Inside Gary Gensler’s SEC: A Conversation with Former Crypto Policy Advisor

This episode dives into the SEC's regulatory philosophy under Gary Gensler, revealing how the agency viewed crypto through the lens of traditional finance and what this means for the future of decentralized innovation.

1. Initial Perceptions and Core Regulatory Philosophy

• Corey Freyer, former Senior Crypto Policy Advisor at the SEC, addressed the common perception of the Gensler era as an "attack on crypto" driven by a bias towards traditional finance.
• Freye clarified that his background includes significant criticism of traditional financial services, stemming from the 2007-2008 financial crisis, and that his skepticism is directed at finance generally, not crypto specifically.
• He expressed respect for the original technological innovation of peer-to-peer electronic transactions but took issue with how the crypto system "morphed" to resemble traditional finance without adhering to its regulations.
• Actionable Insight for Crypto AI: The SEC's foundational skepticism towards financial systems, regardless of technology, suggests that AI-driven financial innovations will face similar scrutiny if they replicate traditional structures without compliance. Researchers should focus on truly novel, decentralized architectures.

2. Corey Freyer's Role and SEC Enforcement Strategy

• Freye, with a background in technology and financial policy, joined the SEC in 2021 as a political appointee, coordinating crypto efforts across all agency divisions.
• His role involved advising Gary Gensler on crypto strategy, ensuring a cohesive approach across rule-making, accounting, and enforcement decisions.
• He clarified that the Chair's office, including his role, did not directly involve itself in ongoing investigations but evaluated recommendations from the enforcement division once investigations were complete.
• Actionable Insight for Crypto AI: Understanding the SEC's internal structure highlights that policy advisors shape the strategic direction, influencing which areas of crypto (including AI-driven projects) become enforcement priorities. Early engagement with policy discussions, rather than just legal defense, is crucial.

3. The SEC's Shift: From ICOs to Centralized Platforms

• Freye noted that the SEC's enforcement actions began before Gensler's tenure, with the Clayton administration pursuing numerous Initial Coin Offering (ICO) cases, establishing precedent that crypto assets could be "offered and sold as securities" under the Howey Test.
• The Howey Test is a legal framework from a 1946 Supreme Court case, used to determine if a transaction qualifies as an "investment contract" and thus a security, requiring registration with the SEC. It involves an investment of money in a common enterprise with an expectation of profit derived solely from the efforts of others.
• He emphasized the nuance that an "investment contract" refers to the circumstances of the offering, not necessarily the underlying asset itself.
• Under Gensler, the SEC shifted focus from individual tokens to centralized platforms, believing that "playing whack-a-mole with 10,000 tokens wasn't going to be a productive use of our resources."
• The agency initially invited platforms to register, aiming to create a competitive advantage for compliant entities and encourage voluntary adherence to securities laws.
• Actionable Insight for Crypto AI: The SEC's strategic shift to platform-level enforcement means AI protocols built on centralized infrastructure or with identifiable central actors are high-risk. Decentralized AI projects should prioritize truly distributed control to avoid being classified as "platforms."

4. The "Office Hours" Debate and Vertical Integration

• Ryan Sean Adams questioned the crypto industry's perception of Gensler's "office hours" as a "trap" and the lack of a clear registration path.
• Freye asserted these were "good faith discussions" and that the SEC was willing to adapt regulations for technical needs, but a "red line" was drawn at vertical integration—combining exchange, custody, clearing, and broker-dealer functions within one entity.
• He argued that such integration creates conflicts of interest and systemic risk, citing the 1929 market crash and the 2008 financial crisis as lessons learned, and that this stance was prescient regarding the FTX collapse.
• Actionable Insight for Crypto AI: Vertical integration is a non-negotiable point for the SEC. AI projects aiming for financial applications must design their architecture to strictly separate functions (e.g., AI model training, inference, data custody, token exchange) to avoid regulatory conflict.

5. The "Path to Decentralization" Dilemma

• David Hoffman presented the crypto industry's argument that startups need to begin centralized before achieving decentralization, a path that the SEC's approach seemed to "nip in the bud."
• Freye reiterated his "technology neutral" stance, stating that if crypto remained purely peer-to-peer, the SEC would not have intervened.
• He argued that once crypto businesses adopted structures resembling traditional finance, they must follow existing rules to protect the integrity of the $125 trillion securities market.
• "If you let part of the sector get away with not following the law, everything else follows."
• Actionable Insight for Crypto AI: The SEC views "economic reality" over technological design. AI projects with a "path to decentralization" must demonstrate a clear, verifiable, and legally compliant transition plan, or risk being regulated as centralized entities from inception.

6. Investor Protection and Market Integrity

• Ryan Sean Adams pressed Freye on the definition of "protect investors," clarifying that it should not mean protecting from volatility but rather ensuring fair markets and disclosures.
• Freye confirmed that the SEC's role is to enforce laws set by Congress, ensuring "fair and orderly markets," stability, disclosure, and eliminating conflicts of interest and fraud.
• He explicitly stated that the SEC does not judge the "merit" of an investment but focuses on the manner in which it is offered and traded.
• Actionable Insight for Crypto AI: AI-driven investment platforms or protocols must prioritize transparent disclosures, robust conflict-of-interest mitigation, and anti-fraud measures. The SEC's focus is on the process and structure, not the underlying AI technology's potential.

