On April 14, 2021, the U.S. Senate confirmed Gary Gensler as the new Chair of the U.S. Securities and Exchange Commission. Over the last few years the SEC has taken an assertive position in considering many digital assets to be securities and has been conservative in approving offerings of digital assets, leaving the industry in a continued state of uncertainty. On the other hand, the SEC made strides to embrace innovation as exemplified by their establishing FinHub and maintaining an open door policy to practitioners in this space.

Gensler is coming to the SEC with a great deal of knowledge and experience in the FinTech and digital assets industry. In particular, during his time out of government, Gensler was a FinTech professor at MIT, serving as Co-Director of MIT’s Fintech@CSAIL and Senior Advisor to the MIT Media Lab Digital Currency Initiative.

As the former chair of the U.S. Commodity Futures Trading Commission who oversaw Dodd-Frank mandated swap reform, Gensler is expected to focus more heavily on trading and markets than his predecessor, Jay Clayton, who came from a corporate finance background. As a member of the newly formed Democratic administration, Gensler is generally expected to support increased regulation and enforcement across all asset classes.   

Gensler will be tasked with trying to solve litany of recent and ongoing market controversies, including meme stocks and enforcement actions against digital asset issuers, many of which are directly connected to the FinTech space. In his Congressional testimony, Gensler specifically called out cryptocurrency, blockchain, and bitcoin as areas of potential focus. Accordingly, we expect Gensler to be quite active in areas that could have a profound, long-term effect on the regulation of FinTech, digital assets, and the operation of the capital markets where he will hopefully provide some needed clarity through the issuance of market guidelines.

Looking into the crystal ball, we see a number of regulatory actions likely to affect the space:

• T+1 Settlement - Particularly after the spectacular rise and fall of certain “meme stocks”, such as GameStop, there have been calls to shorten the settlement period for the trades of securities from two days after confirmation  (T+2) to one day after confirmation (T+1). It is thought this might alleviate some of the liquidity issues that brokerage firms face during times of extremely high volume. That said, implementing this only four years after the market moved from T+3 could be very challenging, and it is likely that some legally required processes will need to be streamlined, reimagined, or eliminated to make this a reality.

• Token Offering Enforcement Actions – The SEC has been proactive in bringing enforcement actions related to the sale of digital assets in violation of federal securities laws, and is presently engaged in a number of high-profile enforcement actions against digital asset issuers, including Ripple Labs (RPX) and the recently announced action against LBRY. Although the SEC has been successful in prior enforcement actions, it was dealt a potentially significant defeat   in the Ripple case when the court recently determined that internal papers expressing the agency’s interpretation or views on cryptocurrency might be discoverable. Furthermore, the SEC’s position on enforcement is not shared by all of its Commissioners, with Commissioner Peirce often dissenting. Recently Commissioner Peirce proffered a revised potential framework for token projects to be able to launch under a safe harbor that would be completely unique under the securities laws, cementing her status as a thought leader in the space. Gensler will need to determine how to proceed in these matters and, in particular, whether to litigate in a way that has the potential to completely cause token projects to be abandoned, as happened in the Telegram and Kik cases. The change in administration could provide cover for a slight shift in how the SEC pursues these matters in striking the delicate balance between ensuring investor protection and allowing financial innovation to proliferate.

• Democratization vs. Gamification - Financial platforms that purport to offer new investment opportunities to the public, and in particular to non-accredited investors, have been under the SEC’s magnifying glass. With proper investor protections, these platforms have the potential to give retail investors access to asset classes (often with different return profiles than what is available on the public markets) that previously only would have been available to investors with millions of dollars at their disposal. On the other hand, the financial incentive for many of these platforms favor high volume, a possible conflict of interest which can lead to platforms designed to encourage potentially risky behavior. Again, the SEC will need to be able to strike a balance between investor protection and financial innovation as platforms develop to give retail investors exposure to private company growth, real estate, private equity, collectibles, and other asset alternative asset classes.

• Clarifying Jurisdiction - As former CFTC Chair, Gensler is likely to appreciate the strong desire of everyone operating in this space to understand   the dividing line between whether a digital asset is a security, commodity, or currency or if there can be overlap. In October 2019, the SEC, CFTC, and Financial Crimes Enforcement Network (FinCEN) released a proposed framework for determining jurisdiction over digital assets which already seems dated. Letting issuers know the precise regulatory regimes to which they will be subject, instead of requiring educated guesswork, would be a huge step to creating in fostering innovation and compliance.

• Bitcoin ETF – After the rejection of multiple applications to issue a Bitcoin ETF, we expect that its time will come soon, and the question is not whether such a fund will be approved but when it will happen.  Thus far, the SEC has been fairly resolute in preventing the launch of a bitcoin exchange-traded fund (ETF), largely due to market manipulation concerns. With several Bitcoin ETFs and two new Ethereum ETFs approved in Canada, and Coinbase launching a record direct listing with the majority of its revenue driven by Bitcoin and Ethereum, the pressure will be on for the SEC to determine an acceptable means of launching an ETF.