Senate hearing on cryptocurrencies
The Senate Committee on Banking, Housing and urban affairs hearing on cryptocurrencies – commentary.
The Senate Committee on Banking, Housing and urban affairs is currently meeting in open session for a hearing to discuss U.S. regulators’ roles in monitoring and policing the 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. Witnesses included SEC chairman Jay Clayton and CFTC chairman J. Christopher Giancarlo.
See below for edited running commentary from the hearing.
SEC chairman Jay Clayton: Initial Coin Offerings (ICOs) are securities. You can call it a coin, but if it functions as a security, it’s a security. Significant requirements keep markets operating properly, but these requirements are not present on many cryptocurrency exchanges. SEC and CFTC do not have direct jurisdiction.
CFTC chairman J. Christopher Giancarlo: A new generation is uniquely interested in bitcoin unlike they’ve ever been interested in the stock market. We should crack down hard on those who try to abuse their motivation. We should also learn everything we can and work together with other regulators.
Senator Mike Crap: Should legislation be changed to give regulators sufficient jurisdiction?
SEC chairman Jay Clayton: We may need to have additional authority.
CFTC chairman J. Christopher Giancarlo: We need to find where the gaps are. There’s a patchwork of regulation but not a comprehensive solution.
SEC chairman Jay Clayton: International nature of cryptocurrencies is a challenge.
Senator Sherrod Brown: There have been four recent enforcement actions against ICOs.
SEC chairman Jay Clayton: We are pursuing our securities laws vigorously. Personnel is my biggest challenge right now, because of a hiring freeze. We may be back later to ask for additional legislation. Some economists posit a relationship between bitcoin’s value and its cost to mine. Our goal is to help Main Street investors understand the risks. We’ve formed a cryptocurrency working group.
Senator Mike Rounds: What’s a security?
SEC chairman Jay Clayton: The definition is large. Money given for the purpose of profiting from someone’s efforts.
CFTC chairman J. Christopher Giancarlo: Bitcoin could be a medium of exchange, means of account or a store of value, and the implications of each are different. For those who are holding on for dear life (HODL) with the hope of its value rising, bitcoin is a security.
Senator Elizabeth Warren: Do you support SEC barring class action lawsuits?
SEC chairman Jay Clayton: I’m not anxious to see a change in this area. If this issue came up, it would take a long time to be decided. It’s not a change that’s high on my priority list.
Senator Elizabeth Warren: Will you weaken rules that protect seniors saving for retirement?
SEC chairman Jay Clayton: We have an insufficient standard and a lack of clarity.
Senator David Perdue: Do you see regulatory arbitrage in this?
SEC chairman Jay Clayton: Yes. There’s a lot happening that’s beyond the understanding of the regular investor.
CFTC chairman J. Christopher Giancarlo: Price arbitrage too. We have different regional and country markets for this. The same thing happened with cotton early on. With different prices in different places. We are communicating with other regulators in other countries.
Senator David Perdue: What are you doing to combat pump and dumps?
CFTC chairman J. Christopher Giancarlo: Our task force has brought enforcement actions, and there’s more to come. We have enforcement jurisdiction. We have a partnership of CFPB for consumer education. We’re directing librarians to use our resources. We’ve got podcasts on this subject. We’re working as hard as we’ve ever worked on this.
SEC chairman Jay Clayton: We’re expecting other entities to act responsibly as well.
CFTC chairman J. Christopher Giancarlo: Fraudsters target seniors in this, as well as precious metals and foreign exchange. If it sounds too good to be true, it is. If it promises ridiculous returns, it’s ridiculous.
SEC chairman Jay Clayton: There are disruptive technologies, but they shouldn’t disrupt how you look at investing.
CFTC chairman J. Christopher Giancarlo: We have FBI agents watching for cryptocurrency use in terrorism.
SEC chairman Jay Clayton: We also have a dark web working group.
Senator John Kennedy: What’s the point of over-disclosure if no one’s reading it? If most investors don’t read the prospectus? I don’t think the disclosure we have now works.
SEC chairman Jay Clayton: I’m not satisfied when people think crypto exchanges have the same protections as the stock market. Disclosure can be improved.
Senator Mark Warner: I think it’s the same kind of transformation as cell phones were. Should this escalate to a higher analysis as a potentially systemic issue?
SEC chairman Jay Clayton: ICOs should be regulated as securities offerings. I’m counting on gatekeepers to do their job.
CFTC chairman J. Christopher Giancarlo: Now with bitcoin futures, we have insight into data to look for manipulation and other issues. The potential applications of blockchain technology are widespread with enormous potential.
SEC chairman Jay Clayton: Significant opportunity to reduce costs. I think it should be pursued vigorously.
Senator Tom Cotton: What’s driving the volatility in cryptocurrencies?
CFTC chairman J. Christopher Giancarlo: Futures helps hedge that volatility.
SEC chairman Jay Clayton: I don’t know what’s driving the volatility. That’s one of the issues before us. An asset that’s very volatile is not a good medium of exchange.
Senator Bob Menendez: What role do the SEC or CFTC have to prevent foreign governments from evading sanctions?
CFTC chairman J. Christopher Giancarlo: We have authority over fraud and manipulation. We would certainly look at it.
Senator Bob Menendez: Undermining sovereign currencies is also a threat.
SEC chairman Jay Clayton: (In response to celebrity hype over ICOs) If you are promoting securities, you are potentially taking on securities law liability.
Senator Jerry Moran: Don’t ETFs reduce volatility and risk? Do additional products alleviate that?
SEC chairman Jay Clayton: If we get comfortable with the rules governing those, we can move forward.
Senator Catherine Cortez Masto: Are companies using blockchain hype to pump up stock prices by associating with the trend?
SEC chairman Jay Clayton: Yes, and we’ve put out a warning on that.
SEC chairman Jay Clayton: Chances are very low of getting investors’ money back if they are lost in a hack at an off-shore exchange or entity.
CFTC chairman J. Christopher Giancarlo: While we have enforcement authority, we don’t have regulatory authority over the protections that exchanges employ to secure customers’ money.
CFTC chairman J. Christopher Giancarlo: Markets are very, very complex. If there are fundamental moves, fundamental changes, that’s where we have to act. Our job is to look at the structural underpinnings and see if there’s anything that’s not functioning.
SEC chairman Jay Clayton: Not one ICO has registered as a security. The gatekeepers that assist us in making sure our laws are followed haven’t done their job.