Regulation by Enforcement Failed: The Gensler Era's Costly Lesson

The phrase “regulation by enforcement” is used by the crypto industry as an accusation. It deserves to be used as an analytical description, because doing so allows us to understand both what Gensler was trying to accomplish and precisely why the strategy failed.

Regulation by enforcement — using civil and criminal enforcement actions to establish legal norms rather than formal rulemaking — is not inherently illegitimate. The SEC has used it throughout its history. The agency’s foundational jurisprudence on what constitutes a “security” under the Howey test, what constitutes “market manipulation,” and what disclosure standards apply in complex structured products cases was all developed through enforcement actions and subsequent judicial decisions, not through rulemaking. The strategy has a respectable pedigree.

The Gensler-era crypto enforcement campaign was a genuine attempt to apply this established method to a new asset class. It failed for reasons that illuminate both the limits of enforcement-based regulation and the specific characteristics of digital assets that make them poor candidates for this approach.

The Theory of the Case

Gensler’s theory rested on a straightforward legal argument. Most crypto assets — he would say “the vast majority” — meet the Howey test for investment contracts: they involve an investment of money in a common enterprise with an expectation of profit derived from the efforts of others. Therefore, they are securities. Entities that sell securities to the public without registration have violated Section 5 of the Securities Act. Entities that operate as broker-dealers or exchanges in securities without registration have violated Sections 15 and 17 of the Securities Exchange Act.

Gensler did not merely assert this — he had genuinely serious legal support for it. The Howey test, established by the Supreme Court in 1946 in SEC v. Howey Co., has been applied broadly by courts for eight decades. The application of securities law to token sales was supported by the DAO Report, published by the SEC in 2017 under the Obama administration, which concluded that DAO tokens were securities. Courts had upheld SEC securities law theories in several early ICO cases. The legal theory was contestable, but it was not frivolous.

The Enforcement Approach

The SEC’s enforcement strategy under Gensler targeted virtually every significant segment of the crypto industry. Exchanges: the SEC sued Coinbase in June 2023, Kraken in November 2023, and Binance in June 2023, alleging that each operated as unregistered securities exchanges and broker-dealers. Token issuers: the SEC brought actions against Ripple (XRP), LBRY, Terraform Labs (UST/Luna), and dozens of ICO issuers. Lending products: Kraken settled a $30 million enforcement action over its staking-as-a-service product in February 2023. Custody: the SEC challenged the accounting treatment of crypto held by custodians through Staff Accounting Bulletin 121.

By the time Gensler resigned in January 2025, the SEC had filed well over 100 enforcement actions against crypto entities since his appointment. The cases were large — Binance’s $4.3 billion DOJ/CFTC/FinCEN settlement in November 2023 was the largest in crypto history — and the theory was consistently applied.

Why the Strategy Failed

The failure was not that the legal theory was wrong. Courts have been genuinely mixed on the securities question — some ruling for the SEC, some for industry, many producing nuanced outcomes that clarified little. The failure was strategic: enforcement produced uncertainty without clarity, and uncertainty is more damaging to a developing industry than even adverse rules.

The Ripple case is the canonical example. In July 2023, Judge Analisa Torres issued a ruling that XRP tokens sold directly to institutional investors in contracts were securities (a win for the SEC) while XRP traded on exchanges to retail buyers was not (a significant loss for the SEC). The ruling was simultaneously celebrated and condemned by both sides, because it provided no useful guidance about which of those characterizations applied to any other crypto asset. If institutional sales were securities and exchange sales were not, what were wallet transfers? Staking rewards? Governance tokens?

The Coinbase case produced similar ambiguity. The district court denied Coinbase’s motion to dismiss in March 2024, allowing the SEC’s case to proceed — but this was procedurally a low bar, not a vindication of the SEC’s theory on the merits. Coinbase appealed to the Second Circuit, which granted interlocutory review — a rare procedural move suggesting the appellate court thought the issues were genuinely uncertain. By the time the cases were stayed following the Trump administration’s crypto policy pivot, no court had definitively resolved whether crypto exchanges were securities exchanges under existing law.

This inconsistency was the enforcement strategy’s fatal flaw. Regulation by enforcement works when enforcement produces clear, consistent judicial decisions that establish the applicable rules. That outcome was not forthcoming from US courts on crypto questions, because the questions are genuinely hard and the facts are genuinely novel. The SEC was litigating a theory that even sympathetic courts could not cleanly validate.

The Offshore Consequence

The practical consequence of enforcement without clarity was that serious companies operating in good faith had no way to determine what compliance would look like. Coinbase had repeatedly asked the SEC, including in a formal rulemaking petition filed in July 2022, to explain how a crypto exchange could register under securities law. The SEC declined to answer. The message received — whether intended or not — was that the SEC wanted enforcement actions, not compliance pathways.

The industry responded rationally. Activity moved offshore. Companies that wanted to operate legitimately sought other jurisdictions: Dubai’s VARA, Singapore’s MAS, Hong Kong’s SFC. Companies that were less concerned with legitimacy simply continued operating from opaque offshore structures, because the enforcement cost of that approach was no higher than the cost of attempting compliance in a system that provided no compliance pathway.

The irony is that regulation by enforcement, intended to bring the crypto industry within the securities law framework, actually accelerated the industry’s migration away from American jurisdiction. The enforcement actions reduced the US presence of regulated crypto activity more than they reduced the volume of crypto activity overall.

The Unintended Political Consequence

The most consequential failure of the Gensler strategy was political rather than legal. The Fairshake PAC raised $202.9 million for the 2024 election cycle — the direct institutional response of an industry that had concluded that electoral strategy was the only remaining option after regulatory engagement had failed. Fairshake was not created because crypto companies enjoy electoral politics. It was created because every other avenue for regulatory engagement had been exhausted or blocked.

The 91% win rate for Fairshake-endorsed candidates in 2024, the defeat of prominent crypto critics, and the subsequent legislative achievement of the GENIUS Act are all downstream consequences of the Gensler strategy. Had the SEC pursued rulemaking — issued actual rules for how exchanges could register, what disclosures token issuers needed to make, which token characteristics triggered securities status — the industry would have had an engagement pathway. It would have commented on proposed rules, litigated specific regulatory requirements through the Administrative Procedures Act process, and built compliance infrastructure. Instead, it built a PAC.

The Post-Gensler Reset

Paul Atkins, confirmed as SEC Chair and a longtime critic of the Gensler approach, launched Project Crypto on July 31, 2025 — a structured rulemaking initiative explicitly designed to provide the regulatory clarity that enforcement had failed to produce. The agency’s crypto enforcement unit’s pending cases were reviewed, with many withdrawn or settled on industry-favorable terms. SAB 121 was rescinded, allowing banks to hold crypto on behalf of clients without the off-balance-sheet requirements that had made crypto custody prohibitively expensive for regulated institutions.

The policy lesson drawn from the Gensler era — at least in the current administration — is that enforcement without rulemaking is not a viable long-term regulatory strategy for complex emerging technologies. It produces litigation uncertainty, offshore migration, political mobilization, and ultimately legislative override. That lesson may not survive the next change of administration. It may be that the regulatory approach reverts to enforcement emphasis when political winds shift. But the structural damage done by four years of enforcement-first regulation — the talent that left, the companies that established elsewhere, the institutional knowledge that accumulated in non-US regulatory environments — will persist regardless of what Washington does next.

The costly lesson of the Gensler era is that regulatory power, exercised without corresponding regulatory clarity, does not achieve its intended outcomes. It merely redistributes activity and generates opposition.