In a hearing today before the Senate Banking Committee, Securities and Exchange Commission Chairman Jay Clayton and Commodity Futures Trading Commission Chairman Christopher Giancarlo opened up about what the near-term U.S. regulatory fate of cryptocurrency might look like. In a week of plunging prices and bad news, the hearing struck a tone that coin watchers could reasonably interpret as surprisingly optimistic.
Senator Mark Warner gave blockchain technology and cryptocurrency a respectful defense.
I was an early investor in cell phones back in the ’80s, and I believe #blockchain has the potential to be just as transformational as cell phones. As our government begins to look at #crypto, I don’t think you can separate #cryptocurrencies from the technology they’re based on. pic.twitter.com/EneUMfcgJ3
— Mark Warner (@MarkWarner) February 6, 2018
Clayton said in his testimony: “Some have taken advantage of this lack of understanding and have sought to prey on investors’ excitement about the quick rise in cryptocurrency and ICO prices,” He went on and said: “There should be no misunderstanding about the law. When investors are offered and sold securities—which to date ICOs have largely been—they are entitled to the benefits of state and federal securities laws and sellers and other market participants must follow these laws.”
He also stated: “ICOs that are securities offerings, we should regulate them like we regulate securities offerings, end of story,”
While both Clayton and Giancarlo agreed that more regulations were necessary in order to protect investors from fraud, Giancarlo had kinder words to say about cryptocurrencies and Bitcoin: “We must crack down hard on those who abuse our young enthusiasm for bitcoin and blockchain technology,” he went on and said: “We owe it to this new generation, to respect their interest in this new technology with a thoughtful balanced response, not a dismissive one,”
Even some senators on the committee named some of the benefits behind blockchain technology and expressed interest in achieving a better understanding of cryptocurrencies.
Over the course of the open hearing, Clayton and Giancarlo traded testimony over what can be regulated, what should be regulated and how while offering a broader outlook on the longterm future of virtual currency markets and blockchain tech.
The testimony drew a useful distinction among three pillars of the virtual currency ecosystem (for lack of a better unifying term): cryptocurrencies, “a replacement for dollars;” ICOs, “like a stock offering;” and distributed ledger technologies, or the technical framework generally known as blockchain.
Throughout the hearing, on the SEC side, Clayton struck a relatively solemn tone focused on ICO fraud concerns while the CFTC’s Giancarlo came across as genuinely enthusiastic and curious about the emerging market.
On a question of the intrinsic value of cryptocurrency:
Giancarlo defended Bitcoin’s value, explaining the process of mining and how it correlates with price (or sometimes breaks from that correlation, as economists he cited have suggested).
Clayton on the same question:
“There are a lot of smart people who think there’s something to the value of cryptocurrency and the international exchange and I’m not seeing those benefits manifesting themselves in the market yet. I look at this from the perspective of main street investors and they should understand that.”
Clayton made further comments casting doubt on the usefulness of cryptocurrencies as currency, citing common concerns around how market volatility makes transactions difficult.
On advantages of a Bitcoin futures market:
“The CFTC can now obtain trading data and analyze it for fraud and manipulation,” Giancarlo said.
“…With Bitcoin futures we’re now having visibility into underlying markets and spot markets that we would not otherwise have.”
Concerns around consumer misconceptions of cryptocurrency trading platforms:
Both chairmen expressed concerns about the unregulated nature of cryptocurrency exchange platforms and their potential to mislead consumers into believing that a regulatory net of some kind exists.
“To be clear, the CFTC does not regulate the dozens of virtual currency trading platforms here and abroad,” Giancarlo said, clarifying that the CFTC can’t require cyber protections, platform safeguards and other things that consumers might expect from traditional securities.
Clayton called for an interagency coordinated plan among states, federal regulators and the SEC and CFTC to address consumer naivete over unregulated trading platforms.
“I think our main street investors look at these virtual currency platforms and assume they are regulated in the same way that a stock is regulated and as I said it’s far from that and I think we should address that.”
On ICOs as a security:
“I believe every ICO I’ve seen is a security… You can call it a coin but if it functions as a security, it is a security…,” Clayton said. “Those who engage in semantic gymnastics or elaborate re-structuring exercises in an effort to avoid having a coin be a security are squarely in the crosshairs of our enforcement provision.”
On coordinated regulation:
When Senator Mark Warner, who expressed more familiarity with the area than most of his peers, criticized the patchwork nature of regulation that allowed Bitcoin futures while still blocking ETFs, calling for a more “coordinated effort” among regulatory bodies, both witnesses were quick to agree. In doing so Warner offered a bullish vision. “The potential writ large amongst crypto assets and the underlying blockchain could be as transformational as wireless was years ago. I think we’re going to need a much more coordinated effort,” Warner said.
All told, the hearing was far from apocalyptic for regulationphobes. While it’s clear that the CFTC and SEC have only scratched the surface of the kind of rulesets they’d like to put in place, their plans appeared to be overwhelmingly focused on protecting consumers from threats like rampant ICO “fraudsters” and unsafe exchanges rather than discouraging growth. For anyone interested in the longterm health and viability of virtual currencies, that should come as good news.