 Playing a game of whack-a-mole. That's what the head of the Securities and Exchange Commission, Gary Gensler, has been doing with the crypto industry in the past few months. Gemini, Kraken, Paxos, Bitrex. These are just a few of the crypto companies that have been facing the STC's crackdown for allegedly violating security laws. And now the STC is after the most experimental but also potentially disruptive sector of crypto, DeFi. That's right, earlier this month, Gensler announced that even decentralized finance platforms will have to register with the agency or face enforcement action. So, what is wrong with the STC's approach to crypto? Is Gensler really trying to kill the industry in the US? And can a system that is by nature decentralized and now sensible be subject to security regulation? We'll answer all these questions in this video. But before we start, don't forget to smash the like button and subscribe to our channel. I'm Giovanni your host and this is a Cointelegraph Report. So let's start with some background. The STC or Securities and Exchange Commission is the US regulator in charge of overseeing the securities markets. Its duty is to protect investors against fraud and market manipulations. Gensler, a former MIT professor, has been running the agency since 2021. Since the collapse of FTX and other fraudulent crypto projects last year, the STC has been at the forefront of a broad government crackdown on crypto. Gensler has said multiple times that the vast majority of cryptocurrencies, with the exception of Bitcoin, are securities and therefore should be registered as such. The problem is that security legislation dates back decades ago and was not designed to suit the complexities of an asset class such as crypto. According to the Howie Test, a security is an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. While many crypto tokens may indeed fall within this definition, others probably don't. Just think of stablecoins. There is no real expectation of profits from such tokens since their value remains stable by design. And yet, the STC recently issued a wealth notice against Paxos, the issuer of BinanceUSD, which had to stop issuing its flagship stablecoin. Another major source of confusion is whether Ether, the second largest crypto, should be considered a security or not. Asked about this during a congressional hearing last Tuesday, Gensler was unable or perhaps unwilling to give a clear answer. I'm asking you, sitting your chair now to make an assessment under the laws as exist is Ether a commodity or a security? Without speaking to any one. I know you've repeatedly said you're not going to speak to one, except you've spoken to one, Bitcoin. So I'm asking you to speak to a second one, the second largest market cap here. And speaking to the tokens, there's 10 to 12,000. If there's a group of entrepreneurs. I'm asking about one. That wasn't very helpful, wasn't it? That was typical Gensler. Instead of formulating specific rules tailored for the crypto industry, he has opted for a regulation by enforcement approach. Basically, that means going after crypto businesses on a case by case basis, hoping to set precedents that other companies will follow. This approach is generating a climate of regulatory uncertainty that risks stifling crypto innovation. But what is the rationale behind this policy? Let's see what crypto lawyer J. W. Varrett has to say about it. The SEC has extraordinary incentive authority to exempt parties from their rules, create alternative regimes, exempt from the traditional rules and design to meet the needs of the particular type of investment. The leadership just doesn't like the politics of seeing being seen as adapting to crypto. And so they think they're not willing to undergo that political cost. So they'll let they'll let the industry suffer and they'll let the token holders suffer. Long story short, Gensler seems unwilling to take on the political risk of entering a constructive dialogue with the crypto industry. What is even more upsetting, Gensler denies that any crackdown is actually happening. On the contrary, he has said multiple times that the existing rules are clear enough and there is no need for additional clarification or a customized set of rules for the crypto industry. Just come in and register, he says. So what's the problem with that? Well, apparently registering with the SEC is easier said than done. According to the SEC's critics, the process is extremely expensive and doesn't fit crypto's unique aspects. And the fact that Gensler says there's a form on our website just to fill it out is, I have to say, as a practicing securities lawyer and a securities law professor, that statement by him is, I'll be kind, misleading is a misleading description of the registration process, simply put. How can a smart contract code or how can a individual operating a delegating node comply with those particular requirements they can? The SEC's crackdown on crypto reached a new level last week when Gensler proposed an update on existing regulation that would expand the definition of an exchange. The new definition would include any entity that brings together buyers and sellers of securities through structure methods to negotiate a trade. Gensler said explicitly that such a definition includes decentralized finance protocols, which could also face penalties for dealing with unregistered securities. So what's wrong with this new proposal? Well, Gensler fails to notice or perhaps doesn't want to, the fundamental difference between a centralized exchange such as Coinbase and a decentralized platform such as Uniswap. Decentralized exchanges do not rely on a centralized entity to manage trades or custody people's funds. They function on open code and smart contracts to perform trades. Basically, no one is in charge of them. So who exactly is supposed to comply with the SEC? Again, it's unclear. But Gensler doesn't seem to care. Calling yourself a DeFi platform is not an excuse to defy the security laws, he said. Gensler's latest proposal sparked a wave of protests among not only crypto industry leaders, but also within the SEC itself. Hester Pierce, an SEC commissioner known for her pro-crypto views, has spoken out against Gensler's latest proposal. We are uninterested in facilitating innovation and competition in the financial markets and instead seek to protect incumbents, said Pierce about the SEC's approach. More criticism against Gensler emerged in the US Congress. United States representative Warren Davidson said he plans to introduce legislation aimed at removing Gensler from his position at the SEC, citing a long series of abuses. A strong argument against the SEC's new proposal on DeFi is that it may go against the US Constitution. As pointed out by CoinCenter crypto activists, the proposal threatens anyone who makes communication protocols available for trading purposes. That means even software developers who write and publish code for DEXEs should register with the SEC or face prosecution. That amounts to a restriction on free speech, which is unconstitutional. So how is this SEC ongoing crackdown on everything crypto going to play out? First of all, it is important to mention the SEC doesn't have the final word on how crypto should operate in the US, the judiciary has. That means each one of the SEC's enforcement actions can be challenged in court. A good example is the case of Ripple, which for three years has been fighting the SEC in court, over whether its native token XRP should be considered a security. The outcome of this case will likely set an important precedent for the industry. Of course, not all companies have the resources to face a legal battle with the SEC. Many will just prefer to shut down and move overseas. When it comes to DeFi, decentralized protocols are not based in any specific jurisdiction, so it is difficult, if not impossible, for the SEC to go after them. However, despite its decentralization, DeFi still has some centralized weak points. A large amount of DeFi trading relies on centralized stable coins, in particular USDC issued by Circle, a company based in the United States. That means that in case of crackdown on USDC, the whole DeFi system will inevitably suffer. To wrap things up, the battle between Gensler's Securities and Exchange Commission and the crypto industry is likely to continue, at least until new crypto legislation will be passed by Congress. This week, crypto exchange Coinbase has sued the SEC, prompting it to provide more clear guidance. Meanwhile, the crackdown on crypto is already pushing innovation overseas. As shown in a recent state of crypto report by A16Z, the US has been steadily losing ground when it comes to the number of crypto developers in the country. Coinbase recently announced it is seriously considering leaving the US if more regulatory clarity will be provided. On the positive side of things, this trend is opening new opportunities for jurisdictions with a more clear crypto regulation. That's all for this video. I hope you enjoyed it. I'm Giovanni, your host. Thank you for watching and see you next time.