The following is a paraphrased synopsis of the Senate Hearing on Cryptocurrency with the Chairman of the SEC and CFTC. If you want to review everything to its entirety, it is highly suggested that you watch the hearing yourself. I picked all of the content that I thought was the most relevant and that I felt got answered in a clear way. This doc is to help people understand the government side of crypto and is not to be referenced as a guideline or an authority.
The overall sentiment from the Senate and the SEC and CFTC Chairmen was positive. Both sides appeared to support and encourage the new cryptoasset class and its respective technology, abite illegal entities, “frauderster”, and rogue nations. It appears that both the SEC and CFTC chairmen have done their research, to the tune of The Honorable Giancarlo referencing bitcoin mining and the term “HODL”.
Witnesses:
The Honorable Jay Clayton
Chairman U.S. Securities & Exchange Commission
The Honorable J. Christopher Giancarlo
Chairman U.S. Commodity Futures Trading Commission
Opening Remarks from The Honorable Jay Clayton
- ICOs have raised over $4 Billion to date
- Investing in an ICO does not mean you are investing in blockchain technology
- Most exchanges are less secure because they are not vetted by the SEC or CFTC
- They believe that every ICO that has gone to market is in fact a security
Opening Remarks from The Honorable Christopher Giancarlo
- He opens with a story explaining how Bitcoin and Cryptoassets have peaked his children’s interest and how government owes it to the public to understand this new technology and reduce risks for consumers
- The SEC has never conducted this much outreach for any other financial product
- Total value of outstanding BTC is about $113 Billion, which is less than the total market cap of McDonalds.
- Total value of virtual currency is around $313 Billion, total global money supply is $7.6 Trill and the total Gold supply is around $8 Trill
- The Futures market gives them jurisdiction to oversee virtual assets
Senator Crapo: Both agencies claim to not have full jurisdiction over virtual assets.
Clayton
- There needs to be a coordinated effort from multiple agencies to regulate virtual assets
- Advises that there needs to be more legislation/regulation in place to oversee the market better
Giancarlo
- Fraud and manipulation will be more of the focus of said legislation
- Fin Syn (The Financial Interest and Syndication Rules) has been active in regulating
Senator Brown: How much of the $4 Billion in ICOs was raised in the US?
Clayton
- We don’t know
Senator Brown: How will you stay on top of the growing industry of virtual currency?
Clayton
- We are understaffed and the hiring freeze has impeded our ability to grow as needed
- We could use more people in enforcement and in trading and markets
Senator Shelby: How are you going to put together a task force to deal with cryptocurrencies?
Giancarlo
- The Treasury Secretary has formed a virtual currency working group consisting of the SEC, CFTC, The Fed, and Fin Syn.
Senator Shelby: Do you need additional legislation?
Clayton
- Not sure, we may be back to request more legislation
Senator Reed: Do you have the personal to understand cryptography and the technology behind it?
Clayton
- We have a team that work together that do understand the technology
Giancarlo
- In 2017 we hired our first Chief Innovation Officer, deep background in new FinTech innovation
- Launched CFTC innovation hub to understand and educate
- Formed virtual currency enforcement task force that has brought forth three civil action suits against bitcoin fraudsters
- Budget request for 13% more funding which will be focused on FinTEch, Cyber and Cryptocurrencies
Senator Reed: Are you tracking all of the daily emerging cryptocurrencies and are you looking at the systemic effects of the cryptocurrency market? This is eerily similar of the late 90’s derivatives market that exploded ten years later.
Clayton
- Cryptocurrencies do not necessarily make sense as a currency
- If people are getting ripped off this will have systemic effect
Senator Rounds: Is bitcoin a commodity, a security or both?
Giancarlo
- Bitcoin is a medium of exchange, a store of value, or a means of account
- If it is a medium of exchange it is like a currency, but has issues with processing. Yet it is still spoken of as a means of account, which gives it implications from the Fed. If it used as a store of value, it is like an asset or a commodity.
- Some people want to hold on to it, so it is a commodity
Senator Perdue: How do you regulate arbitrage, (South Korea and China)?
Giancarlo
- Regional and International markets do fluctuate
- We work with other countries like Japan to regulate cryptocurrency
Senator Perdue: What are you doing to combat pump and dumps?
Giancarlo
- There are more civil actions to come against people that take advantage of consumers
Senator Donnelly: What other ways are you preventing retail investors from falling victim to fraud?
Giancarlo
- We are educating librarians, hosting webinars, we have dedicated groups that are focused on education
- One of the most frequently searched terms on library computers is bitcoin
- Seniors seem to be the focus of fraudsters
Senator Donnelly: What would you say to seniors that are looking to bitcoin for retirement?
Giancarlo
- If it sounds too good to be true, it is
Clayton
- There are disruptive technologies that come along, but you should not let it disrupt how you invest
Senator Donnelly: How are you planning to work with law enforcement and federal authorities to make sure cryptocurrency is not used by terrorists and North Korea?
