SEC's Lost Texts Raise Red Flags in Crypto Enforcement Era

The U.S. Securities and Exchange Commission (SEC) has admitted to "avoidable errors" that led to the permanent loss of nearly a year of text messages from former chair Gary Gensler’s government-issued mobile device between October 2022 and September 2023 [1]. The Office of Inspector General (OIG) concluded that the SEC’s IT department implemented an automated policy that caused an enterprise wipe of Gensler’s device, erasing stored messages and system logs [2]. This period coincided with the agency’s heightened involvement in crypto enforcement actions, including lawsuits against major exchanges such as Binance and Coinbase [3].

The OIG report identified several compounding factors that contributed to the data loss, including poor change management, lack of proper backups, and unaddressed software flaws. Notably, IT staff failed to detect that Gensler’s device had become inactive and was flagged for auto-wipe, resulting in a factory reset that permanently erased the messages [1]. The agency also admitted it could not determine why Gensler’s device stopped communicating with the mobile device management system due to a lack of log data [2].

Among the deleted messages were communications involving SEC enforcement actions against crypto companies and their founders. These texts, some of which were deemed federal records, included discussions about the timing of legal actions against crypto platforms. The OIG report noted that around 38% of the recovered messages were mission-critical, such as a May 2023 conversation between Gensler, his staff, and the Division of Enforcement regarding the filing of actions against certain crypto trading platforms [1]. The loss of these records raises concerns about transparency in the SEC’s enforcement decisions during a pivotal period in the crypto industry.

The incident has drawn sharp criticism from industry leaders and legal experts. Coinbase’s Chief Legal Officer, Paul Grewal, argued that the deletion was not a simple oversight but the destruction of evidence relevant to ongoing litigation [3]. Others, like Custodia Bank founder Caitlin Long, questioned the timing, noting that the missing messages spanned the collapse of FTX, the Grayscale ETF lawsuit, and the alleged Operation Chokepoint 2.0 campaign [3].

In response, the SEC has taken steps to prevent similar incidents, including disabling text messaging on most staff devices, implementing new backup practices, and notifying the National Archives and Records Administration of the lost records [1]. The agency has also agreed to five OIG recommendations, including improved log monitoring and stricter controls before performing device wipes. Additionally, the SEC acknowledged that the loss of Gensler’s messages could affect its responses to certain Freedom of Information Act requests [2].

The consequences of the data loss highlight the broader implications for regulatory transparency and accountability. With the SEC under new leadership, which has rolled back several enforcement actions from Gensler’s tenure, the incident adds to ongoing debates over the agency’s evolving stance on digital assets. Meanwhile, Gensler has returned to academia, resuming his role at MIT’s Sloan School of Management, where he continues to research topics like fintech and public policy [2].

Source:

[1] SEC Report Faults Errors For Loss Of Gensler's Texts (https://cointelegraph.com/news/avoidable-errors-led-to-the-loss-of-gary-gensler-text-messages-sec)

[2] Gary Gensler's texts go 'missing' from crypto-enforcement era (https://www.thestreet.com/crypto/policy/gary-genslers-texts-vanish-during-ftx-collapse-and-etf-lawsuit)

[3] SEC transparency questioned after Gary Gensler's texts ... (https://cryptoslate.com/sec-transparency-questioned-after-gary-genslers-texts-vanish/)