Today, in Washington D.C. the Senate Banking Committee is meeting and some of the topics to be covered are cryptocurrencies and Initial Coin Offerings (ICOs). The entire cryptocurrency market was watching with bated breath to see what stance America might take on virtual currencies. Would they begin a crack down? Would they ban? Might they regulate? Here’s what they had to say.
Commodity Futures Trading Commission
Testifying today was J. Christophor Giancarlo, chairman of the CFTC. In his opening statement he made it clear that he had a grasp on the underlying technology including the public distributed ledgers and how transactions take place and are confirmed. He even noted that the vast coverage of cryptocurrencies in mainstream media far outpaces its overall value in the global market.
He reiterated that virtual currencies like Bitcoin are commodities but the CFTC does not have regulatory jurisdiction over virtual currency exchange platforms. It does have jurisdiction over derivatives traded in the U.S. In this respect, they have filed suit against several bad actors including My Big Coin Pay Inc., The Entrepreneurs Headquarters Limited, and Coin Drop Markets. These actions were taken in partnership with the SEC.
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Since the CTFC has jurisdiction over derivatives, it is responsible for commodities like Bitcoin Futures. Both CBOE and CME have properly filed with them in regards to their Bitcoin Futures options. The combined value of the Bitcoin Futures market between the two is roughly $94M. Through the process of approving those options, they came up with an extensive list of additional monitoring and risk management that needed to be done.
Education is Future
The CFTC chair also went on to say that educating investors and those involved in the market is vital for continued consumer protections. They have partnered with several other organizations in order to ensure that consumers know what they are getting into.
Finally he summed up his informational testimony portion with the benefits of blockchain technology. Distributed ledgers, Giancarlo said, have the possibility to change global finance. First, by increasing economic efficiency. Second, by reducing potential risk from centralized systems. Finally by protecting against fraud and utilizing high quality data for governance.
Blockchain will have a “broad and lasting impact” on global financial markets. His conclusion is that virtual currencies are a paradigm shift in payments, and economic activity. He believes that intelligent policies will allow digital assets to flourish and provide technological innovation that will benefit American markets.
Securities and Exchange Commission
The other major testimony today was at the Senate Committee on Banking, House and Urban Affairs. The chair of the U.S. SEC, Jay Clayton, gave testimony talking about virtual currencies. He is very optimistic that the “financial technology will help facilitate capital formation, providing promising investment opportunities for institutional and Main Street investors alike.”
Are Crypto Exchanges, Actual Exchanges?
He spoke about whether or not market regulators have jurisdiction over crypto exchanges. But they are in fact money transfer systems. He expressed concern about the use of the term exchange when, in fact, they are not registered exchanges or alternative trading systems. Money transfer systems generally fall under jurisdiction of a state and are not directly regulated by the SEC or CFTC. The two agencies are open to discussing virtual currency and cryptocurrency exchange specific policies with Congress. The specific reason would be “bring clarity and fairness to this space.”
Are Cryptos Currencies?
At present the SEC does not have the ability to regulate currency and commodities trading and transactions. However, some crypto “currencies” are more akin to securities. Here’s an interesting part of his testimony.
As I have stated previously, these market participants [brokers, dealers, investment advisers and trading platforms] should treat payments and other transactions made in cryptocurrency as if cash were being handed from one party to the other.
Clayton stated that the majority of ICOs he has seen basically involve the sale of securities. This would then mean that they fall under jurisdiction of the SEC. He cites the case of the DAO ICO. Those who are selling blockchain-based securities in the U.S. must register with the SEC unless there is a valid exemption.
ICOs fall into the realm of securities when marketing of those coins include the promise of profit by sale on a secondary market. That means, any ICO that says their tokens will be available on an “exchange” after the ICO ends must register with the SEC as a securities sale. This gives purchasers of the tokens certain protections and paths to remuneration in case of fraud.
Public Companies Jumping on the Bandwagon
Clayton stated the disturbing trend of publicly traded companies of changing their names and business models to cash in on the blockchain craze. A good example of this might be Kodak which, at CES, announced they would create a cryptocurrency and a mining business. Its stock price swelled quickly. But has not returned to its original level. Clayton said that without properly informing their investors the changes and risks involved, they may be violating SEC regulations. The SEC is carefully inspecting these aspects of business now.
How Blockchain May Help Financial Markets
In his conclusion, he too agreed that technological innovation can drastically improve markets via “increased competition, lower barriers to entry and decreased costs for market participants.” Blockchain is no different and could democratize the access to capital, especially for smaller companies that do not have access to large capital stores. The distributed ledger could also offer investors new opportunities.
SEC Regulation of Cryptocurrencies?
Ultimately, any SEC regulation of cryptocurrencies will be “to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.” Clayton finished his testimony with this.
…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.
This should be seen as good news for Bitcoin and the cryptocurrency markets. The SEC and CFTC are not interested in banning, only in regulating. Specifically, in order to protect those investing, and maintain a certain order. This sort of regulation may take some of the volatility out of the crypto markets, but it could also legitimize them in the eyes of the U.S. government.