US Senate to be approved as SEC Chairman. While the composition of the Senate is currently evenly split with 50 Democrats and 50 Republicans, approval for Gensler should be straightforward as incoming Vice President Kamala Harris will be able to cast a deciding vote in favour should the Senate be deadlocked on the decision.