{"id":22633,"date":"2018-02-07T01:50:33","date_gmt":"2018-02-07T01:50:33","guid":{"rendered":"http:\/\/ci027cfe6470022697"},"modified":"2018-02-07T01:50:33","modified_gmt":"2018-02-07T01:50:33","slug":"sec-and-cftc-give-testimonies-senate-hearing-virtual-currencies","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/business\/sec-and-cftc-give-testimonies-senate-hearing-virtual-currencies","title":{"rendered":"SEC and CFTC Give Testimonies at Senate Hearing on Virtual Currencies"},"content":{"rendered":"
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Today, February 6, 2018, the prospects for coherent U.S. regulation on cryptocurrencies became a little more clear, as were the impasses that were frustrating progress on the issue. The Senate Committee on Banking, Housing and Urban Affairs (the \u201cCommittee\u201d) heard joint testimony from the heads of both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). While both the SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo provided written<\/a> testimonies on February 5, 2018, the statements from the chairmen as well as the answers later garnered from Senate questioning gave some clarity as to the direction U.S. regulation of \u201cvirtual currencies\u201d is headed. Below is a general overview.<\/p>\n

Jay Clayton Loves Blockchains, Lukewarm on Cryptos, Not a Fan of ICOs<\/h3>\n

In his opening testimony, the SEC chairman called the topic of regulating cryptocurrencies, ICOs and related trading activities important, stating that \u201cthese markets are local, national and international.\u201d From a market regulatory perspective, he stated, \u201cFor ease of analysis, I break this space into three categories. First, a promising new technology referred to as \u2018distributed ledger technology\u2019 or \u2018blockchain\u2019 \u2026 The second and third categories are cryptocurrencies and ICOs.\u201d <\/p>\n

While the chairman lauded and even asked for blockchain technology startups to alleviate inefficiencies in market regulatory frameworks, he was less enthusiastic about both cryptocurrencies and ICOs, stating that they are \u201csubsets of the products seeking to take advantage of the commercial opportunities presented by blockchain.\u201d Cryptocurrencies, according to Clayton, are \u201cpromoted to be a replacement for dollars,\u201d while ICOs in his view are \u201clike a stock offering.\u201d<\/p>\n

Clayton went on to state that while \u201cthose who promote these so-called virtual currencies assert that they will make it easier and cheaper to buy and sell goods, particularly across borders\u201d and \u201cthat transaction fees and costs will be eliminated or reduced … to date these assertions have proved elusive in many areas.\u201d <\/p>\n

While some could argue that the chairman\u2019s opening commentary on cryptocurrencies was less than favorable, that impression was far overshadowed by his stance on ICOs. Per Clayton, \u201cFrom what I have seen, initial coin offerings are securities offerings. They are interesting companies, much like stocks and bonds, under a new label.\u201d He didn\u2019t stop there, however, stating, \u201cYou can call it a coin, but if it functions as a security, it is a security.\u201d Another cause of concern for Clayton on the ICO front: <\/p>\n

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An ICO may have nothing to do with distributed ledger technology beyond the coin itself. <\/p>\n<\/blockquote>\n

The two problems \u201cworth particular attention,\u201d however, were the lack of regulatory oversight on the markets and that \u201cmany\u201d ICOs are being conducted illegally by not following securities laws. Clayton wrapped up his opening volley at ICOs by warning the ICO market that \u201cthose who engage in semantic gymnastics or elaborate structuring exercises in an effort to avoid having a coin be a security are squarely within the crosshairs of our enforcement division.\u201d<\/p>\n

So much for ease of analysis.<\/p>\n

Chairman Giancarlo\u2019s Opening Remarks Add More Hopeful Balance<\/h3>\n

The CFTC chairman began his opening remarks by revealing a story about how his own children\u2019s interest in investing bloomed only last year with the rise of Bitcoin. Giancarlo remarked, \u201cIt strikes me that we owe it to this generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one.\u201d He did urge, however, that regulators \u201cmust crack down hard on those who try to abuse [the younger generations\u2019] enthusiasm with fraud and manipulation.\u201d<\/p>\n

Chairman Giancarlo\u2019s remarks went on to elucidate the CFTC\u2019s wish for regulators to thoroughly educate themselves and the public in order to create good policy choices and sound regulatory frameworks to protect consumers.<\/p>\n

Giancarlo followed up his prudent remarks by saying, \u201cI suggest the right regulatory response to virtual currencies has at least several elements.\u201d Specifying further, he stated that we must first \u201clearn everything we can.\u201d He then suggested that perspective with regard to the market cap of virtual currencies is key, stating that the \u201ctotal value of all virtual currency in the world is around $313 billion. In comparison, global money supply is around $7.6 trillion, while the value of all the gold in the world is around $8 trillion.\u201d <\/p>\n

The next task, according to Giancarlo, is to educate consumers. According to him: <\/p>\n

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We\u2019ve never conducted this much outreach for any other financial product. <\/p>\n<\/blockquote>\n

Another element, according to the chair, is regulatory coordination because \u201cno one agency has direct authority over virtual currencies.\u201d He was careful to point out the need for finding a balance between exercising legal authority over virtual currency derivatives while clarifying the CFTC\u2019s statutory limitations. Those limitations, as Giancarlo made abundantly clear, include the CFTC\u2019s lack of authority over regulating the spot markets for cryptocurrencies. He did, however, say that the CFTC has enforcement authority in the spot markets through their authority over the cryptocurrency derivatives markets.<\/p>\n

Patchwork Regulation Isn\u2019t Enough<\/h3>\n

Senator Mike Crapo, the head of the Senate Committee, asked both regulators, \u201cBoth of you said you don\u2019t have complete jurisdiction, but do you have sufficient jurisdiction? Should Congress address by law the issue [of regulating virtual currencies]?\u201d<\/p>\n