Giancarlo
- We currently work closely with law enforcement
Clayton
- We also have a dark web group that is working with law enforcement
Senator Kennedy: When you bought your investment fund did you read the prospectus of the fund?
Giancarlo
- I did not read it cover to cover
- Most investors don’t read it
Senator Kennedy: What’s the point of having disclosure if no one is reading it?
Giancarlo
- Historically, adequacy of full disclosure is a building block of Securities laws
Senator Kennedy: How far do you think we should go with regulation?
Clayton
- I am not satisfied with what people are thinking in regards to foreign exchanges or how people are handling ICOs
- I agree that we need disclosure that helps consumers
Senator Warner: Do you believe that this will elevate to an FSOC (Financial Stability Oversight Council) level?
Clayton
- Yes
- We rely on Gate Keepers to help regulate
Senator Warner: I think we have moved too fast on allowing bitcoin futures trading. I think cryptocurrency will be as revolutionary as the cell phone market and we will need a coordinated effort.
Giancarlo
- Bitcoin futures is regulated
- This gives us visibility into underlying spot markets
- Coordination is important
Senator Cotton: What are your thoughts of the underlying technology involving blockchain and distributed ledger?
Giancarlo
- If we didn’t have bitcoin we would not have this tech
- The applications for this tech includes Financial Industry,Banking, Charity, Agriculture Futures, Transportation, Regulators
- (Giancarlo) References credit exposure in 2008 and how a distributed ledger could have helped make good decisions and possibly prevented the crisis
- The potential is great
Clayton
- Anywhere verification and record keeping has cost, there is an opportunity for this tech
- I hope that people pursue it vigorously
Senator Cotton: What are the factors driving the extreme volatility in bitcoin?
Clayton
- I don’t know what is driving the volatility, they are not coordinated with sovereign currencies
Senator Cotton: What does that volatility portend for cryptocurrencies future as a potential as legal tender for nation states?
Clayton
- An asset that is highly volatile is not a good means of exchange
Senator Menendez: Does the SEC and CFTC have a role to play in the use of foreign countries using cryptocurrency to evade US sanctions?
Giancarlo
- Currently we have limited jurisdiction in that matter
Senator Menendez: ICOs went from $96 Million in 2016 to $4 Billion in 2017. A lot of ICOs are using celebrities to promote their coin. What can the SEC do to protect consumers?
Clayton
- If you are promoting securities, you are taking on securities law liability
Senator Menendez: Why is the SEC not comfortable with approving ETFs with significant investments in cryptocurrencies?
Clayton
- Our ETF product space is largely a retail product space, we have made it clear to the market space that there are a couple of issue with an ETF that is based on cryptocurrency, they go to price discovery and custody and some other issues around volatility. We have let the industry know that those are issues of concerns to us and we do not want to approve an ETF product with a cryptocurrency underlier until we can get comfortable with those issues.
Senator Cortez Masto: Companies are using blockchain as an opportunistic scheme to pump up their stock (i.e. Kodak, Long Blockchain, formerly Long Island Iced Tea Corp). What is your response to this?
Clayton
- Nobody should think it is ok to change their name or falsely say they are using a technology that they are not. We issued a warning on the SEC website and I gave a speech on this. This is problematic
Senator Cortez Masto: More than 3 million bitcoins have been stolen and multiple exchanges have been hacked. If consumers lose their money, what can they do to get their money back?
Clayton
- It is very hard for us to get their money back.
Giancarlo
- We do not have the same regulatory authority that we do in domestic exchanges
Senator Shelby: From a regulatory standpoint do you see anything amiss in regards to the market correction (I believe he is referencing the traditional market i.e. S&P 500 and NYSE)?
Clayton
- All of the systems in place were working as they should and we did not see anything abnormal
Giancarlo
- Markets are very complex, and you hear people say reasons that may have affected the market. All of the fundamentals were working and the margins were intact.
Senator Warren: How do we make ICOs safer and why has not one ICO tried registering with the SEC?
Clayton
- The gatekeepers that we rely on are not doing their jobs. ICOs take the promise of a secondary market without registering with us and it is not OK.
- It is a violation of the law and they can hide information.
- These companies can do a private placement but only if they do it right.
Thank you for reading this piece, I hope you found it useful! If you are interested in continuing the conversation, we would love to have you in our Telegram group Crypto Cooperative: https://t.me/cryptocooperative
Resources from related government agencies:
Official Page of the hearing
https://www.banking.senate.gov/public/index.cfm/hearings?ID=D8EC44B1-F141-4778-A042-584E0F3B9D39
Testimony from J. CHRISTOPHER GIANCARLO before the hearing on Feb 6th
Testimony from Jay Clayton before the hearing on Feb 6th
CFTC webpage on Bitcoin (as referenced in the hearing)
http://www.cftc.gov/bitcoin/index.htm
Lab CTFC webpage (as referenced in the hearing)
http://www.cftc.gov/LabCFTC/Overview/index.htm
SEC Statement on Cryptocurrenies and Initial Coin Offerings
https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11
