The US Senate is today holding a discussion entitled “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission”.
As the name implies, the subject under discussion is the extent to which the American financial watchdogs can control the partially regulated assets. The SEC has been somewhat active in halting fraudulent ICOs, and has warned against them, but clarification is vital as the industry grows.
The heads of the SEC and the CFTC, Jay Clayton and J. Christopher Giancarlo respectively, will be faced with a number of US senators to field questions on this subject.
Clayton said in a pre-prepared statement: “As Chairman Giancarlo and I stated recently, we are open to exploring with Congress, as well as with our federal and state colleagues, whether increased federal regulation of cryptocurrency trading platforms is necessary or appropriate. We also are supportive of regulatory and policy efforts to bring clarity and fairness to this space.”
We will be providing updates on the hearing as it progresses.
Clayton’s opening remarks
“My remarks may be viewed by some as over simplistic, but they reflect how I present these issues to mainstream investors.
For ease of analysis, I break this space into three categories: first, a promising new technology, referred to as distributed ledger technology, or blockchain. Proponents of this technology assert that it will bring great efficiencies to our national and global economies, including our capital markets, and I hope that it does. The commission looks forward to working with market participants who seek to bring efficiencies, including more effective oversight, to our capital markets.
The second and third categories are cryptocurrencies and ICOs, which are subsets of the products seeking to take advantage of the commercial opportunities presented by blockchain technology. One is promoted to be a replacement for dollars, and one is like a stock offering.”
Regarding the advantages promoted by cryptocurrency advocates, he said: “To date these assertions have proved illusive in many areas.”
Regarding ICOs, he said: “You can call it a coin, but if it functions as a security, it is a security”
He identified two main issues. First, that these markets have much less oversight than traditional investments on stock exchanges. He said that he considers regulations to be vital for consumer protection. Second, he said that many ICOs are being conducted illegally, and he doesn’t think that this is because the law is unclear.
He offered a message to those that use “semantic gymnastics” to avoid regulation – they will be in the crosshairs of the law.
Giancarlo’s opening remarks
Giancarlo began by talking about his three children, and how he has always tried to interest them in the stock market, to no avail, but then found that they were suddenly interested in Bitcoin. He said that the enthusiasm of the younger generation should be respected, but at the same time there should be a strong hand against those who abuse the system.
He pointed out that the total value of cryptocurrency is dwarfed by the value of the currency markets and gold, and this should be taken into account.
He said: “We’ve never conducted this much outreach for any other financial product.” He also urged all agencies involved to work together, and emphasised strong enforcement against charlatans.
Senator Michael Crapo of Idaho asked if the two think that there should be more oversight, and if there should perhaps be one body to take care of the industry.
Clayton and Giancarlo both agreed that new legislation may be necessary to deal with this new industry.
Senator Brown of Ohio asked about the ICO industry. When he asked how much of the 4 billion dollars made through these funds was raised in the US, he was frankly told that it wasn’t clear.
He asked how the SEC intends to take on the challenge of cryptocurrency with the agency’s recent reduction in staff numbers, and received a reply that a hiring freeze means that Clayton’s hands are tied, but he would prefer more enforcement agents.
Senator Richard Shelby of Alabama asked a similar question – how the two agencies going to work together.
Giancarlo said that broad discussion have been held on the subject. He then asked if more legislation is necessary, and the answer was inconclusive.
Shelby then asked what the ‘bottom’ of the cryptocurrency market is. Giancarlo said frankly that he isn’t an economist, but that he has been assured by economists that there is a natural equilibrium.
Senator Jack Reed of Rhode Island asked the two if they have hired enough computer experts (“technologists”) to understand and oversee the industry.
Clayton answered that a committee was formed who have performed admirably in “getting up to speed”, but more people would always be welcome. He said that his agency has a “combination of technologists and economists”.
Giancarlo answered that he has hired the agency’s first ever chief innovation officer, and formed ‘Lab CTFC‘, as well as a task force which has already been active in enforcement. He also said that he has requested more funding.
Senator Mike Rounds of South Dakota asked for clarification as to the status of Bitcoin as a commodity, security, or currency.
Giancarlo responded that Bitcoin is not useful as a currency – and that many simply want to hold on to it because there might be something in it. In this sense, it is a commodity. His concern is to take care of fraudsters.
