SEC & CFTC are PRO BITCOIN! (US SENATE Hearing) 02.06.18



virtual currencies are meant to act as a type of money that can be traded on online exchanges for conventional currencies such as dollars we're used to purchase goods or services predominantly online it's also important to note that the technology innovation and ideas underlying these market markets present significant positive potential virtual currencies Bitcoin specifically have captured the attention of investors and speculators and computer programmers and regulators all over the world I don't know how many people imagined how quickly and broadly Bitcoin and the technology it's based on would spread it's nothing short to most of its is nothing short of remarkable to be sure it's critical for our regulators to understand innovation and technology so that markets can grow and evolve while investors and consumers are protected Wayne's a thousand percent rise last year and 60 percent decline last month makes yesterday's Dow Jones record point drop look almost like a rounding error it's clear that virtual currencies bring us into a new age but that doesn't mean we overlook the basic principles of going after the bad guys and being tough when they are repeat offenders a promising new technology referred to as distributed ledger technology or blockchain proponents of this technology assert that it will bring great efficiencies to our national and global economies including our capital markets I hope that it does and the Commission looks forward to working with market participants who seek to bring efficiencies including more effective oversight to our markets I'd like to get begin briefly with a slightly different perspective and that is as a dad I'm the father of three college-age children a senior a junior and a freshman during their high school years we tried to interest them in financial markets my wife and I set up small brokerage accounts with a few hundred dollars that they could use to buy stocks yet other than my youngest son who own shares in a video game company we haven't been able to pique their interest in the stock market I guess they're not much different than most kids their age well something changed in the last year suddenly they were all talk about Bitcoin they were asking me what I thought and should they buy it one of their older cousins who owns Bitcoin was telling them about it and they got all excited and I imagine that maybe members of this committee may have some had some similar experiences in your own families of late it strikes me that we owe it to this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response not a dismissive one it's important to remember that if there were no Bitcoin there would be no distributed ledger technology it grew out of that technology initiative and the application potential applications and by the way I'm no pie in the sky dreamer I've just report what I read and and and but the the applications range from enormous potential in financial services industry in the banking industry but right down to the way charity dollars are spent the way perhaps refugees are accounted for across the globe there was an article just this morning about the use of distributed ledger technology for two and a half billion people around the world who don't have access to banking services one of the areas that in our own area of Agriculture futures 66 million tons of American soybeans were just handled through a blockchain transaction by the dreyfus company for sale to China so bitcoin is now being used it's used in our American transportation logistics system distributed ledger technologies got an enormous potential now how it will be realized when it'll be realized one of the other challenges in it those we can't say but the potential seems extraordinary thank you mr. Clayton I agree that the potential seems very significant and just look around anywhere in our economy where verification and record-keeping has cost that is potentially reduced is an opportunity for this technology that's just one of them at night.i I hope people pursue it vigorously you do need more personnel but very specifically do you have the technologists the computer experts that unity begin to understand how these cryptocurrencies work the cryptologist and not just a sort of on a day-to-day basis sort of you know give you the temperature but look ahead and say this is the direction it's going which could have very significant deleterious effects Steve do you have anyone like that on the staff the answer to your question is we formed a cryptocurrency working group a the cyber group they've done it they've done an exceptional job getting up to speed on this in a short amount of time and identifying some of the very issues you talk about could you know in an emerging area like this could you use more horsepower always but I you you make a very good point senator on looking looking out across the International nature of this and trying to understand where it's going to land and do the do the things that people say add up that's that is a very important word just where the technology is located if you don't have on my resume you don't is it we have we have we have what I would say it's a combination of economists and technologists it's a question of you know here's what the technology is and does it make economic sense we have those people in our economics division deira and we also have some of them enforcement and they work together but you need more yeah I'll take that as a yes mr. Chinn caller same question do you have the technologists are you working together Thank You Senator Reid we've done a couple of things in 2017 to as Senator Brown said to get ahead of the curve we hire the agencies first ever chief innovation officer someone who comes with a deep background in a lot of these new financial technology innovations we also created something called lab CFTC which