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GAO SEC crypto review at Congress behest doesn’t find much

GAO government accountability office

The House Financial Services Committee asked the Government Accountability Office (GAO) to review the Security and Exchange Commission’s (SEC’s) engagement with fintech. Plus, it requested a report on the SEC’s competency in crypto-assets. The GAO made some benign procedural recommendations that the SEC agreed with. While the findings were innocuous, there are a few interesting takeaways in the paper.

What’s a crypto-asset security?

The GAO gives examples of crypto-assets distinguishing between cryptocurrencies and crypto-asset security tokens. It defines the latter as representing ownership rights and is the digital form of conventional securities such as stocks and bonds.

That definition of crypto-asset securities contrasts with the SEC’s broader definition, including most cryptocurrencies. The report notes that the “SEC Chair has stated his view (our emphasis) in speeches that most crypto assets are securities because they are investment contracts under the Howey test.” Perhaps we’re reading between the tea leaves, but the GAO appears to disagree with the SEC’s definition without addressing the topic directly.

The SEC has a lot of crypto specialists. Or do they?

According to the report, the SEC has 116 crypto-asset subject matter specialists who spend most of their time on the topic. That sounds like a lot, but the SEC has a total headcount of around 4,895. In that context, that’s not a big figure. Of that number, 43% are within enforcement.

SEC DivisionHeadcount
Economics & risk8
Investment Management 10
Trading & Markets3
Corporation Finance (CF)9
CF Office of Crypto Assets (for disclosures)?
An incomplete breakdown based on data in the report

Does the SEC attract good crypto candidates?

The GAO spoke to nine industry and other associates. Five of the nine said FinHub and other SEC staff possess fintech expertise. Three industry associations said the SEC may lack expertise because it can’t compete with private sector salaries. 

In 2022, the government’s Office of Human Resources found it was hard to find talent with crypto-asset, AI, and cybersecurity skills (not just for the SEC). Additionally, the government requirement that staff divest crypto proved a disincentive to joining.

Engaging with the SEC

Three of the nine (unidentified) organizations interviewed said FinHub – the SEC fintech outreach group – had become less collaborative since its 2018 formation.

In the past, it was a two-way street. Organizations would help educate FinHub, and FinHub would “share information and help members identify red flags related to the application of the federal securities laws”. Two organizations said FinHub is less willing to share information. As a result, they refrain from engaging with FinHub to avoid the risk of attracting an enforcement action.

The GAO recommendations

As stated, the three recommendations were more procedural. The SEC has done considerable work in these areas in the first two cases, but they’re not sufficiently formal.

  • The SEC needs to prepare a new workforce planning strategy aligned with the agency’s 2022–2026 strategic and performance plans.
  • FinHub needs to document the policy and procedures for its internal controls.
  • FinHub needs to develop measurable goals and targets.