Why did Gary Gensler, once an ally of crypto, suddenly become an industry enemy?

By Sam Lyman

Compiled by: Luffy, Foresight News

WASHINGTON, D.C. – SEC Chairman Gary Gensler has forged close ties with members of the House and Senate...

Who will monitor the monitors?

This age-old question has become more important as the budget and size of the federal bureaucracy continue to expand.

But as the U.S. government has evolved, so has the influence of the Fourth Estate. Social media has enabled a new generation of citizen journalists to hold public officials accountable by focusing on their past positions. In recent weeks, the spotlight has focused on Gary Gensler, chairman of the Securities and Exchange Commission (SEC).

As the SEC steps up its efforts on cryptocurrency regulation, members of Congress have been pressuring Gensler to change his stance on cryptocurrencies. The contradictions between Gensler’s past and present statements have surfaced on Twitter, thanks to the work of professional journalists and amateur detectives. Together, this decentralized community dutifully monitors the watchdog.

What did they find? Gensler’s views on cryptocurrencies have changed dramatically. Here’s a timeline of his long journey from industry ally to adversary.

Phase 1: Allies (2018-2020)

While Gensler’s recent enforcement actions have made him an industry public enemy, that wasn’t always the case. Many in the cryptocurrency community once viewed him as a forward-thinking regulator and friend. Before taking over the SEC, Gensler spent three years in academia, where he gained a reputation as a public leader who saw the innovative potential of cryptocurrency.

2018

Gensler gave a presentation to an audience of hedge fund managers on the policy implications of emerging cryptocurrencies. In his speech, he made it clear that Bitcoin, Ethereum, Litecoin, and Bitcoin Cash “are not securities.” Since these tokens accounted for the majority of cryptocurrency trading volume at the time, he said that “probably three-quarters of this market are not securities.”

That same year, Gensler began researching digital assets at MIT and taught the university’s blockchain and cryptocurrency courses. There, he gave a speech that publicly addressed the question: Are cryptocurrencies securities or commodities? His answer: “Both. I know this isn’t an answer many people like, but that’s where we are now.”

2019

Gensler, speaking at a fintech conference in New York City, praised Algorand and its lead developer Silvio Micali, a colleague of Gensler’s at MIT at the time. Gensler called Algorand’s project “a great technology” and said the blockchain is so efficient “you could build an Uber on it.”

That same year, Gensler applied to become an advisor to the cryptocurrency exchange and even held a special meeting in Japan with Binance CEO Changpeng Zhao, according to Binance’s lawyers. (To date, Gensler has not refuted this claim).

2020

Gensler taught his last course at MIT on blockchain and cryptocurrency. His lectures are available online, leading many to believe that he would take a pro-innovation approach to cryptocurrency if he were to reenter public service. With the election of Biden as president, speculation has grown that he would appoint Gensler as chairman of the SEC.

Phase 2: Skeptics (2021-2022)

Sure enough, President Biden appointed Gensler as SEC Chairman. Given some of Gensler’s past public statements and praise for various crypto projects, many in the crypto community cheered Gensler’s appointment. For example, Senator Cynthia Lummis tweeted: “While the SEC has a reputation as a black hole for innovators, Gary Gensler has recognized the potential of crypto assets.”

Indeed, the mood in the Capitol was sunny and optimistic as Gensler took office. But soon after taking office, Gensler's attitude toward cryptocurrency began to change.

2021

In press statements and public comments about cryptocurrencies, Gensler’s tone has shifted from openness to skepticism — and in some cases, hostility.

The chairman of the U.S. Securities and Exchange Commission began to voice the need for increased regulation, calling cryptocurrencies a "Wild West" rife with fraud. He further said: "I believe that we now have a cryptocurrency market where many tokens may be unregistered securities."

Still, Gensler acknowledged that cryptocurrencies remain in a state of regulatory limbo. He said legislation in Congress would help provide greater clarity for the industry because “there is no regulatory framework for exchanges of these crypto assets either at the SEC or at our sister agency, the CFTC.”

2022

Gensler’s tone hardened as he emphasized the “Wild West” narrative. “Of the nearly 10,000 tokens in the cryptocurrency market, I believe the vast majority are securities,” Gensler said in a September speech to the entire institution. Just two months later, cryptocurrency exchange FTX went bankrupt, vindicating some of Gensler’s claims.

Phase 3: Adversaries (2023-Present)

Gensler’s skepticism turned to opposition after the FTX fiasco. Tired of waiting for Congress to pass legislation, the SEC took an enforcement approach, beginning a series of Wells notices and lawsuits against high-profile cryptocurrency exchanges.

There’s just one problem: The new strategy requires Gensler to “swallow” all of his previous statements about cryptocurrencies.

2023

Gensler said in an interview with New York Magazine that “everything except Bitcoin” is a security, a significant departure from statements he made in 2018 in which he said several major cryptocurrencies were not securities and that many tokens had characteristics of commodities.

Gensler said that "the cryptocurrency market lacks regulatory compliance, not transparency," contradicting his own 2021 call for Congress to pass legislation to increase transparency in the cryptocurrency industry.

While Gensler claimed in 2021 that cryptocurrencies lack a clear regulatory framework at the SEC, he now believes that "the law is clear" and all cryptocurrency exchanges must register with the SEC.

Although Gensler reportedly offered to serve as an advisor to cryptocurrency giant Binance in 2019, the SEC is currently suing the company for alleged market manipulation and misuse of customer funds. The SEC is also suing Coinbase for listing “unregistered securities.”

Speaking of unregistered securities, the SEC claims in its lawsuit that ALGO is exactly that. Remember, ALGO is the native token of Algorand, a protocol that Gensler hailed as a breakthrough technology in 2019.

Gensler’s “Anchoring Strategy”

So why did Gensler suddenly change his attitude?

There is likely a coherent strategy behind his contradictory statements.

As a seasoned bureaucrat, Gensler understands better than most how Washington negotiations work. Effective policymakers employ a negotiating technique called “anchoring,” where their first proposal is often far from the desired outcome. (Think of Rep. Alexandria Ocasio-Cortez’s “Green New Deal” or the initial $3.5 trillion price tag for Biden’s “Build Back Better” plan.)

These initial proposals are often eccentric and have little chance of becoming law. But they set a reference point for negotiations and make it look like the proposers are making significant concessions as policy inevitably moves toward the center.

This may be Gensler’s logic behind his actions at the SEC. By taking the hard line that “everything but Bitcoin” is a security, he sets the framework for negotiations and forces Congress to act on legislation.

Cryptocurrency is more likely to be a "digital commodity"

Congress’ response to Gensler was the McHenry-Thompson Act, which (far from labeling everything except Bitcoin a security) proposed an entirely new asset class called “digital commodities.” Many existing tokens would meet the definition of digital commodities in the act, so they would fall under the purview of the Commodity Futures Trading Commission (rather than the SEC).

The McHenry-Thompson bill is the most comprehensive cryptocurrency framework ever passed by Congress. It has strong support in the House of Representatives, but will likely face strong opposition in the Senate, where Democrats have shown deference to Gensler on many issues related to cryptocurrency. As a result, if this legislation passes this Congress, it will likely not appear in its current form.

Another option for the bill's backers is that Congress will be more friendly to cryptocurrencies in 2025. But that assumes the industry can withstand another 18 months of SEC crackdowns. Rope-boxing is risky in any situation, but it's even riskier against a powerful fighter like Gary Gensler.