When Gary Gensler (ex-Goldman Sachs investment banker) was announced as the new head of the Securities and Exchange Commission (SEC) in February 2021, the crypto industry saw a glimpse of hope. After all, the man in charge of regulating the industry was a “crypto native,” having taught a course on the subject at MIT. However, two years later, it’s clear that Gary has been a big letdown for the industry as the SEC failed to identify major frauds and protect investors.
The following opinion editorial was written by Joseph Collement, General Counsel at Bitcoin.com.
This should not come as a surprise, as history shows that the SEC is as effective as a screen door on a submarine when it comes to protecting investors. They’re supposed to be the watchdogs of Wall Street, but they’re more like the lapdogs of Wall Street.
Take the collapse of Enron in 2001 as an example. The SEC did not formally review the company’s cooked financial statements for at least three years prior to its downfall. Six years later, the SEC’s complete laissez-faire approach toward Wall Street led to the biggest financial crisis since the Great Depression. In the years leading up to the 07-08 collapse, experts and whistleblowers were warning about the dangers of subprime mortgages and the risky practices of lenders. Despite its power to monitor investment banks, the SEC did not take any meaningful steps to protect millions of investors.
Then there’s the Madoff Ponzi scheme, the man who stole billions of dollars from unsuspecting investors for decades. The SEC conducted multiple investigations into Madoff’s business practices, but they failed to uncover the fraud. Madoff was able to continue his scheme for decades until the bubble burst in 2008. It’s worth noting that Madoff sat on SEC advisory committees while he was running his Ponzi scheme.
And now, we have the collapse of FTX and Alameda, which left hundreds of thousands of customers out of pocket. Despite clear signs, the SEC had the chance to intervene, but they didn’t. Instead, they met with SBF behind closed doors for private discussions. This is especially noteworthy considering that Alameda’s CEO’s dad, Glen Ellison, was Gary’s boss at MIT.
So, why does the SEC keep failing us? One reason could be that they’re too focused on small, insignificant cases, instead of focusing on the big, systemic issues. When you’re a bully, it’s easier to pick on the smaller kid at school. For example, we’ve seen the SEC go after relatively small projects for technical violations of securities laws (think LBRY) while failing to intervene in major frauds such as FTX. The SEC knows smaller projects do not have the resources to fight them, so it’s an easy win for them and great PR. This is not to say small cases should be ignored, but rather that the SEC should be able to balance both.
A different rationale could be that the SEC is not properly equipped or staffed to handle these complex cases. The SEC’s budget and staffing levels have remained relatively stagnant in recent years when compared to the exponential growth of crypto markets since 2017. This may have left them struggling to keep up with the rapid pace of change.
Another explanation could be that the SEC has been captured by the industry it regulates. It is no secret that the SEC has close ties with the financial industry. In fact, many of the SEC’s top officials come from Wall Street firms, and they often return to the industry after leaving the SEC (think Mary Jo White, ex-head of the SEC, now representing Ripple against the SEC). This revolving door undoubtedly creates a conflict of interest and can lead to a lack of oversight of the industry. It’s also not impossible to imagine that someone in the government was influenced by FTX. This would explain why SBF was not investigated prior to FTX’s collapse and the reason why he essentially walked out of court as a free man post-bond hearing.
Finally, there could be a lack of political will to hold the SEC accountable. The SEC is an independent agency, but it ultimately answers to Congress and the President. Unfortunately, politicians are often more interested in scoring political points than in addressing the real problems facing the securities markets.
Whatever the reason may be, the fact remains that the SEC keeps dropping the ball. It is imperative that the public calls for accountability from our government agencies. We need an SEC that operates without political bias and fearlessly takes on the elite to guard 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 subject in the comments section below.