By John Sarson, CEO Sarson Funds, Inc.

Coinbase’s motion in SEC lawsuit questions the agency’s authority over crypto. It cites past Gensler comments and the Ripple case. Congress is pushing back on Gary Gensler over mission creep and a toxic culture. As innovation moves overseas and the SEC shifts focus to AI, lawmakers are predicted to remove Gensler and refocus the SEC on its investor protection mandate.

Coinbase Files Motion Questioning SEC’s Authority

Coinbase files motion in the case of SECURITIES AND EXCHANGE COMMISSION, v. COINBASE, INC. AND COINBASE GLOBAL, INC. as defendants. The 38-page opening statement from August 4th provided quotes from past public statements made by SEC Chair Gary Gensler. In these referenced quotes, Gensler is on record stating that “there is not a market regulator around these crypto exchanges” and that naming an authority to regulate exchanges could only come from Congress.  Since Congress has not granted any agency this authority to date, Coinbase’s defense is essentially asking the Chairman, “Were you lying then, or are you lying now?”

It will be interesting to see the SEC’s response.

The SEC’s approach to the crypto industry is having an impact on US companies.  According to Jahon Jamali, CEO of American Crypto Academy, “The resulting lack of regulatory clarity in the US has driven innovative digital asset projects overseas.”.

This view is echoed by Marco Aniballi, Managing Director of Block Blox who writes, “The lack of regulatory clarity for crypto is problematic globally… [the] hot potato avoidance of the issue at the highest levels in the US and it’s vassals (close allies) has visionary innovation teams looking elsewhere.”

Coinbase files motion and their defense team also highlights the recent court ruling in the Ripple case that specifically indicated that token sales by an exchange did not satisfy the “Howey test” of providing an investment contract between the token issuer and the token buyer.  This is another major issue that will need to be overcome by the SEC as they continue to pursue this case.

According to a Fox Business News article reviewing problems at the SEC published in 2022, “The problem with working for Gensler, multiple SEC sources tell Fox Business, is both style and substance. People at the SEC are complaining about his expansive agenda — pushing the commission into new areas of enforcement such as crypto regulation and mandating new company disclosures on issues like the environment. That, combined with his brusque management style, has created a toxic work environment at the SEC, these people say.”

The article, titled, “SEC leaders with nearly 50 years’ experience quit under Gary Gensler’s tenure” can be found here.

Gary Gensler and the SEC made a public announcement last week that also caught the attention of many people. Stating that their new focus would be on Artificial Intelligence and that “We can get to crypto later”.  This appears to be a continuation of the toxic management style and mission creep that have been hallmarks of the agency under Gensler’s administration.

As Gensler further expands the SEC’s agenda to include a focus on Artificial intelligence one might wonders when Congress will act to reign in an agency that seems to be holding itself accountable to neither Congress nor to the public it was chartered to protect.

Already some lawmakers including Ohio Republican Rep. Warren Davidson, have introduced motions to recall the chairman and restructure the agency.  To quote Rep. Davison in his recent motion, “To correct a long series of abuses, I am introducing legislation that removes the Chairman of the Securities and Exchange Commission and replaces the role with an Executive Director that reports to the Board, where all authority resides”.

During a recent Financial Services hearing, Rep. Davidson outlined the following abuses committed by SEC Chair Gary Gensler:

• Abusing rule proposals by averaging more than 2 new SEC rules per month.
• Inappropriately short public comment periods.
• Unworkable, and unlawful, ESG disclosure mandates.
• Hotel California rules for crypto: The ability to check in (with the SEC) any time, but never have the ability to leave (with approval).
• Endless discovery with no resolution and no clarity for captives or the market.
• An unworkable proposal for overhauling equity market structure.
• A de facto ban on crypto through the proposed custody rule.
• Failing to work with Congress.

This author believes that, given the defense offered by Coinbase in their recent motion, along with the newly announced and somewhat bewildering “new” focus of the SEC on Artificial Intelligence, Congress will proceed with the removal of Gary Gensler and a restructuring of the SEC designed to refocus the agency on its mission of investor protection and ensure more effective collaboration with Congress.  The SEC under Gary Gensler seems an example of an agency run amok with too much power and too little accountability for it to remain in its current condition for much longer.

Disclosures: Not investment advice. It should be assumed that Sarson Funds or its affiliated managers hold positions in all projects that are discussed. It is not possible to invest in any project directly through Sarson Funds, Inc. or its affiliated managers. Any investment product offered by managers affiliated with Sarson Funds should be assumed to be only available to Accredited Investors and subject to the individual terms and conditions of that offering including but not limited to those eligibility requirements associated with U.S. Securities Regulation D, section 506c. Talk with your financial advisor before making any investment decisions or have them contact Sarson Funds directly at [email protected].