SEC’s Crypto Record Rebuked by Ex-Commissioner, GOP Lawmakers in Hearing

• The Securities and Exchange Commission was mostly a punching bag for witnesses in a House Financial Services Committee hearing hosted Wednesday by its crypto subcommittee.
• Daniel Gallagher, a former SEC commissioner, recounted Robinhood's difficulty in trying to comply with the agency's views on crypto and argued the regulator has ignored its own authority to do something more to establish digital assets rules.

The U.S. Securities and Exchange Commission was hammered for two hours in a congressional hearing on Wednesday in which the witness list predominantly included agency critics, including former Commissioner Daniel Gallagher, who is now at Robinhood.

In a preview of what could come when all five SEC commissioners – including Chair Gary Gensler – face a full hearing of the House Financial Services Committee on Sept. 24, the agency took a rhetorical beating from most of Wednesday's witnesses, all the Republican members and some of the crypto-friendly Democrats on the subcommittee holding a hearing entitled, "Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets."

Gallagher, who is a senior lawyer at Robinhood Markets and whose name has been circulated as a possible agency chair if Republicans retake the White House next year, recounted a "very frustrating" situation in which his company was rebuffed in an effort to register with the SEC for crypto activity and has recently received a notice that the agency is weighing an enforcement action "on our very compliant Robinhood crypto offering."

Read More: Robinhood Joins Coinbase in Saying It Tried to 'Come In and Register' Like SEC Wanted

"We have to look over our shoulder left and right because of this regulatory uncertainty," Gallagher said, arguing that the agency has deliberately ignored a legal authority that would have allowed it to engage in some initial rulemaking even before Congress weighs in.

"Ultimately, it will be up to Congress to rectify the commission's failure to act to register both tokens and platforms and to provide clarity for those which do not require registration," Gallagher said. "Only Congress will be able to truly provide the necessary long term regulatory clarity for digital assets, but nothing is stopping the commission from moving now to provide tailored relief that allows firms to register, even if provisionally, and continue to innovate in the meantime."

Lawmakers questioned the uncertainty over the compliance status of Prometheum Inc., the SEC's first special purpose broker dealer for crypto, which recently opened its crypto securities custody operation. They also questioned witnesses on the meaning of the SEC's recent admission in its legal dispute with Binance that it erred in using the confusing shorthand term "crypto asset security," which wasn't meant to suggest that crypto tokens themselves are securities.

Democrats spent much of their time underlining the extent of fraudulent activity in the industry. Rep. Sean Casten (D-Ill.) also criticized former President Donald Trump's family crypto project, World Liberty Financial. The congressman suggested its intent to retain 20% of its tokens for insiders seems designed to get around the proposal in a prominent legislative proposal, the Financial Innovation and Technology for the 21st Century Act (FIT21), in which projects with less than 20% of internal ownership can be considered decentralized.

Rep. Brad Sherman (D-Calif.), one of the panel's most colorful and vocal critics of the crypto industry, also targeted Trump.

"He's announced that he is now the chief crypto advocate," Sherman noted. "So on the one hand, he has all that power given to them by the Republican Party. On the other hand, he's trying to make billions of dollars for advocating crypto. That's a conflict of interest that makes Clarence Thomas look like Mother Teresa," he said, in a reference to the recent scandals tied to Supreme Court Justice Thomas.