is our innovation hub and you asked where is it located it's actually located in New York City because so much of this innovation is taking place there we wanted to be close to these innovators to learn from them but but in terms of protecting consumers we also formed a virtual currency Enforcement Task Force it was actually that task force that recently brought three civil actions against Bitcoin fraudsters and and and as I said in my testimony there's more to come and as to the resource questions we do need more resource senator Warner I usually agree with my friend from Louisiana I think we may be on top of something that is transformational and I don't think you can separate the underlying distributed ledger or blockchain from some of these crypto assets and if we looked if we had the same rate of increase that we've the next two years that we've had the last couple years we're talking now a couple hundred billion we be at north of 20 trillion dollars caught up in this area by 2020 I remember back I was lucky enough to get into cell phone business back in the early 80s and everybody thought it was gonna be a small business and they were wrong and I got rich I think we were looking at the same kind of transformation about to take place and we are gonna have to wrap our arms around it from our point of view when it's used as a store of value then it's very much like an asset like a commodity and in fact what we hear a lot of is people buying and holding if you if you go on to the Twitter universe you'll see a phrase H odl which means hold on for dear life nice and the thinking is is that they buy it and hold it in fact I I mentioned in my opening remarks my 30 year old niece who bought Bitcoin years ago and she's an H OD L she says I'm gonna own it I don't know what's gonna come of it but I want to hang on to it and she's not a fraud stirrer or manipulation she's just a kid and and and believes in it and you know I was fascinated talking to her and I think she represents a lot of folks that think there's something in this I want to hold on to it the committee will come to order this morning we will receive testimony from SEC chairman Jay Clayton and CFTC chairman Chris Giancarlo on the growing world of virtual currencies and the oversight conducted by their two agencies and welcome gentlemen virtual currencies are meant to act as a type of money that can be traded on online exchanges for conventional currencies such as dollars we're used to purchase goods or services predominantly online additionally developers businesses and individuals are selling virtual coins or tokens through initial coin offerings also known as IC OS to raise capital over the last year many Americans have become increasingly interested in virtual currencies especially given the meteoric rise in valuation and recent fall a Bitcoin just for perspective on January 2 of last year Bitcoin broke the $1,000 barrier then peaked in December of 2017 at almost twenty thousand dollars and as of this morning is trading at roughly six thousand nine hundred dollars today the market capitalization of Bitcoin is roughly one hundred fifteen billion dollars this is an incredible rise given that in 2013 when this committee had subcommittee hearings on the topic the total value of Bitcoin and circulation was approximately five billion dollars as virtual currencies have become more widespread financial regulators and heads of financial institutions have noticed and voiced their opinions regulators and heads of industry have tried to educate investors so they make informed decisions and ensure that the markets they oversee and participate in are working appropriately for its part the SEC has put forth many statements and guideposts to help the markets and investors namely the SEC has issued investor bulletins on initial coin offerings issued an investigative report on what characteristics make an ICO a security offering issued several statements by Chairman Clayton on the issue brought enforcement actions against fraudsters and issued joint statements with the CFTC about enforcement of virtual currency related products the CFTC has also been helping inform the markets by launching a dedicated website on virtual currencies to educate investors bringing enforcement actions against individuals involved in cryptocurrency related scams issuing several statements by Chairman giancarlo and others and other commissioners on the issue and scheduling hearings on the topic much of the recent news about virtual currencies has been negative between the enforcement actions brought by your agencies the hack of the International coin check exchange and the concerns raised by various regulators and market participants there is no shortage of examples that increase investor concerns it's also important to note that the technology innovation and ideas underlying these market markets present significant positive potential these aspects underpinning virtual currencies have the ability to transform for investors the composition of and the ability to access the financial landscape thus changing and modernizing capital formation and transfer of risk technology is forward-looking and we look to our regulators to continue carrying out their mandates including investor protection as markets involvement evolve I look forward to hearing more and learning more about virtual currency oversight from our two witnesses today including what their agencies are doing to ensure appropriate disclosures and safeguards for investors Senator Brown Thank You mr. chairman Craig Bowen I welcome to Chair Clayton ensure cherish giancarlo it's good to have you both here virt virtually Bitcoin specifically you've captured the attention of investors and speculators and computer programmers and regulators all over the world I don't know how many people imagined how quickly and broadly Bitcoin and the technology it's based on would