SEC’s Surreal Sound of Silence

Why Congress is still questioning Gary Gensler’s leadership deficit

Ric Edelman: It's Thursday, September 21st. If you've paid any attention to crypto at all, then you're aware of the fact that lots of people call crypto the Wild West. I think that's a little wrong. I've called it Lewis and Clark for sure. Crypto is still relatively new. First new asset class in 170 years. Yeah. The last time we came up with a new asset class was the discovery of oil in the 1850s. Now we've got blockchain distributed ledger technology, digital assets, tokenization and the metaverse. So it's no surprise that there weren't rules in place for all of this. Laws and regulations always come after the innovation.

First we had cars. Then we had car accidents. And then we got the rules of the road. Drive on the left. Stop at red lights. Stay within speed limits. Rules always follow the innovation. But crypto is now almost 15 years old – and still no rules. Well, that's a bit of a misnomer. There are lots of existing rules that apply to other stuff that also applies to crypto, like lots of tax rules, lots of accounting rules and basic stuff too, like anti-fraud rules.

But all that said, crypto is brand new. It was never conceived of when Congress wrote the Securities Act of 1933 or the Securities Exchange Act of 1934, or the Investment Company Act of 1940, or the Investment Advisers Act of 1940. All those laws were written in response to the crash of 29. Again, the laws came after the event, and those laws, by the way, created the Securities and Exchange Commission and authorized the SEC to write regulations governing investments. 

So why hasn't the SEC yet written any new rules for crypto? I mean, it's been nearly 15 years. Well, Republicans in Congress want an answer to that question. French Hill, chair of the Financial Service Committee's Digital Assets Subcommittee in the House, and Dusty Johnson, chair of the Agriculture Committee's Digital Assets Subcommittee in the House both say they want SEC Chair Gary Gensler to engage with them on new crypto rules. The reason there are two subcommittees on digital assets from two different committees in the House, it's because the House Financial Services Committee oversees the SEC, while the House Agriculture Committee oversees the CFTC, the Commodity Futures Trading Commission.

Is crypto an investment or a commodity? These committees want to answer that question and they want the SEC to weigh in on it.

But so far, Gary Gensler of the SEC has refused to engage, at least to the satisfaction of these two subcommittee chairs. The Senate is in a similar situation. Sherrod Brown, the chair of the Senate Banking Committee, says any bill dealing with crypto is going to get in front of his committee. Congress is complaining that the only thing Gensler and the SEC are doing is going after bad guys in crypto. But wouldn't it make much more sense to create laws that prevent bad guys in the first place? It's like Gensler saying he's fine with car accidents and doesn't think we need to make rules that make cars safer. Hill and Johnson wrote a letter to Gensler complaining about his position. 

Gensler's approach, they wrote, and I quote, “Does not result in compliance and  customer protection, but instead creates further confusion.” They said, quote, “This concern is exacerbated by certain SEC actions which appear calculated for maximum publicity and political impact,” unquote.

It's not just members of Congress who are angry at Gary Gensler. So are former SEC commissioners. There was a conference recently where a bunch of them were on a panel and they were unanimous that SEC's Gary Gensler is mismanaging his job. They said the SEC's current approach to regulating digital assets lacks authority and clarity. Oh, and by the way, current FCC commissioners refused to attend the event. Paul Atkins, who was an SEC commissioner 15 years ago, said the FCC is, quote, “Like the ostrich with its head in the sand, just sort of ignoring what's going on.”

Former commissioner Daniel Gallagher said existing securities laws do not accommodate the digital asset market, the exact opposite of what Gary Gensler has been saying. The result, Gallagher said, is that investors and investment firms have been scrambling to figure out how to behave. He said, quote, “We're kind of collecting tea leaves here and there and trying to read them. It's quite a mess.”

