U.S. Senate Hearing on Cryptocurrencies

On Feb. 6, Jay Clayton and Christopher Giancarlo, the chairmen of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), respectively, jointly testified before the Senate Banking Committee to discuss the regulatory oversight of cryptocurrencies.¹ Their testimony highlighted that both the SEC and the CFTC are seeking to strike the right balance in this area by trying to protect the public against manipulation and fraud while also encouraging innovation. They discussed subjects ranging from the authority of both the SEC and CFTC to oversee the cryptocurrency markets to the possibility of cryptocurrency exchange-traded funds (ETFs) being approved by the SEC.

Regulatory Oversight of the Cryptocurrency Market

Currently the SEC and the CFTC are authorized to regulate only the aspects of the cryptocurrency markets that fall under their jurisdiction. When asked by committee members about the passage of legislation that would expand the SEC’s and CFTC’s regulatory reach to explicitly include cryptocurrencies and whether additional funding would be necessary for them to oversee the cryptocurrency market, both Clayton and Giancarlo said that they would consider this further and provide their complete thoughts to the committee at a later date. Clayton stressed that the current hiring freeze limits his agency in its capacity to oversee the markets. Giancarlo noted that giving the CFTC direct authority over spot market trading (which would be needed to oversee such activity in cryptocurrencies) would constitute a “dramatic expansion” of its mission.

ICO Tokens Generally Viewed as Securities

Consistent with previous statements, Clayton expressed the view that initial coin offering (ICO) tokens should comply with securities laws (when applicable) given that “I believe every ICO I’ve seen is a security …” and that the problem is that none of them have registered with the SEC as securities offerings. Clayton also warned professionals providing advice to ICOs, “Those who engage in semantic gymnastics or elaborate re-structuring exercises in an effort to avoid having a coin be a security are squarely in the crosshairs of our enforcement provision.”

Cryptocurrency Futures Market

Giancarlo discussed the recent listing of bitcoin futures by the CME and CBOE exchanges and the self-certification approach adopted by the CFTC in connection with these products. Giancarlo indicated that this self-certification process is being undertaken by the exchanges voluntarily, with such exchanges also implementing enhanced risk management and monitoring for these products. Giancarlo also explained that the existence of a futures market in bitcoin is advantageous from a regulatory standpoint because the CFTC gains visibility into underlying markets and spot markets that it would not otherwise have. Giancarlo further indicated that due to the existence of bitcoin futures and the related trading data, the CFTC has an enhanced ability to identify fraud and manipulation in the bitcoin futures markets. 

Cryptocurrency ETFs

When Sen. Mark Warner (who expressed a good level of familiarity with the area) called for more coordination between the CFTC and the SEC and inquired why bitcoin futures were allowed while the SEC was still blocking ETFs, Clayton mentioned that certain issues regarding the custody of cryptocurrency assets, their volatility and their price discovery would have to be resolved before the SEC could approve cryptocurrency ETFs.

Conclusion

Overall, both the SEC and the CFTC struck a cautiously optimistic tone with respect to distributed ledger technology by indicating that the technology holds a lot of promise, including with respect to its role in the future of payment systems and financial markets. In this regard, Giancarlo mentioned in his opening statement the interest of young people in bitcoin (including his own children) and said that regulators should “respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one.” Nevertheless, both regulators stressed that regulatory oversight is necessary and the nature of such regulation needs further thought. 

¹ Giancarlo’s written testimony can be found here: http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo37

Clayton’s written testimony can be found here: https://www.sec.gov/news/testimony/testimony-virtual-currencies-oversight-role-us-securities-and-exchange-commission

The webcast of the hearing can be seen here: https://www.banking.senate.gov/public/index.cfm/hearings?ID=D8EC44B1-F141-4778-A042-584E0F3B9D39