On the morning of February 6, 2018, Securities and Exchange Commission (SEC) chairman Jay Clayton and Commodity Futures Trading Commission (CFTC) chairman J. Christopher Giancarlo gave testimony before the Senate Banking Committee in a hearing on virtual currencies. ETHNews reported on the prepared remarks, which were released ahead of the hearing.
Here are your seven takeaways from this morning's events:
1. The SEC and CFTC need economists and technologists that understand cryptocurrency and its market dynamics.
Several senators inquired about the impacts of the federal hiring freeze and budgetary restrictions. Chairmen Clayton and Giancarlo explained how they are performing their duties, but both agencies sound like they need expert help to address and properly regulate the cryptocurrency markets.
2. Both chairmen see promise in distributed ledger and blockchain technologies.
The two encouraged businesses and market participants to drive innovation and capital efficiency. Blockchain technology could even become a vital part of financial regulation. While Giancarlo's tone gave away his exuberance about the tech, Clayton seemed more realistic about the prospects of dramatic change in the near term. Disruptive technologies come along, he said, but they shouldn't change the way you look at markets. There will be winners, but there will also be many losers.
3. Yes, ICOs are (almost always) securities.
"You can call it a coin, but if it functions as a security, it is a security," declared Clayton. To date, no ICOs have registered with the SEC. "To the extent that digital assets are securities – and I believe every ICO I've seen is a security – we have jurisdiction and our federal securities laws apply." It remains unclear how – or if – the SEC will address ICOs that have already transpired and drawn US investors.
4. Beware cryptocurrency financial products. Did bitcoin futures arrive on the scene too quickly?
Even as Senator Mark Warner (D-VA) wondered if cryptocurrency derivatives were brought along too hastily, CFTC chairman Giancarlo declared his optimism that bitcoin futures may improve price discovery. At the very least, the CFTC brought five spot markets under its purview by allowing the certification and listing of bitcoin futures. On the part of the SEC, Chairman Clayton expressed hesitation regarding cryptocurrency exchange-traded funds (ETFs). He noted that ETFs typically enable long positions, something that could theoretically lead to runaway prices on an even greater scale.
5. The SEC and the CFTC have been pretty active in cracking down on blatantly fraudulent or noncompliant activities.
Over the last several weeks, the CFTC has brought three enforcement actions against cryptocurrency charlatans. In the last few months, the SEC has taken action against scam artists and an ICO that qualified as a securities offering (Munchee). Most recently, the stock market regulator filed suit against AriseBank, a Dallas-based ICO.
"I don't think the gatekeepers that we rely on to assist us in making sure our securities laws are followed have done their job ... There are thousands and thousands of private placements that go on every year in the US. We want them to go on. We want people to raise capital but we want them to do it right." – Jay Clayton
Both agencies have also taken care to warn potential cryptocurrency investors. In December, Clayton published his thoughts on cryptocurrencies and ICOs. Over the course of 2017, the SEC warned of pump-and-dump schemes, insider trading, and celebrity promotion of ICOs.
6. There is a messy patchwork of regulation at the state level. A federal solution may be necessary.
Neither the SEC nor the CFTC has full jurisdiction over the cryptocurrency markets. Congress may need to revisit the matter to extend the agency's authorities – or even establish a new regulatory body dedicated exclusively to governing the cryptocurrency markets.
7. There are not really any systemic risks from cryptocurrency thus far. The market cap remains a tiny fraction of the global economy.
In view of the largest single-day point drop of the Dow Jones Industrial Average, it's vital to contextualize the microscopic nature of the cryptocurrency markets. Giancarlo compared bitcoin's market cap to that of McDonald's. On a global scale, this is almost negligible.