The Senate Committee on Banking, Housing, and Urban Affairs held a hearing pertaining to virtual currencies and oversight of the Securities and Exchange Commission and the Commodity Futures Trading Commission on February 6, 2018. The hearing shed some light on the potential future path for U.S. regulation of cryptocurrencies and highlighted many issues that crypto is creating for the SEC and CFTC. Very broadly, SEC Chairman Jay Clayton lauded the rise of blockchain technologies but was less enthusiastic about cryptocurrencies and ICOs. From CFTC Chairman Christopher Giancarlo’s perspective, he advocated for supporting younger generations’ excitement over cryptocurrencies and increased education on crypto and blockchain for both regulators and the public but zero-tolerance and strict punitive measures for those who engage in fraud and manipulation.
Mr. Jay Clayton, Chairman, Securities and Exchange Commission
Mr. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission
Mr. Jay Clayton:
Distributed ledger technology, or blockchain, is a very promising, new technology. Clayton hopes it will bring great efficiencies to our national and global economies, including our capital markets. Regarding cryptocurrencies, however, the chairman noted that while “those who promote these so-called virtual currencies assert that they will make it easier and cheaper to buy and sell goods, particularly across borders” and “that transaction fees and costs will be eliminated or reduced … to date these assertions have proved elusive in many areas.” On ICOs, or initial coin offerings, he sees them as nothing more than modernized securities offerings – like stocks and bonds, but under a new label. Clayton believes the lack of regulatory oversight on the markets and the many ICOs currently being conducted illegally by not following securities laws are two major problems.
Mr. Christopher Giancarlo:
Giancarlo opened stating that “It 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.” He did urge, however, that regulators “must crack down hard on those who try to abuse [the younger generations’] enthusiasm with fraud and manipulation.” First, Giancarlo believes regulators need to educate themselves fully on the matter. Perspective is also key – the total 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. The chairman emphasized the need for consumer education; specifically noting that there has never been a need for this much outreach for any other financial product. Regulatory coordination needs to be made a priority – there also needs to be clarity between the exercising of legal authority over cryptocurrencies and statutory limitations of regulatory agencies; currently, it’s a very blurred jurisdictional line.
Question & Answer Portion:
In response to Chairman Mike Crapo’s (R-ID) question regarding agency jurisdiction and whether congressional action is needed for the regulation of cryptocurrencies, SEC Chairman Clayton suggested coordination between all federal banking regulators is needed and they need to work together to create a comprehensive action plan for regulating crypto markets. CFTC Giancarlo took it a step further suggesting the Committee bolster the current patchwork regulatory statutes the agencies are currently working with.
A major topic often revisited throughout the hearing was on the legality of ICOs. Ranking Member Sherrod Brown (D-OH) discovered that Clayton was unsure of how much of the $4 billion in capital ICOs raised last year was raised in the United States. Additionally, a discussion with Senator Elizabeth Warren (D-MA) revealed that no ICO companies had registered with the SEC last year with Clayton commenting that the “gatekeepers [the SEC] rely on” to assist them in ensuring securities laws are followed, saying they “have not done their jobs.”
Senators Robert Menendez (D-NJ), Jack Reed (D-RI), and David Perdue (R-GA) all discussed problems currently plaguing the industry including the Coincheck hack in Japan, serious exchange vulnerabilities, and North Korean & Russian state agents’ potential interest in abusing or manipulating the cryptocurrency market. Menendez discussed Venezuela’s implementation of the Petrocoin in an attempt to circumvent U.S. sanctions. Perdue discussed how to best combat pump-and-dump schemes and regulatory and financial arbitrage with the witnesses while Senator Reed emphasized the need for crypto and cyber experts to work alongside the regulators in this changing fintech world.
The core regulatory bodies of the financial services industry are very interested in exploring these up-and-coming crypto/blockchain industries. That said, it is important that all parties involved are protected from unnecessary risk, fraud, and/or manipulation. The main goal of a working group comprised of the SEC, FINCEN, CFTC, and other entities is to crack down on scams. Both witnesses agreed that Congress may need to grant the financial regulators additional power and clarity on how to regulate cryptocurrencies.
To read the full transcript of the hearing, click here.
Prepared by Patrick Firth, Michael Best Strategies, Washington, D.C.