On Tuesday, a joint appearance of leaders from the Commodity Futures Trading Commission (CFTC) and Securities And Exchange Commission (SEC) before a meeting of the U.S. Senate Banking Committee had just one topic on the docket: cryptocurrencies and the U.S.’s role in the market’s regulation.
The outcome of the hearing? If the price of bitcoin is any indicator, not as bad as many cryptocurrency traders may have feared. Bitcoin, ethereum, litecoin, and other major cryptocurrencies pulled back from a week-long slow motion price crash that wiped tens of billions of dollars off of the cryptocurrency market’s cumulative valuation.
Rather than calling for a crackdown on crypto trading and ICOs, the tenor of the high-profile meeting was generally pro-innovation while encouraging a measured but deliberate approach to regulating the emerging sector of blockchain technology.
SEC chairperson Jay Clayton and Christopher Giancarlo of the CFTC spent most of their time discussing the challenges of regulating the burgeoning cryptocurrency market and reiterating the need for oversight, while also pointing to the potential of distributed ledger technology (DLT) to streamline the more traditional side of the financial sector.
In The Eyes Of The Law, ICOs Are Securities Offerings
The legal status of ICOs and other token crowd-sales has been something of an open question.
Clayton, in prepared testimony released on Monday night, said that “by and large, the structures of ICOs that I have seen involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws.” This is contrary to how many ICOs have claimed to be structured.
He cited the fact that ICO promoters tout the “potential for profits based on the entrepreneurial or managerial efforts of [the token’s creator]” and “the secondary market trading potential of these tokens, i.e., the ability to sell them on an exchange at a profit.”
The SEC chairperson concluded that these assets are being treated as securities by their promoters and should comply with the law. Clayton suggested that many organizations have run afoul of SEC requirements, noting that “not even one company has registered its ICO with the SEC so far.”
CFTC Chair Sees The Positive Potential Of Blockchain Technology
Giancarlo’s testimony primarily covered the launch of regulated bitcoin futures markets and efforts on the part of his and other government agencies to inform the general public of the very real risks imposed by investing or trading in cryptocurrencies. He also highlighted inter-agency coordination between the CFTC, IRS, SEC, the US Treasury’s Financial Crimes Enforcement Network (FinCEN), and international regulatory partners.
Giancarlo asserted in his testimony that distributed ledger technology, such as bitcoin’s blockchain, has real-world utility outside of trading and speculation. In his statements, he cited a report claiming that DLT could save mainstream financial institutions as much as $20 billion in annual infrastructure and operational costs. He cited another report suggesting that “blockchain could cut trading settlement costs by a third, or $16 billion a year, and cut capital requirements by $120 billion.”
“Moving from systems-of-record at the level of a firm to an authoritative system-of-record at the level of a market is an enormous opportunity to improve existing market infrastructure,” said Giancarlo in his concluding statements on the promise of blockchain for the financial services sector.
A “Do No Harm” Approach To Regulation
In his remarks on policy considerations for the CFTC, Giancarlo referenced a Clinton-era regulatory position toward regulating the Internet: do no harm.
Although Giancarlo said he “[believes] that ‘do no harm’ is the right overarching approach for distributed ledger technology,” it doesn’t necessarily imply a laissez faire, totally hands-off strategy. He said that “[appropriate] Federal oversight may include: data reporting, capital requirements, cyber security standards, measures to prevent fraud and price manipulation and anti-money laundering and ‘know your customer’ protections.”
Clayton’s closing remarks echoed Giancarlo’s. He said “we should embrace the pursuit of technological advancement, as well as new and innovative techniques for capital raising, but not at the expense of the principles undermining our well-founded and proven approach to protecting investors and markets.”
How or if the U.S. approach to regulation and oversight will change remains uncertain. But the forward march of bitcoin and its cousins, the smart contracts and decentralized organizations its distributed ledger technology facilitates, and investment and speculation in this emerging class of blockchain assets promises to give regulators a lot to learn.