7. DeFi, Intermediaries, and the "Code is Speech" Debate

• David Hoffman asked if truly intermediary-less Decentralized Finance (DeFi) is permissible, distinguishing it from fraudulent platforms like Celsius.
• Freye stated that genuinely intermediary-less protocols for non-security crypto assets might fall outside SEC securities jurisdiction, but could be subject to banking laws.
• He challenged the notion of "code as free speech" when applied to financial activities, arguing that if code facilitates securities trades and a centralized actor can be identified, it falls under securities law.
• Actionable Insight for Crypto AI: The "code is speech" argument faces significant regulatory hurdles. AI models deployed as smart contracts for financial activities will likely be scrutinized for identifiable central actors or promoters. Researchers should explore truly autonomous, self-governing AI systems to align with the SEC's narrow definition of "intermediary-less."

8. The Uniswap Wells Notice and Regulatory Capacity

• Ryan Sean Adams questioned the Wells Notice issued to Uniswap, a prominent DeFi protocol, arguing it was an attack on open-source, intermediary-less finance.
• A Wells Notice is a formal letter from the SEC informing a company or individual of the intent to bring an enforcement action, allowing them to respond before a final decision.
• Freye argued that Uniswap, despite its claims of decentralization, had identifiable centralized actors (Uniswap Labs) involved in its development, updates, and promotion, making it subject to securities laws.
• He also highlighted the SEC's limited resources ($2 billion budget, 4,800 employees for a $125 trillion market) as a reason why the agency cannot audit every piece of code to determine security or exploitability.
• Actionable Insight for Crypto AI: AI protocols with identifiable development teams, governance structures, or profit motives will likely be viewed as centralized actors, regardless of underlying code. Relying on the SEC to audit AI model code for security is unrealistic; projects must build in transparency and auditability for their own credibility.

9. The Definition of a Security and Regulatory Clarity

• The hosts questioned the SEC's broad application of the Howey Test, asking if it stretched too far to include various assets.
• Freye explained that the Howey Test is intentionally broad to prevent circumvention of securities laws, focusing on the "economic analysis" of an offering rather than a rigid definition of an asset.
• He argued that providing black-and-white definitions for securities would create "a road map to getting around the securities laws."
• Actionable Insight for Crypto AI: The SEC's flexible interpretation of "security" means AI-driven tokenized assets or investment contracts will be assessed based on their economic substance and distribution methods. Projects should assume a broad interpretation and design with robust legal counsel.

10. Political Influence and the Future of Regulation

• The discussion touched on the political impact of Gensler's actions, with Ryan Sean Adams suggesting it harmed Democrats' popularity. Freye dismissed this, arguing the industry's political influence is overstated and that regulation ultimately strengthens markets.
• He criticized the current administration's (Paul Atkins at the SEC) approach of unwinding Gensler-era policies through guidance rather than formal rulemaking, which creates instability and harms the SEC's credibility.
• Actionable Insight for Crypto AI: Regulatory shifts based on political cycles create significant uncertainty. AI projects should not rely on temporary "good cop" guidance but advocate for durable, clear rulemaking through the Administrative Procedure Act (APA) process to ensure long-term stability.

11. Specific Policies: SAB 121 and Stablecoins

• SAB 121 (Staff Accounting Bulletin 121): Freye defended this 2022 accounting rule, which required public companies to record crypto assets held for customers as liabilities on their balance sheets. He stated it provided crucial disclosure for investors regarding bankruptcy risks and liabilities, proving prescient before FTX's collapse.
• Stablecoins: Freye criticized the "Gensler Bill" (likely referring to proposed stablecoin legislation) as a "really bad idea," arguing that private currencies have historically failed and that centralized stablecoin issuers (like Circle or Tether) are not truly crypto due to their ability to freeze wallets and control transactions.
• Actionable Insight for Crypto AI: SAB 121 highlights the SEC's focus on accounting transparency for crypto assets, especially in bankruptcy. AI projects dealing with asset custody or tokenized assets must consider these liability implications. The SEC's view of stablecoins as centralized entities with counterparty risk suggests that AI-driven stablecoin protocols will face intense scrutiny.

12. Gary Gensler's Communication and Lost Text Messages

• Ryan Sean Adams questioned the disappearance of Gary Gensler's text messages. Freye acknowledged it was "a bad look" but assured that Gensler "assiduously followed the law" regarding record-keeping, often transposing texts into emails. He believed nothing controversial was lost.
• David Hoffman asked why Gensler avoided direct, collaborative discourse with crypto media. Freye explained that as SEC Chair, public statements are "market moving information" and engaging in open dialogue carries "extremely high risk" due to ongoing investigations and the potential for accidental disclosure of trade secrets or criminal penalties.
• Actionable Insight for Crypto AI: The SEC's cautious communication strategy underscores the sensitivity of regulatory information. Crypto AI projects should be mindful that any public statements or engagements with regulators can have significant market and legal implications.

Conclusion

The SEC under Gary Gensler prioritized traditional financial regulatory principles over crypto's unique technological claims, viewing vertical integration and identifiable central actors as red lines. Crypto AI investors and researchers must internalize this "economic reality" lens, designing truly decentralized, transparent, and functionally segregated systems to navigate evolving regulatory landscapes and mitigate enforcement risks.