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The SEC is an independent regulatory and law enforcement agency that conducts its own investigations, which are not supposed to be influenced by politicians.
On March 16, a bipartisan group of congressmen decided to weigh in on the Securities and Exchange Commission’s ongoing investigation into cryptocurrency and blockchain companies. In a letter sent to the regulatory agency, the group demanded that SEC chair Gary Gensler and his department explain themselves in their information-gathering, calling into question the commission’s authority and approach. “We have questions regarding the Securities and Exchange Commission’s (the Commission) utilization of Division of Enforcement and Division of Examination authorities,” the letter begins, stating that rather than using those powers in the context of an enforcement investigation, “those authorities are better suited to the SEC’s divisions charged with seeking public commentary as part of the rulemaking process.”
“We have reason to believe these requests might be at odds with the Paperwork Reduction Act,” the letter continues, essentially bemoaning the notion that crypto and blockchain firms might have to rustle up some documents to respond to the SEC. The letter concludes by asking Gensler 13 specific questions regarding the investigation.
The letter was signed by Republicans and Democrats alike: Reps. Tom Emmer (MN), Warren Davidson (OH), Byron Donalds (FL), and Ted Budd (NC) from the Republican side of the aisle; Reps. Josh Gottheimer (NJ), Jake Auchincloss (MA), Ritchie Torres (NY), and Darren Soto (FL) for the Democrats.
That wasn’t all. The letter’s lead author, Rep. Emmer, took to Twitter to issue an even more explicit statement, writing that “crypto startups must not be weighed down by extra-jurisdictional and burdensome reporting requirements. We will ensure our regulators do not kill American innovation and opportunities.” The comments made it unequivocally clear that, in Emmer’s view, the congressional inquiry to the SEC was meant to protect cryptocurrency firms from investigation.
The letter and subsequent statement are stunning for a number of reasons. First, it appears to be an obvious attempt to exert influence on a federal law enforcement investigation. The SEC is an independent regulatory and law enforcement agency that conducts its own investigations, which are not supposed to be influenced by politicians. Members of Congress can call for investigations into sectors or businesses; it’s extremely uncommon for them to call for the thwarting or redirection of an ongoing investigation.
The House and Senate have lengthy and detailed ethics rules. There are also federal statutes in place to prevent political interference into ongoing investigations. In the case of issuing a public statement that could alter the course of an inquiry into a sector, especially in the information-gathering stage, it’s likely that those congressmen would have (or at least should have) sought counsel from their lawyers regarding those ethics proceedings. The Prospect sent requests for comment as to whether that counsel was indeed sought and what recommendation was made, or if it was never sought in the first place, to the offices of Reps. Emmer, Auchincloss, Torres, and Gottheimer. Only Rep. Torres's office responded. “That question would be best to ask Rep. Emmer’s office since he was the primary writer of the letter. I imagine his office likely consulted legislative attorneys here in the House, but you would need to check him. After a letter is drafted it gets circulated to other Members to get their signatures with the understanding that it has already been vetted.”
The justification for that intervention is also noteworthy. Invoking the Paperwork Reduction Act as grounds for limiting the SEC’s investigation is a highly dubious rationale. According to Elise Bean, a former investigator on the Senate Permanent Subcommittee on Investigations, the Paperwork Reduction Act would be a highly unusual justification for limiting an investigation. “The PRA does not apply to ‘an administrative action or investigation involving an agency against specific individuals or entities,’” Bean said. “That’s why it is rare to see anyone invoke the PRA to try to stop or slow down a federal investigation.”
It appears to be an obvious attempt to exert influence on a federal law enforcement investigation.
Of course, given that the cryptocurrency sector has been rife with examples of firms defrauding investors, concealing transactions, and potentially even evading sanctions, as well as the complexity and opacity of the broader cryptocurrency sector, it would make plenty of sense for the SEC to cast a wide net in its information-gathering.
The move from this bipartisan gang comes at a time when money is pouring into Washington from crypto firms, in the form of lobbying and campaign contributions. “Industry insiders” gave $7.3 million to political campaigns and committees through the end of 2021, according to Bloomberg, and, according to The Wall Street Journal, the sector is now teeming with former regulators who have revolved out into lobbying. “Three former chairs of the Securities and Exchange Commission, three former chairs of the Commodity Futures Trading Commission, three former U.S. senators, and at least one former White House chief of staff, former Treasury secretary and former chair of the Federal Deposit Insurance Corporation” all work for or advise crypto firms.
Ron Hammond, now director of government affairs at the Blockchain Association, a D.C.-based cryptocurrency lobby shop, was not long ago the financial services policy lead for Rep. Davidson (R-OH), who is a signatory of the letter. The Blockchain Association also celebrated the March 16th letter on Twitter, pronouncing themselves “proud of this bipartisan effort” that is “ensuring the US remains a crypto innovation leader.”
The unusual intervention by this bipartisan octet puts the SEC in a difficult position. If they bow to the pressure of these congressmen, and walk away from the investigation, it will seem to be a clear case of influence and intimidation. If they continue on, it will look as if they’re defying the letter, drawing potential congressional pressure. Either way, the investigation will seem to have been politicized unnecessarily, which is why these sorts of things are so rare.
While cryptocurrency’s influence in Washington is new, these sorts of maneuvers have plenty of precedent. In 1987, a similar cabal of five senators (including Arizona Republican John McCain) were accused of improperly intervening in a regulatory investigation by the Federal Home Loan Bank Board into Charles Keating Jr., chairman of the Lincoln Savings and Loan Association.
Two years later, Lincoln collapsed, costing the federal government $3.4 billion and kicking off the savings-and-loan crisis, which ended up requiring some $125 billion in federal bailout money, in the culmination of a long deregulatory campaign throughout the 1980s. In the aftermath, the Senate Ethics Committee found three of the “Keating Five” guilty of substantially and improperly interfering in the federal investigation, a scandal that loomed for many years. The stain of his involvement with the Keating Five even followed McCain into his 2008 presidential campaign, with a blistering ad from his opponent, Barack Obama.
The “Blockchain Eight,” undeterred by that historical stain on Congress, are getting louder and louder. In tandem with last Wednesday’s letter, Rep. Torres published an op-ed in the New York Daily News the next morning, clamoring for a loosening of the already underregulated sector. “The New York Department of Financial Services (DFS) has the dubious distinction of being the single worst regulator of crypto in the country,” he inveighed. “It takes up to three years to get a license and only 30 companies have been approved for one. From June to January, not a single license was granted.”
Of course, many of the congressmen who have signed their names to this letter are among the youngest in the country. Both Auchincloss and Torres were just a year old when the Keating Five scandal broke. For now, one can only hope that the budding Blockchain Eight saga doesn’t follow the same script, with a hobbled enforcement agency unable to engage in necessary oversight, and a tumbling financial services sector nearly bringing down the entire economy with it.
Editor's note: This article has been updated with comments from Rep. Torres’s office.