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Senator Elizabeth Warren of Massachusetts pointed out that a Bloomberg article claimed that the SEC was considering allowing companies to sell ICOs while blocking the ability to file class action lawsuits.
Clayton did not give a clear answer, saying that he didn’t want to pre-judge. He said that “he is not anxious to see a change.” Warren was not satisfied with this answer.
She then grilled Clayton about protection for pensioners, which was very interesting, but not relevant to cryptocurrency.
Senator Joseph Donnelly of Indiana noted that the agencies have warned investors about the cryptocurrency market, and asked the two to clarify the ways that the agencies can prevent investors from falling for fraud.
Giancarlo noted that his agency has teamed up with the CFPB to educate librarians about the subject, because it was found that library computer s nationwide have been used to search about Bitcoin.
Clayton said that he is counting on other financial bodies on acting responsibly in this area.
Donnelly asked about how the agencies can prevent the use of terrorism financing and the avoidance of sanctions.
Clayton said that the SEC has a dark web working group, and Giancarlo replied that the CTFC works “very closely” with law enforcement agencies on this subject.
Senator John Kennedy of Louisiana asked Giancarlo when the last time was that he personally purchased a stock, bond, etc. He was answered that he put it on hold when he (Giancarlo) took on his post. Kennedy then asked him if he personally read all the terms of conditions regarding his investments, and was answered in a tongue in cheek way that no, Giancarlo didn’t.
Given this, he pointed out that most investors probably don’t read up on the things that they are buying – so “what’s the point” in requiring disclosure about cryptocurrency investments “if nobody’s reading it?”
He asked a philosophical question – how far do the regulators think that the government should go in protecting people from themselves? What is the point in warning people, if they themselves aren’t willing to make the effort? He pointed out that some countries have banned the industry, and that the only people that profit from this system are lawyers.
Clayton answered that the law was good, but “disclosure could be improved.”
Senator Mark Warner of Virginia said: “I think we may be on top of something that is transformational”, and that the world is close to a systemic level event and if FSOC should be involved.
Clayton answered by reaffirming that a distinction needs to be made between ICOs and cryptocurrencies. He said that ICOs should be regulated as securities, “end of story”. Giancarlo agrees that “there is so much more to be done.”
Senator Tom Cotton of Arkansas asked about the regulators’ thoughts on the underlying value of blockchain technology.
Giancarlo said: “It’s important to remember that if there were no bitcoin there would be no distributed ledger technology”.
He said that the applications of the technology range from huge potential to streamline the finance industry, to charity and how refugees are handled, to unbanked populations around the world. He mentioned the recent shipment of soybeans paid for with Bitcoin.
Cotton then asked about volatility and what drives it. Giancarlo said that regulators are used to volatility, and that that is the reason that futures products exist. Clayton said that he “doesn’t really know” what is driving it.
Senator Bob Menendez of New Jersey asked about cryptocurrency being used to evade US sanctions. He asked under what circumstances would the SEC and FTC take action on this subject.
Giancarlo answered that his jurisdiction would be very limited, as his authority is connected with enforcement regarding fraud and manipulation. He said that in this area, the two regulatory agencies most greatly differ. He noted that both he and Clayton are part of a task force that was put together by the treasury secretary that includes the Fed and FinCEN. He said that he looks forward to asking that very question at the next meeting.
Menendez then asked what is being done to protect investors in the case of celebrities promoting cryptocurrencies. Clayton answered that his agency has warned people that if they promote securities, they are taking on a liability, and that that seems to have cooled this trend down somewhat.
Senator Catherine Cortez Masto of Nevada asked about companies jumping into blockchain technology to pump up their stock prices.
Clayton said that he thinks that it’s not acceptable to falsely advertise securities and has put out a warning on the SEC’s website.
Cortez Masto then asked what the agencies can do for investors who have lost their money, citing hacks such as Mt Gox.
Clayton made it very clear that when people invest online in an offshore entity, the chance of getting their money back “is very very low”. Giancarlo said that his agency simply does not have the authority to ensure that cyber safeguards are in place.
Senator Warren in a second round pointed out the ICOs are often fraudulent, citing the fact that Facebook recently banned their advertisement. She asked Clayton how many current and upcoming ICOs have registered with the SEC, given that they are considered securities under law, and received the response “zero”. She asked why this is the case.
Clayton responded vaguely, to the effect that he is favour of private placements, but that they need to be done according to law.