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Gary Gensler SEC Confirmation Hearing and Risk Alert

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TRANSCRIPTION OF VLOG

Hello and welcome to another Legal Briefs – crypto edition.  Today Gary Gensler had his confirmation hearing to become the head of the SEC and perhaps the most important person in the U.S economy, next to Powell of course, and our good Senators had a chance to ask some deep, probing, hardball questions of this appointee and here.

So today we are going to discuss Mr. Gensler’s testimony – whether we can gather anything of note from it – which we can, and we will talk about the SEC “Risk Alert” that was issued last week which I read with some … consternation.  Okay, I apologize, I was debating how to approach this vlog and never like to come across as too negative, but the truth is that the Risk Alert issued last week and Gensler’s testimony today is really a disappointment to me and I see a lot of clouds on the horizon in the crypto world.  We are going to talk about why I felt this hearing the Risk Alert was a disappointment for the crypto community and then at the end if you are an XRP holder, I want to step back and look at the XRP forest from the regulation trees and tell you, the XRP holder, why a bad SEC might be good for XRP.

But first, a quick disclaimer – please don’t take anything I say as legal or financial advice.  If you want some good legal advice – please go back in time and hire her:

Put  her name in the comments if you’re a 90s child.  Did you know that there are now more women in law school than men?  Amazing.

In any case, the big confirmation hearing was today and as WE know, the big issue before the SEC and the United States of America is what will happen to the Internet of the Financial world – blockchain and decentralized ledgers – and so if you watched the hearing and were just listening for mention of Bitcoin or blockchain like I was – you would have waited until one hour and fifteen minutes in before the first question or comment on it!

And, here it was, the first crypto question, and it was a good question, and the answer?  Exactly what I didn’t want to hear.

Notice the non-answer and twist.  The question in general was about over-regulation of the crypto world and how would he change the SEC in order to keep crypto companies from leaving the Country to friendlier jurisdictions.  And how did Gensler answer?  He threw out a platitude “We’ll work to develop technology” but then spun the question and really answered about how the SEC, under him, will work to protect investors from the companies and will work to protect investors from crypto exchanges as well.  Protecting investors is all well and good – unless you regulate an industry so much it disappears, and then you have no more investors to protect.  But Gensler didn’t want to address where that line was and in the next question we understand why.

The  next question about “digital assets” didn’t come until the 2 hour mark but it was THE most important and it was from the Senator from Tennessee – listen closely and see if you catch what Gensler is throwing:

Apply the law in a “technology neutral” way.  What does “Technology neutral” mean in “bureaucracy-speak?”  it means that Gensler is saying that he is not going to treat cryptocurrencies ANY different than any other security.  “Technology neutral” means that he and his organization are going to treat blockchain and decentralized ledgers like any other company – that he will not allow for any leeway for blockchain related tokens or coins.  For a Gensler SEC, the XRP coin is exactly the same as those 10 shares of stock certificates your grandfather kept in his sock drawer.

But really, Mr. Gensler, what about this wonderful new technology that you are so intimate with?  We are losing this battle with other countries – surely there is SOME change you can make at the SEC to help the technology flourish, right?  In Wyoming they’ve done it and look what happened – Ripple opened a new company in Wyoming.  And here’s the senator from Wyoming to ask that exact question.  Surely he will tell us now:

SO, no, still no answer about how the SEC can help blockchain technology companies rather than just put a thumb on them, ostensibly to “Protect investors.”  How protected to do you feel by the SEC?

I know that in his written opening statement Gensler said that technology is changing and our rules have to change with them but as far as his answers to what I thought were some pointed questions, I was very disappointed – so disappointed in fact that I went back and watched some old videos of Mr. Gensler and then I really just felt …not very smart. 

There’s something called confirmation bias and I honestly think I fell prey to it.  I believed that the SEC regulatory scheme will really hurt the U.S. crypto business space and so when I watched prior statements from Mr. Gensler I simply failed to take his words at face value and that’s really on me, not on him.  He has been frightening consistent.  Look at this from 2019:

There it is.  He’s been saying it for YEARS now and well, I just couldn’t or wouldn’t hear it.   According to Gensler, the SEC is going to “Scare” companies into compliance and that will be through litigation and threat of litigation.  This position is consistent with what I told you in my vlog titled “The SEC is coming for your crypto”.  The SEC has been building case authority for the last couple years stretching the definition of what a security to include EVERYTHING INCLUDING Ethereum.  Notice how he singled out Bitcoin as a non-security but didn’t mention Ethereum.