SEC Chairman Clayton posited that all federal banking regulators should come together and have a coordinated plan for dealing with a virtual currency trading market, though he noted that they may at some point in the future find they need additional legislative authority. CFTC Chair Giancarlo concurred but directed the Committee to look at \u201cgaps in the legislation\u201d that could be presented. According to Giancarlo, there is patchwork coverage, but it is not enough to handle a regulatory framework that could be covered by a coordinated effort.<\/p>\n

ICOs That Have Raised Funds from U.S. Investors Violated U.S. Securities Laws<\/h3>\n

The issue of ICOs and their legality was an oft-revisited point during the Q&A portion of the hearing. The minority leader on the Committee, Senator Sherrod Brown, asked Clayton how much of the $4 billion in capital raised last year through ICOs was raised in the United States. The SEC chair couldn\u2019t give any clarity but suggested the number was probably enough that regulators should be talking about the issue. Senator Elizabeth Warren also had her say on the issue, stating, \u201cSome ICOs raise money for legitimate companies, but others, we know, are just Ponzi schemes.\u201d <\/p>\n

Senator Warren then referenced Facebook\u2019s recent ban<\/a> of cryptocurrency and ICO ads and asked SEC Chairman Clayton a series of questions \u201caround\u201d how to make ICOs safer. The senator asked, \u201cIn 2017, companies raised more than $4 billion in ICOs. How many of those companies registered with the SEC?\u201d Clayton told Senator Warren that \u201cnot one\u201d had registered. Pressing further, the senator asked the chairman how many companies with upcoming ICOs had registered with the SEC, to which Clayton gave the same answer. Unfazed, Senator Warren asked Clayton for a comment on why no one registered an ICO with the SEC. The chairman\u2019s response was a vague admonishment of the \u201cgatekeepers [the SEC] rely on\u201d to assist them in ensuring securities laws are followed, saying they \u201chave not done their jobs.\u201d<\/p>\n

Elaborating further, he stated, \u201cWhat ICOs do is take the disclosure-like benefits of a private placement and then add to it general solicitation and promise to the investor of a secondary market without registering to us.\u201d Senator Warren finished off her line of questioning, saying to Clayton, \u201cI am understanding you to say [that] it [what ICOs do by not registering] is a violation of the law?\u201d The SEC chairman simply answered, \u201cCorrect.\u201d But he did moderate his views on the illegality of ICOs by stating, \u201cI\u2019m perfectly happy for these people to do private placements, but do them right.\u201d<\/p>\n

Senatorial Enlightenment: Hacks, HODLs and \u201cKimchi Premiums\u201d<\/h3>\n

While not all of the questions were focused directly on clarifying future U.S. regulatory frameworks on \u201cvirtual currencies,\u201d the cryptocurrency industry was made aware of the effort regulators and lawmakers alike took to learn about the new asset class. <\/p>\n

Throughout the hearing, several senators demonstrated an awareness of problems currently plaguing the industry. References to the Coincheck hack in Japan, Mt. Gox and exchange vulnerabilities, and North Korean and Russian state agents\u2019 potential for abusing prices in the cryptocurrency market all came up.<\/p>\n

Senator Robert Menendez cited Venezuela\u2019s attempt to circumvent sanctions using Petrocoin, while Senator Jack Reed stressed the need for technologists and computer expert personnel among the regulators to help them understand the burgeoning asset class. Senator David Perdue began a line of questioning about combating pump-and-dump schemes, regulatory arbitrage and financial arbitrage that prompted the CFTC chair to explain what \u201ckimchi premiums\u201d were. Most surprisingly, however, was Chairman Giancarlo\u2019s attempt to define \u201chodling\u201d to the Committee in the middle of an answer to Senator Mike Rounds about the commodity-like aspects of cryptocurrencies.<\/p>\n

Some senators did conflate which countries took recent regulatory actions on virtual currencies, but it is a confusing enough subject that it is the cover story<\/a> for Bitcoin Magazine<\/em> this month. While not directly indicative of which regulatory measures the U.S. will take, industry participants can take some benefit from knowing legislators and top regulators are making an attempt to educate themselves and to thoughtfully institute measured regulatory frameworks in an effort to protect investors while not ruining the industry.<\/p>\n","protected":false},"excerpt":{"rendered":"

Today, February 6, 2018, the prospects for coherent U.S. regulation on cryptocurrencies became a little more clear, as were the impasses that were frustrating progress on the issue. The Senate Committee on Banking, Housing and Urban Affairs (the \u201cCommittee\u201d) heard joint testimony from the heads of both the Securities and Exchange Commission (SEC) and the […]<\/p>\n","protected":false},"author":3483,"featured_media":22634,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[1620,3240,1035,183],"class_list":{"0":"post-22633","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business","8":"tag-cftc","9":"tag-icos","10":"tag-jay-clayton","11":"tag-sec"},"author_data":{"id":3483,"name":"Andrew Nelson","nicename":"andrew-nelson","avatar_url":"https:\/\/secure.gravatar.com\/avatar\/af835cd11a5a229df8ac174e518cd28da06a525a2406929b15f3e30a0965090e?s=96&d=robohash&r=g"},"featured_image_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/11\/sec-and-cftc-give-testimonies-at-senate-hearing-on-virtual-currencies.jpg","_links":{"self":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/22633","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/users\/3483"}],"replies":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/comments?post=22633"}],"version-history":[{"count":0,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/22633\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media\/22634"}],"wp:attachment":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media?parent=22633"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/categories?post=22633"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/tags?post=22633"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}