In February 2021, the crypto industry saw a ray of hope when Gary Gensler (former Goldman Sachs investment banker) was announced as the new head of the Securities and Exchange Commission (SEC). After all, the person responsible for regulating the industry was a “crypto native” who had taught acourseon the subject at MIT. But two years later, it is clear that Gary was a huge disappointment to the industry as the SEC failed to identify the big scams and protect investors.
The following opinion editorial was written by Joseph Collement, General Counsel of Bitcoin.com.
This should not come as a surprise, as history has shown that the SEC is as effective as a submarine screen door when it comes to protecting investors. They should be the watchdog of Wall Street, but more like the lapdog of Wall Street.
Take the 2001 Enron collapse. The SEC did not formally review the cooked financial statements for at least three years before the company failed. Six years later, the SEC’s complete laissez-faire attitude toward Wall Street led to the biggest financial crisis since the Great Depression. in the years leading up to the July 2008 collapse, experts and whistleblowers had warned about the dangers of subprime mortgages and the dangerous practices of lenders. the SEC had the authority to monitor investment banks authority to monitor them, but failed to take meaningful steps to protect millions of investors.
Then there is the Madoff Ponzi scheme that stole billions of dollars from unsuspecting investors for decades; the SEC conducted numerous investigations into Madoff’s business practices but failed to discover any wrongdoing. Madoff was able to continue his scheme for decades until the bubble burst in 2008. It is worth noting that Madoff served on the SEC’s advisory committee while operating his Ponzi scheme.
And now we have the collapse of FTX and Alameda, with hundreds of thousands of customers suffering losses. Despite the clear signs, the SEC did not intervene, even though it had the opportunity to do so. Instead, it met with SBF behind closed doors for closed-door discussions, which is especially noteworthy given that Glen Ellison, the father of Alameda’s CEO, was Gary’s boss at MIT.
So, why does the SEC continue to disappoint us? one reason may be that they focus too much on small, unimportant cases instead of focusing on big, systemic problems. In the case of bullies, it is easier to bully smaller kids in schools. For example, we’ve seen the SEC pursue relatively small projects for technical violations of securities laws (think LBRY) while not intervening in big fraud cases like FTX because the SEC knows they don’t have the resources to fight small projects. so it is an easy win for them and great PR. This is not to say that small cases should be ignored, but that the SEC should be able to balance both.
Another rationale could be that the SEC is not adequately equipped or staffed to handle these complex cases; compared to the rapid growth of the crypto market since 2017, the SEC’s budget and staffing levels have remained relatively stagnant in recent years. This could mean they are struggling to keep up with the rapid pace of change.
Another explanation might be that the SEC has been captured by the industries it regulates; it is no secret that the SEC has close ties to the financial industry. Indeed, many SEC executives come from Wall Street firms and often return to the industry after leaving the SEC (think Mary Jo White, former head of the SEC and now representing Ripple against the SEC). This revolving door will no doubt create conflicts of interest and may lead to a lack of oversight of the industry. It is also not hard to imagine that someone within the government was influenced by the FTX. This would explain why SBF was not investigated before the collapse of the FTX and why he walked out of court as essentially a free man at his post-bail hearing.
Finally, there could be a lack of political will to hold the SEC accountable; the SEC is an independent agency, but ultimately answers to Congress and the President. Unfortunately, politicians are often more interested in scoring political points than addressing the real issues facing the securities markets.
Whatever the reason, the fact remains that the SEC continues to drop the ball. It is imperative that the public demand accountability from government agencies. We need an SEC that operates without political bias and fearlessly challenges the elite to protect investors from exploitation.
What do you think should be done to ensure that the SEC operates without bias and effectively protects investors in the crypto industry? Let us know what you think about this topic in the comments section below.
Image Credits: Shutterstock, Pixabay, Wiki Commons, Editorial photo credit: CryptoFX / Shutterstock.com.