And THAT position that Gensler is telling us about, that they are going to “scare” the market into compliance is unfortunately very consistent with what happened late last week with the issuance of the SEC “Risk Alert” bulletin.  Before I tell you how scary and disappointing this “Risk Alert” is, let me just reiterate how the SEC will approach enforcement of Crypto-currencies.  It will NOT be by sending you and me scary letters or suing US – the investor.  That would look bad and even the SEC can’t sue a hundred thousand individual investors.  No, the SEC will go after the bigger players where a handful of lawsuits can affect (and in the SEC’s mind, “Protect”) the hundred thousand investors.  So last week the SEC released this “Alert” and it’s addressed to Investment advisors, Broker-dealers, and OF COURSE securities exchanges.

Take a look and see why this is so scary.  First, on the first page in footnote 1 notice that the SEC doesn’t play on an even playing field.  Nothing in the Risk alert (which is really a warning letter) is binding on the SEC – NOTHING.  But here is the main point of this letter to me.  Look at what, for example, the SEC is putting the burden on Investment Advisors to do:

The investment advisor must do “due diligence on digital assets” including “whether they are classified as securities.”  So an investment advisor, before he or she recommends you purchase Ethereum is now responsible for investigating whether it is a security or not or risk violating his or her legal responsibilities.  Also, look at footnote 3, The advisor is also now responsible for understanding and  performing due diligence on the effect of a “forked” or “airdropped” digital asset.   These demands simply can’t be met by most investment advisors.

Same with theExchanges.

The SEC investigations are now going to go into whether the SEC believes any securities are being sold on the exchange and if you are selling XRP or any other coin that the SEC believes is a security, why haven’t you registered with us so we can regulate your business?  This letter is notice that the exchanges better start getting ready to be able to answer those questions.

Is this a regulatory body that is “welcoming” of new technology? 

And let’s contrast this warning letter to what is going on in Europe for example.

https://ec.europa.eu/digital-single-market/en/legal-and-regulatory-framework-blockchain

The European Union is talking about exemptions from existing rules which allows regulators and companies to test innovative solutions utilising blockchains.  They even call it a “sandbox” where regulators, companies, and tech experts to test innovative solutions and identify obstacles that arise in deploying them.

Wow, does that sound “technology neutral” to you like what Gensler was talking about?  Not at all.  It sounds like a regulatory framework that allows a new and genetically different technology to have some leeway and a feeling that the regulators are working WITH them instead of trying to GET them.

And if you have a new crypto based startup, and you could start it anywhere you want, would you want to start it under threat of litigation and economic disaster ?  Or would you want to start it in the European “Sandbox?”   Hmm..

I know, I had a very negative response to the hearing today.   When I outlined this vlog, I didn’t read anything anyone else had written or said on purpose – I don’t want to be influenced by that but instead be honest.  But now I have read some other people’s response and I realize not everyone had the same negative impression I did.  And the truth is, I hope I’m wrong.  But I didn’t like it and I don’t like what it could mean for the future of the crypto business in the United States.

BUT I do want to leave you with one positive takeaway and this is only for the XRP crowd.  Last week and this week’s events make me feel like from this point there will be only more lawsuits by the SEC in the crypto space.  It’s coming.

 But like I mentioned before, the SEC has only one shot at each company.  If the SEC loses, it doesn’t get a second shot.  So I have an analogy:  if you have a bully in your high school class – a big guy – already has a full beard, benches 300 pounds, shoots steroids in his butt after P.E. – and he’s determined to beat up all the guys in his class.. do you want to be the first one he beats up or the last one?  Which?  You want to be the first, because you will heal, the black eye will go away and you can move on with the business of your life.  If you’re the last and you know it’s coming, it’s gonna effect you every day with worries, you’re hiding during lunchtime, and no one is going to want to be around you too much in case they get in the middle of your pounding.  It’s worst to be last!

So, with that analogy in mind I would suggest that XRP is in a better position than most other coins because XRP is taking its licking RIGHT NOW and although it sucks RIGHT NOW, it’s going to be over by October and then Ripple will move on with its life.  And that’s where we are at.  I don’t feel like what I saw is suggestive of an agency-head who is going to back off this litigation with Ripple.  I had thought so before maybe I was projecting my own thoughts onto Gensler but I saw NO EVIDENCE of that today.  That doesn’t mean a settlement can’t or won’t happen – I just think the chances of it happening before the close of discovery in August are much slimmer for me because I don’t think Gensler has the mindset to make it happen.

As always, thanks for watching. As the warrior/philosopher Choo Co La Tah said “TO deny the existence of the sun does not allow you to escape its blister”.  When you see the evidence, believe it, and only then will you know how to act.  Best of luck.

Jeremy Hogan
Jeremy Hogan
Attorney Jeremy Hogan is a partner at Hogan & Hogan.