This is the third article in a three-part series based on Gary Gensler’s extensive prior public statements on crypto. Here are parts 1 and 2.
Cointelegraph has been busily digging through a treasure trove of likely future Chairman of the Securities and Exchange Commission Gary Gensler’s thoughts on crypto, especially from a series of lectures he gave at MIT in the fall of 2018. One especially notable element of Gensler’s thinking is his obvious respect for Bitcoin’s mechanism of internal governance and his obvious interest in seeing that decentralization elsewhere in finance.
12 years out from BTC’s genesis block, there aren’t many serious characters in the U.S. federal government calling for anything as misguided as a Bitcoin ban. Even antagonists recognize that such a measure would be impossible. But beyond just tolerance, Gensler is clearly intrigued by Bitcoin’s mechanisms for internal decentralized regulation and bullish on applying their principles elsewhere in finance.
Gensler goes decentral
Famously, the SEC has decided that Bitcoin is a commodity, falling under the purview of the Commodity Futures Trading Commission (which Gensler chaired during the Obama years) rather than the SEC. Consequently, Gensler’s decisions at the SEC will be fairly oblique in the way that they touch the original cryptocurrency, but his overall appraisal of Bitcoin’s governance shows a refreshing level of knowledge, as well as an obvious respect for the tenets of decentralization.
“There’ve been many efforts that all died, until Bitcoin, to crack that riddle that we talked about: peer-to-peer money without a central authority,” Gensler said, while discussing Satoshi Nakamoto’s original whitepaper with a crowded lecture hall. Beyond simply being impressed with the technological achievement of Bitcoin and its “monetary policy that limits the supply of the currency,” he was supportive of the ability for transactions to be free from third parties.
“When you’re dealing with a central authority, a commercial bank, they can decide whether to extend credit or not. That’s a form of censorship. It’s a form of allocating something,” Gensler said. “But distributed decentralized platforms are more censorship resistant
It’s almost paradoxical to think of someone so deeply ingrained in the traditional centers of financial power. Before his regulatory career, Gensler got his start in finance working for Goldman Sachs. He’s coming from very much the centers of power, which makes it pretty remarkable that he identifies established industry players as pushing for regulation at the expense of new start-ups:
“One thing that wasn’t mentioned is sometimes institutions want to be regulated over time, because it creates barriers to entry. It’s usually not at an early stage. But later on, it creates some barriers to entry, and it’s actually the incumbents who often collect some economic rents.”
The many costs of mining
Mining is obviously a central feature of Bitcoin’s system of governance. It’s also remarkably controversial, with recent estimates saying that the Bitcoin network consumes more energy than the Netherlands. Indeed, the bad PR of Bitcoin’s electricity use has inspired a surge of renewable energy firms to enter the industry. But Gensler took time from his lecture to defend Bitcoin’s energy use as compared to the many overlooked externalities of all the other monetary systems of the world:
“I would note that all strong currencies — strong monies — for centuries have had something to limit the supply. And so now we’re doing it electronically and through this mining. That doesn’t mean it’s the best use. I’m just saying it’s another way. Extracting gold out of the ground is very hard. And in the 19th century, to have big vault doors and security guards with rifles was a way to insure it. And one could even say that having central banks takes cost. So I think of it as a trade-off of how you ensure a currency as a harder currency to create.”
Despite his clear sympathy for decentralization, Gensler is not exactly bullish on Bitcoin. “We’re not going to be a Bitcoin minimalist or maximalist. I’m probably, to self-disclose here, a little bit center-minimalist on Bitcoin,” he says to his classroom at one point. Later on, he told the class that he did not own any Bitcoin himself — although, as always, that could be OPSEC.
On the subject of mining, Gensler noted several long-standing concerns aside from energy usage. One is that the massive mining pools have effectively centralized the system, rendering a 51% attack more likely than is comfortable. Another is that Gensler suspects that the most successful miners are successful based on illegal activity:
“I truly believe — but can’t factually prove — a number of the biggest mining pools or miners are in places where they’re doing illicit activity. They’re getting their electricity for less than what it’s really costing on the grid by bad actors.”
Even these issues with the particularities of Bitcoin don’t diminish the fact that Gensler clearly believes in the importance of decentralizing governance. “I’m more into democratizing capital markets,” he says at one point.
So what does all of this mean? Gensler is certainly no crypto-anarchist, and he’s definitely not interested in rolling back crypto regulation to where it was in 2018. But his sympathy towards decentralizing finance is clearly strong. In his lectures, he comes off sympathetic to strong protections for transactional privacy and the process of crypto tokens beginning their lifecycles as centralized projects before becoming decentralized currencies. This will be a critical area at the SEC, especially as co-commissioner has already spent the last year pushing for a safe harbor for such projects.