The future of crypto regulation comes down to one unpopular man

It is my personal belief that no normal person should know the name of the Securities and Exchange Commission’s chair, and yet here I am, about to explain why he’s been an issue in the 2024 presidential election.

The man in question is Gary Gensler, an economist who formerly worked at the Commodity Futures Trading Commission and the Massachusetts Institute of Technology. As SEC chair, he has been on the receiving end of death threats. Former President and current Republican nominee Donald Trump made a campaign promise to “fire Gary Gensler” to the raucous approval of a packed arena at this year’s Bitcoin Conference. Though blockchain enthusiasts have been the most vocal in their displeasure, the controversy around Gensler isn’t limited to them. The Economist has dubbed Gensler “the most controversial man in American finance”; House Democrats and Republicans have expressed “stern displeasure” on Gensler’s crypto approach.

You could say he is unpopular.

Many industries dislike their regulators. It is arguably the job of the SEC commissioner to be somewhat unpopular! And the cryptocurrency industry’s revulsion for Gensler is unsurprising after a series of SEC enforcements, including against major companies and exchanges. But Gensler himself became a contentious, oddly partisan issue on the level of presidential politics. And the story gets more complicated from there because this is not a cut-and-dried case of a regulator being persecuted by the industry for doing his job. Gensler is also unpopular among his own staff, though not for any reasons that will get thousands of people roaring inside a convention center. 

It’s unusual for the SEC to be a hot-button issue — even during the 2008 financial crisis, the SEC chair wasn’t exactly a well-known figure. (The chair at the time was Christopher Cox. Yes, literally who.) But the SEC has become politically heated because Gensler wanted it to be, says Adam Pritchard, a professor of securities law at the University of Michigan. “He wanted to raise the profile of the agency,” says Pritchard, pointing to what he says is “an ambitious rulemaking agenda.”

Let’s review some very recent history: Gensler’s time at the Commodity Futures Trading Commission (CFTC), the agency that regulates derivatives markets. Gensler was in charge of the CFTC in the wake of the 2008 financial crisis, during which he successfully convinced Congress to include, as part of the Dodd-Frank Act, new rules involving swaps (a type of financial derivative that was implicated in the crisis) that put them under the purview of the CFTC. His approach at that agency was described using words such as “hard-charging” and “aggressive.” 

Before Dodd-Frank, the CFTC’s oversight was just the $35 trillion futures market; after, it was responsible for the $400 trillion swaps market as well. But taking on new duties also meant a lot of new work. The CFTC had to write a lot of new rules, and real people had to clock in hours to make that happen. On top of that, his enforcement chief filed “a record number of cases” against Wall Street banks. As a result of the speed and confusion with which the CFTC was working, the staff had to issue “130 exemptions or no-action letters,” essentially saying no enforcement action should be taken despite the existence of a new rule.

Under Gensler’s leadership, the CFTC outspent its budget and sometimes had to put employees on unpaid leave. At the same time, he built up a reputation as a micromanager. Gensler “routinely demanded that staff work weekends and holidays,” according to the Partnership for Public Service, which named the CFTC as one of the worst places in government to work while Gensler was at the helm. 

Gensler’s management style left much to be desired; it also left the CFTC with a considerable amount of unoccupied real estate. Office space at the CFTC surged by almost 75 percent during his tenure. “Gensler signed leases across the country, assuming he would be able to fill the offices with new staff,” noted Fortune. But the funding for that staff never came, and by 2016, a fifth of the agency’s headquarters in DC remained unoccupied — as did almost a third of the New York office. 

The playbook Gensler has been using at the SEC looks similar. Here, too, he’s been known for his hard-driving ethos. His two highest-profile issues, environmental disclosures and crypto, have earned him enemies in the Republican Party. 

Under the SEC’s new rules around environmental disclosures, companies are required to disclose risks related to climate change. (Those rules have been paused in the face of an onslaught of lawsuits — part of a larger-scale attack on the regulatory state via the courts.) 

“I don’t imagine a lot of voters are up in arms about public companies being forced to disclose the impact their policies have on the environment,” says Marc Fagel, who spent more than a decade at the SEC and who is now a lecturer at Stanford Law School. But because Republicans have been complaining about “ESG,” and “woke Wall Street,” this otherwise anodyne set of rules is now part of the culture wars.  

But it’s Gensler’s record on crypto that makes his haters really froth at the mouth. 

The division between the CFTC and the SEC is peculiar; in most other countries, there’s just one financial regulator. That division is a crucial part of the crypto story; the industry’s preferred regulator is the CFTC. But in the absence of a congressional mandate, a turf war has ensued, with the SEC filing enforcement actions against Coinbase and Binance, two of the largest exchanges, in 2023, claiming the exchanges allowed users to trade unregistered securities. 

The SEC under both Gensler and his predecessor had some significant wins; it litigated or settled almost 200 crypto cases since 2017, Gensler told Barron’s in May. In March, a judge found that the suit against Coinbase could go forward — saying the SEC had sufficiently shown “that Coinbase operates as an exchange, as a broker, and as a clearing agency under the federal securities laws, and, through its Staking Program, engages in the unregistered offer and sale of securities.”

Meanwhile, Gensler has said outright that crypto is “rife with fraud, scams, bankruptcies and money laundering” — not in and of itself a controversial opinion but one that maybe comes off a touch more outspoken than the typical federal bureaucrat. Maybe to drive the point home, he’s taken a number of crypto companies to task with enforcement actions, which include but are not limited to lawsuits. This is a sore point for the crypto industry, which has complained that the SEC isn’t making rules, just punishing companies, and doing so without providing clear guidance about how to avoid punishment.

