Bridging the Gap: The Gensler Controversy and the Path to Digital Asset Harmony

After major ups and downs, how can we assess the importance of blockchain-based assets? Will they find their place in everyday life or remain on the periphery of regulatory scrutiny?

First of all, it should be noted that digital assets represent the next stage of evolution brought about by the Internet. The World Wide Web has decentralized the exchange of information, turning intermediaries into unnecessary points of friction.

Similarly, blockchain technology is decentralizing financial assets or is in the process of doing so. Since antiquity, the main problem of finance has been the methods of accounting for wealth. Either governments or banks were responsible for keeping records of who owned what assets and to whom those assets were transferred.

This methodology is rooted in a lack of alternatives, making money subject to manipulation, destroying the potential for savings, and forcing consumers to seek alternative mechanisms to preserve their purchasing power. One such destructive manifestation is setting an inflation target of 2% without being able to explain the rationale for that target consistently.

Bitcoin broke this historic barrier as a product of a public distributed ledger - the blockchain. The combination of a distributed ledger and a peer-to-peer verification/mining network made Bitcoin wing a true decentralized, permission-less financial system.

Everything else that followed built on this concept. At the heart of the BTC token is a smart contract that interacts with other smart contracts, their authenticity is ensured by the blockchain network. In turn, any existing logic can be tokenized and secured on other blockchains using similar authentication methods.

The overarching theme is that blockchain allows wealth to be expressed in a tokenized form, accessible without third-party intermediation. Along with the stock market came the decentralized crypto market with all its advantages and disadvantages. In the transition from a traditional financial system to a decentralized financial system (DeFi), stable coins have proven particularly popular.

Tied to the value of fiat currency, these tokens are poised to become a major source of demand for U.S. Treasuries - monetized government debt. Already, the largest stablecoins, USD Coin (USDC) and Tether (USDT), back their tokens with billions of shorted U.S. Treasuries. A newcomer among stable coins, PayPal USD (PYUSD), is also doing so.

The value of tokenized wealth thus becomes an extension of the existing central banking system, as Federal Reserve Chairman Jerome Powell noted in June 2023, "We see payment stable coins as a form of money, and in all developed countries the source of trust in money is the central bank. "

Also testament to the power of smart contracts is the development of digital currencies (CBDCs) by central banks. The question is not whether the blockchain revolution will disappear, but what form it will take.

As the debate about the future of digital assets deepens, many traders are finding it necessary to manage day trading alongside full commitments to stay ahead of the curve, emphasizing the rapid evolution and depth of today's financial landscape.

Will decentralized and permission-less digital assets be suppressed in favor of centralized and permission-requiring digital assets? Will informal taxation through inflation continue unhindered? Will CBDC-formatted smart contracts become more than just payment instruments?

This is the current landscape of the global financial game. Making the system of banks run redundant, both central and commercial, cannot go without friction. Securities and Exchange Commission (SEC) Chairman Gary Gensler best illustrates this friction.

The blockchain revolution has created two types of friction: one friction counteracting the other.

When something is digital in nature, especially without requiring permission, it is easy to copy.

With only three months in office, it prefigured DeFi's interaction with TradFi. At the Aspen Security Forum that month, Gensler laid the groundwork for countering a new class of digital assets. Interestingly, he began his speech by recognizing the historic contributions of Satoshi Nakamoto:

"But Nakamoto solved two riddles that have plagued these cryptographers and other technology experts for a couple decades since the birth of the Internet. The first was how to move value on the internet without a central intermediary... And move value around on the Internet without a central intermediary and, related to that, how to prevent so-called double spending of this valuable digital token. "

To bring the burgeoning tokenization sector into the federal sphere, however, Gensler presented it as a national security threat. Threats related to "money laundering, tax compliance, sanctions." Gensler's solution was to use the Investment Company Act to classify virtually all cryptocurrencies as securities with retroactive effect.

"In general, it is the anticipation of profits from the efforts of the sponsor or others and so on. And it depends on the facts and circumstances, but it's a story of many such circumstances. "

Without any crypto legislation, the SEC has been driven by enforcement efforts. Gensler's framework started with Coinbase. A month after the Aspen speech, Coinbase CEO Brian Armstrong publicly questioned the SEC.

The point is that the SEC's mission to protect investors, in the face of increased transparency, has turned into obfuscation and selective targeting to establish pseudo-crypto law.

The digital asset space has undergone significant cuts in the two years since Gensler's important memo in Aspen. The SEC has sanctioned several crypto exchanges and digital asset protocols, declaring them unregistered brokers and clearing houses.

The SEC's mission to protect investors failed before our eyes during this period, as shown by the multi-billion dollar losses of the FTX and Celcius funds, to name just a few. Some lawmakers have noticed the trend, referring to Gary Gensler, chairman of the SEC:

"This guy, in my opinion, is a regulator with bad faith. It blindly penalizes the crypto community by completely overlooking the real bad actors." - Congressman Tom Emmer, party chairman in the House of Representatives.

Shortly thereafter, Emmer, along with Warren Davidson, proposed the "SEC Stabilization Act" to fire Gary Gensler after his "long series of abuses." In addition to changing Gensler, the law provided for limiting commissioners to three members from each political party at any given time. Presumably, this would have prevented the infusion of political agendas into SEC operations.

Meanwhile, as the legal void was filled, the security agency faced serious judicial opposition. The latest legal defeat was the SEC's rejection of an appeal in the landmark Ripple Labs case, which confirmed that XRP is not a security.

If the case had gone in the other direction, the SEC could have greatly expanded its authority to limit the digital asset class. The agency also lost a case against Grayscale Investments for impermissibly converting Grayscale Bitcoin Trust (GBTC) into an ETF.

The SEC's refusal to approve even one Bitcoin ETF is also a signal of bad faith behavior. Legalizing Bitcoin in this way is expected to open a hundredfold gateway for capital inflows before the digital class arena is more firmly controlled by federal regulation.

Another signal came from the historic FTX crypto scam involving Sam Bankman-Fried (SBF). The imprisoned former CEO met with Gensler several times but did not see any red flags. Congressman Tom Emmer has suggested that this could have been a ploy to make FTX the designated dominant market maker in crypto.

The connection so far is circumstantial, based on the fact that Gary Gensler worked as a faculty member at MIT