And Troy Paradise, an SEC commissioner from 2008 to 2013, said, quote, “You've got to have regulations that meet the technology that's not to be pro or anti any particular thing. It's to create a regulatory environment that allows the marketplace the opportunity to figure out what the opportunities are and how those opportunities are going to be taken care of.” 

A half dozen other former SEC commissioners all had the same criticism. It looks like Gary Gensler just doesn't get it. It's not about whether you like or dislike crypto any more than liking or disliking cars. It's simply a question of recognizing that rules you created for horses and buggies won't work for the new technology. And we need new rules to keep people safe. Tell the business community what the rules are. That's all anyone in crypto is asking for, and it's befuddling that Gensler won't provide those rules.

It's not because Gary Gensler is one of those right wing anti-government types who thinks we're overregulated and he doesn't think we need any new rules. Gensler has unleashed more new rules than any SEC chair since the 2008 credit crisis. 47 sets of new rules that substantially alter market participants and only 17% of the new rules that Gary Gensler has created were required by law. Almost everything he's imposed has been because he simply wanted to. So it's clear that he's willing to write new rules.

So why is he not willing to write the rules we need for crypto? Maybe Congress will succeed this time in getting him to participate. We'll see. Meantime, the technology is continuing to develop and grow. You know, it all began in 2009 with bitcoin, a digital coin that led to tokens, that led to tokenization. And for sure, tokenization is the big new thing in crypto these days. We're going to be able to tokenize everything. Have you ever noticed that you can trade shares of stocks very, very easily with a click of a mouse, but you can't trade real estate that way?

Wouldn't it be cool to own a share of the Empire State Building where instead of you having to own the whole building, you could own a share worth 100 bucks of the building? Tokenization lets us do that and we are beginning to tokenize real estate all around the world. We're going to be able to tokenize artwork, exotic cars, rare wine, collectibles of all sorts. We'll be able to tokenize salaries and recording contracts. Anything you can envision will become tokenized. It's the new big thing.

And the next big thing will be the metaverse. That's going to be the next version of the Internet. It'll bring our physical world together with the new digital world, with the metaverse. You'll be able to move your possessions from one of those worlds to the other. The metaverse is the broad term that refers to an Internet economy that's supported by virtual reality.

If you play video games, you're already familiar with this. To play those games, you create an avatar, a digital version of yourself. You'll do the same with the metaverse. You'll create an avatar and you'll enter an online community using that avatar. And once you're there, you'll do things that you currently do in the real world. You'll buy land and tools. You'll gain skills and knowledge. You'll trade possessions with other people. The metaverse already exists. There are stores where you can shop in the metaverse, stores like Fidelity, Gucci, Adidas, Samsung, Nike, lots of others. 

You can buy real estate that exists only in the metaverse. Concerts by the biggest names in music are now routinely being held in the metaverse. Showrooms that showcase products are in the metaverse. Does all this sound weird? Well, think of the movie Avatar. That was a metaverse. But I'll tell you what, the metaverse isn't it isn't a social media network... Facebook, YouTube, Zoom. They are not the metaverse.

In the metaverse, you won't just talk online with your colleagues like on Zoom in the metaverse. Your avatar will sit at a conference table surrounded by colleagues. It'll feel as though you're all physically together, even though it's actually a virtual experience. The metaverse is already changing the face of business. Facebook changed its name to Meta Platforms because this is the future.

That's just the start. Last year, Apple, Amazon, Alphabet, Microsoft and Meta, they invested a combined $150 billion on metaverse tech. That's more than the Pentagon's entire R&D budget. If you'd like to invest in that trend like me, well, I own shares of the Global X Metaverse ETF, symbol VR. This ETF invests in hardware and software companies that allow users to experience digital realities as creator platforms where live streaming and other media is shared in 3D simulations. Creator economies where what you create, you get to own, as well as semiconductors, cloud computing, technology, 5G infrastructure. It's pretty broad. The Global X Metaverse ETF, symbol VR, check it out at Global X ETFs.com. Or ask your financial advisor about it.

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