Cryptocurrencies hearing reveals potential for systemic risk
Open session Senate Committee tasks U.S. regulators with determining “long term” risks for crypto traders.
The Senate Committee on Banking, Housing and urban affairs met in open session on Tuesday for a hearing to discuss U.S. regulators’ roles in monitoring and policing the fast-growing cryptocurrency industry.
The hearing, entitled Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) was held in Washington, D.C. and witnesses included SEC chairman Jay Clayton and CFTC chairman J. Christopher Giancarlo.
Senator Jack Reed posed questions to the regulators’ chairmen concerning the potential future implications of digital assets, companies and initial coin offerings (ICOs) on America’s overall financial system:
“Are you tracking all these different daily emerging currencies?” Reed asked.
“Is someone looking long term at the systemic effects? Where are we going to be?”
Reed added that the interest in crypto was “eerily reminiscent of the late 90’s and derivatives”, which he explained were “nominally small parts of the market that were esoteric, that ten years later exploded”.
In answering Reed’s question, CFTC chairman J. Christopher Giancarlo said that, of the many cryptocurrencies and initial coin offerings (ICOs) that exist, only “a handful have gotten significant traction”.
“That’s important for listeners to know because so many of these are fraudulent,” he said.
“We went after one… called ‘My Big Coin’, which became known as ‘My Big Con’ by people that were defrauded by it… it was a ponzi scheme. They were taking consumers money and using it to buy houses and furniture and jewelry. We went after them, and went after them hard, and will continue to do that.”
Giancarlo said that, in terms of systemic risk, “right now, this is still a relatively small market, just by ratio, but… we have to watch it and watch it carefully”.
SEC chairman Jay Clayton agreed with the CTFC’s enforcement stance but reminded the Senate Committee that the SEC doesn’t have direct jurisdiction over pure cryptocurrencies.
“We have had to watch it because, of course, they’re integrated with the markets that we do oversee,” he said.
In response to Reed’s inquiry as to the number of cryptocurrencies that are made available to the public, Clayton pointed out that he personally struggles to understand how these “currencies” can remain viable.
“Does ten make sense, or fifteen, or twenty make sense? I have a hard time getting my head around that because if it’s an efficient medium of exchange and you have fifteen of them fluctuating at different places, [it] probably doesn’t make a lot of sense to me,” he said.
“On systemic, I agree with chairman Giancarlo.”
However, “if people are getting ripped off, that represents reputational risks, which can have systemic effects”.
Understanding the risks
During the hearing, Clayton indicated that he believes main street investors look at virtual currency trading platforms and assume that they are regulated in the same way that the stock exchange is regulated.
“There’s a lot happening that’s beyond the understanding of the regular investor,” he said.
Giancarlo added that “the spot market for bitcoin [and other cryptocurrencies] is not a regulated marketplace”.
“There’s a patchwork of state regulation across the nation. Some states have been very assertive in this area, other states less so and some states have nothing,” he said.
One such state that has been aggressively cracking down on fraudulent and misleading cryptocurrency-related activities is Texas. On Friday, the southern state’s securities board issued its fourth emergency cease-and-desist order against a cryptocurrency company in a little over one month, according to CNBC.
In late January, Texas effected a cease and desist order against AriseBank, a company claiming to be a “cryptocurrency bank”, disclosing that they must no longer offer their services to consumers in Texas.
Clayton said that given the international nature of the cryptocurrency market, a “patchwork is probably not sufficient” if cryptocurrencies continue to develop as a significant market accessed by main street investors.
“We may be back with our friends from Treasury and the Fed to ask for additional legislation,” Clayton said.
Giancarlo added that policymakers “owe it to this new generation to respect their interest in this new technology with a thoughtful regulatory approach,” he said.
The value of cryptocurrencies
Addressing the intense market volatility of cryptocurrencies, Giancarlo said that he doesn’t know where the natural equilibrium point is but mentioned that “some economists posit that there is a relationship” between bitcoin’s value and the difficulty or cost to mine the cryptocurrency, which may designate a price floor.
Giancarlo said that when cryptocurrencies are used as a store of value, then it’s very much like an asset.
“What we have here is a lot of people buying and holding. If you go on to the Twitter universe you’ll see a phrase, HODL, which means ‘hold on for dear life’. The thinking is that they buy it and hold it,” he said.
Clayton said that “there are a lot of smart people who think there’s something to the value of cryptocurrency and international exchange”, however he added that he has not seen a manifestation of these benefits.
“What’s something worth? It’s what somebody is willing to pay you for it. But in our world, the securities world, there are rules that dictate how much you have to tell somebody about what you’re selling them,” he said.