On Tuesday, February 6th, SEC Chairman, Jeff Clayton, and Commodity Futures Trading Commission (CFTC) Chairman, Chris Giancarlo, were called before a US Senate Committee to discuss Virtual Currencies. This was a positive day for the future regulation of the digital currency markets and the market responded favorably with a 15%+ bounce.
The following analysis of the highlights is intended to shine some light on the future implications from the session and help explain why the price of Bitcoin and other digital currencies reversed their downward trend:
Chairman Giancarlo shared a personal story about his struggle getting his children interested in investing. An older cousin piqued their interest by telling them about Bitcoin, so Giancarlo felt “(We) owe it to this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one. And yet we must crack down hard on those who try to abuse that enthusiasm with fraud and manipulation.”
In addition he said that the CFTC and SEC need to: “Thoroughly educate ourselves and the public about this new innovation and we must make good policy choices and put in place sound regulatory frameworks to reduce risks for consumers.
Finally, he mentions that although he does not currently have jurisdiction over exchanges, he does have insight into the “spot markets” via Futures Trading, which he does have jurisdictions over.
By discussing his children and their view, he is going on record that digital currencies are here to stay. This was the most significant part of the day from a positive perspective. He could have said that digital currencies were all ponzi schemes, but in fact, tried to explain their value. At another point, a Senator asked where the intrinsic value of Bitcoin came from and he responded with a very educated viewpoint — that he has seen charts that show Bitcoin’s price floor not being zero, but actually the cost of mining each Bitcoin (“electronically produce each coin”).
His surprise answer leads into his focus on education, for both enforcement officials and the general public. With news and information having such a direct impact on prices at this time, his approach to education could have a global impact.
This is especially true when it comes to helping the public avoid scams. In regards to programs that guarantee unusually high returns, he commented that he told his kids, “If it sounds too good to be true, it probably is. If you give someone money, you better be prepared to lose it,” which is good advice for everyone.
Chairman Clayton classified the “promising new technology” into three categories:
1.Distributed Ledger Technology or Blockchain
As for the technology, Chairman Clayton “looks forward to working with market participants that look to bring efficiencies.”
As for Cryptocurrencies and ICOs, he lumps these into “subsets of (companies) trying to take advantage of the commercial opportunities created by Blockchain Technology.” In this subset there are two categories, “a replacement for dollars (and) a stock offering.”
He later says “Every ICO I’ve seen is a security and that ICOs are not following securities laws,” and thinks laws are clear: “Those doing Semantic gymnastics are squarely in crosshairs of enforcement division.”
He then goes on to talk about how because you are trading on something that looks like an exchange, it does not have the rule sets of traditional exchanges. Broker Dealers have capital and conduct requirements.
This is not the first time that the SEC has declared that all ICOs are securities. Personally, I question how many ICOs he’s actually seen. Are SEC Analysts only bringing him unregulated securities to look at or has he looked at all 1,400+ coins on the market?
That question points to an earlier statement by Sen. Sherrod Brown (D-Ohio) during the session about the SEC continuing to enforce regulations on the banks and traditional stock markets…”There are only so many hours in a day to analyze both public markets and digital currency markets.” When asked if the SEC would revisit ICOs that they have not shut down, Chairman Clayton changed the subject.
Chairman Clayton also stated that “Investing in an ICO does not mean you are investing in Blockchain related ventures,” which seems somewhat contradictory to his statement about all ICOs being securities, since most securities do grant ownership in the venture.
What was very clear was that the Chairman is very interested in regulating digital currency exchanges and enforce the same regulations that the public markets have to follow. This is a good thing because none of us want to lose our investments due to the failure or hack of an exchange.
Senate Understanding of Blockchains and Digital Currencies
Although the Senate Committee asked many relevant questions, it was Virginia Senator Mark Warner who made the most enlightened statement on the subject, saying: “I don’t think you can separate the underlying distributed ledger/blockchain from some of these cryptoassets. I was lucky enough to get into the cell phone business in the early 80s and everyone thought it was going to be a small business. They were wrong and I got rich.”
Additionally, he did express concerns about cyber security in the space, which again points to additional regulation for online digital currency exchanges.
One concern about the future of digital currency regulation is that the Government Officials who will be tasked in creating laws do not understand it enough to do that properly. Comments like those of Senator Warner are a step in the right direction.
Chairman Giancarlo then noted that “there would be no distributed ledger technology without Bitcoin. Blockchain technology is unlike other technologies where the infrastructure was created first and services were built on top of them. It’s a good way to frame this debate.
Many Senators expressed concerns that Foreign Governments are using digital currencies to circumvent International sanctions. Both Chairmen Clayton and Giancarlo expressed that they do not have jurisdiction in over the dealings of Foreign Governments, but will do anything they can to support the agencies that do.
The Senators on the panel sounded willing to increase the jurisdiction of the SEC and CFTC if it would help with this issue. However, this is a major issue that needs to be addressed at the international level with coordination between governments. The US can lead the way on those efforts, but the SEC and CFTC cannot enforce this alone. There are other agencies, such as the Financial Crimes Enforcement Network (FINCEN) and the Financial Action Task Force (FATF), but the Chairmen agreed with many Senators that a new agency may need to be created.
This will not be the last we hear from Chairmen Clayton and Giancarlo, but it is clear that they will be making the enforcement decisions in this space. It will be important to monitor their words and actions in the coming months.