When the crypto exchange Coinbase requested that the SEC draft comprehensive rules for the crypto industry, the SEC rejected its petition. Coinbase then filed a legal challenge, saying the SEC’s denial was “arbitrary and capricious,” one of the legal standards for overturning an agency action. 

Before I say more, let’s go over that again: one of the biggest crypto exchanges asked for more regulation, and then the regulatory agency in question — run by a man who says crypto is full of scams and frauds — said no.

That seems pretty absurd on the face of it. Keep in mind, however, that there’s some weird legal crossfire in the timeline. Coinbase’s suit against the SEC over rulemaking was happening at the same time as the SEC’s suit against Coinbase over unregistered securities. And on top of that, there’s an additional complication: regulation just isn’t what it used to be. “The conservative judiciary has limited rulemaking,” says Fagel, the former SEC staffer. (The Supreme Court kneecapped regulators earlier this summer as part of an ongoing trend toward disempowering federal agencies.) “Yes, the SEC could spend three years concocting an entire regulatory regime for crypto. There would be a lawsuit in an hour.”

It might be more realistic to think of Coinbase’s suit as not asking for regulation per se, but as asking for regulation that Coinbase likes. Because if Coinbase doesn’t like said regulation, it’ll sue.

Meanwhile, the courts have tended to back the SEC when it sues or takes enforcement actions — as opposed to rulemaking or other agency decision-making — so, rationally speaking, it’s just good sense for the SEC to focus on doing the things that judges let them do. 

Gensler’s approach would be defensible, except that the SEC hasn’t abandoned rulemaking. In just the first eight months of 2022, the SEC proposed more than twice as many new rules as in 2021, and more than had been proposed annually for the last five years, according to an SEC inspector general report. 

“There’s no question that the rulemaking initiatives have come fast and furious since he took over at the SEC,” says Pritchard. That means that the number of challenges to the rules has also spiked. Crafting rules that will withstand challenges is time-intensive, creating a feedback loop of more work for the staff, Pritchard says.

This is the part that makes Gensler’s SEC start to look a lot like Gensler’s CFTC, and not in a good way.

As a result of the pace of rulemaking, attrition rates at the SEC were the highest in 10 years, the 2022 inspector general report said. Managers told the SEC inspector general that it had been harder to hire people with experience, so the agency was relying on temporary workers, “in some cases with little or no experience in rulemaking.” 

According to the SEC union, staff have been leaving “at more than twice the rate prior to Gensler’s arrival, and the pace of departures is continuing to accelerate.” The people who were most likely to leave were the most experienced. The SEC staff has experienced benefit cuts, which the union chalks up to “a series of budget decisions made by Chair Gensler,” who chose to increase spending, betting that Congress would increase the SEC’s budget. “In effect, Chair Gensler wagered with your compensation and benefits, knowing that his staff would suffer the consequences if he lost the bet,” the union told its membership. (Congress did not increase the SEC’s budget, and Gensler did in fact lose this bet.) 

The union has also decried Gensler’s “irrational hostility” to remote work, adding that “the union is being forced to litigate issues like this more frequently under Chair Gensler than under any previous SEC Chairman.”

Overwork and staff attrition have heavy consequences when you’re the literal government. In March 2024, SEC attorneys were sanctioned by a judge for “gross abuse of power” in a crypto case involving a company called Digital Licensing (or, more familiarly, Debt Box). Following the sanctions, the Salt Lake City offices of the SEC were closed because of “significant attrition” — and while the Debt Box fiasco wasn’t the only reason it closed, it did play a role. Attorney sanctions are relatively rare, and sanctions of government lawyers are even more so. 

The SEC chair term lasts five years, meaning Gensler’s time is up in June 2026. But regardless of who is elected, Gensler’s tenure may not continue into the next administration. Gensler has said he would “absolutely” stay for a second term under Biden, when Biden was still the Democratic nominee. Meanwhile, the Trump campaign has targeted him specifically, with the former president saying he would “fire” Gensler. Vice President Kamala Harris’ donors have also been pushing to get rid of Gensler. Her exact stance on Gensler as a regulator isn’t clear, but Gensler is closely associated with Sen. Elizabeth Warren (D-MA), and the relationship between Warren and Harris has been tense.

Legally, the president can fire SEC chairs — but the chair then becomes a normal SEC commissioner. In that case, they can only be removed for cause, says Anne Joseph O’Connell, a law professor at Stanford Law School. (Typically, though, chairs resign when a new party is elected, while the regular commissioners carry on.) It’s unclear what would happen in the case of a Harris administration — intraparty transitions don’t happen very often.

It’s funny. There’s reason to think that Gensler is, in fact, bad at his job. But when the crypto industry calls for Gensler to get fired, it’s probably not because it’s concerned about the work-life balance of the SEC staff. The same people who want Gensler’s head on a platter are the least likely people in America to find common cause with the SEC union. And given the polarization in American politics, when Gensler is demonized by the crypto industry (and lumped in with the actually effective Lina Khan by the business class), he comes out looking good to a certain set of half-informed liberals.

The real story here is the paralyzed regulatory state. The legislative chambers that could have increased the SEC’s budget and mitigated its problems of too much rulemaking with too little staff are gridlocked. (Maybe Gensler’s chaotic leadership would have rendered that a null effort, but it’s hard to say for sure.) As for the problems with what is sometimes termed “regulation by enforcement,” that’s exactly the incentive structure the right wing has set up by kneecapping agencies’ abilities to set rules. Gensler is a symptom, not the disease.

When the SEC makes rules, it gets tied up in court, and so even when the industry wants rules, it’s not going to get them. Strong regulation isn’t nearly as dangerous for corporations as unpredictability is. Go ahead and fire Gensler — who cares? The next SEC chair isn’t going to be able to set predictable guidelines, either.