spread it's nothing short to most of us is nothing short of remarkable to be sure it's critical for our regulators to understand innovation and technology so that markets can grow and evolve while investors and consumers are protected understanding the risks of emerging technologies is no easy task but we rely on you to maintain the integrity of these new markets and minimize the risks to Americans who want to participate in them the volatility of that coin has been also remarkable davai defying attempts to think of it as a traditional currency bitcoins a thousand percent rise last year and 60 percent decline last month makes yesterday's Dow Jones record point drop look almost like a rounding error but that growth has shown us the intersection of ingenuity and too often greed sometimes it appears that scam artists and hackers may understand more about the technology than most than most market participants that should discuss and concern all of us I hope our witnesses today help us understand the evolution of the markets related to virtual currencies raise awareness of the many threats involved and identify the regulatory gaps each of you has made several public statements recently explaining the threats to investor protection and the potential to abuse is for abuses in virtual currency markets I understand neither the SEC nor the CFTC has sufficient authority to police all aspects of virtual currencies but you must make the most of the authority you have as you both noted in The Wall Street Journal that coin mania has some analogies to the dot-com bubble of the late 90s I hope there are lessons from that era you draw and to do your job to protect investors in addition to the investment risk virtual currency may be used to fund illicit activity especially outside the United States I know the regulatory framework in other countries many other countries is still in development I'm pleased that the US and fence and in particular has been a leader but we can do more I hope the Chairman agrees with me the committee needs to look closely at the gaps in regulation in this area and to review our agency's ability to get ahead of the curve as you begin to adapt to the unique enforcement of regulatory demands posed by virtual currencies I call them both of you not to forget in your day jobs this chair Clayton and I talked the other day not to forget your day jobs to pursue and punish misconduct more traditional misconduct but very serious misconduct wherever it might appear that means Main Street it also means Wall Street I'm concerned it's business as usual when it comes to violations by the big banks just last week the CFTC impose penalties on three big banks for market manipulation good but then decided those firms deserve waivers from bad actor provisions under the securities law that might make sense if this were an isolated incident but the banks in question of something like sixty eight violations over the last ten years so it's very very serious too often we see big banks pay fines and move right along with little contrition and frankly no serious punishment recidivist violators won't stop breaking the laws if your agency's service sanctuaries I've raised the issue of waivers over the years I'm disappointed in your unwillingness to pursue every avenue available it's clear that virtual currencies bring us into a new age but that doesn't mean we overlook the basic principles of going after the bad guys and being tough when their repeat offenders Thank You mr. Thank You senator Brown now we will turn to the testimony of our witnesses and first today we will receive testimony from the Honorable Jay Clayton now we will turn to the testimony of our witnesses and first today we will receive testimony from the Honorable Jay Clayton chairman of the US Securities and Exchange Commission following him we will then hear from the Honorable Chris giancarlo chairman of the US Commodity Futures Trading Commission and gentlemen again we welcome both of you here appreciate you coming to share your knowledge and understanding on this issue with us and chairman Clayton you may proceed Thank You chairman Crapo ranking member Brown distinguished senators of the committee thank you for the opportunity to testify before you today on the important topic of cryptocurrencies initial coin offerings and related trading activities the total market capitalization of all crypto currencies was estimated at 700 billion dollars earlier this year in 2017 icos initial coin offerings raised nearly 4 billion these markets are local national and international today I will tempt to level-set where we stand from a market regulatory perspective my remarks may be viewed by some as overly simplistic they reflect how I present these issues to Main Street investors for ease of analysis I break this space into three categories first a promising new technology referred to as distributed ledger technology or blockchain proponents of this technology assert that it will bring great efficiencies to our national and global economies including our capital markets I hope that it does and the Commission looks forward to working with market participants who seek to bring efficiencies including more effective oversight to our markets the second and third categories are crypto currencies and IC OS which are subsets of the products seeking to take advantage of the commercial opportunities presented by blockchain technology one is promoted to be a replacement for dollars the other is like a stock offering crypto currencies some of the more widely known crypto currencies were introduced as substitutes for traditional currencies such as the US dollar or the euro those who promote these so called virtual currencies have asserted that they will make it easier and cheaper to buy and sell goods particularly across borders they have asserted that transaction and verification fees and costs will be eliminated or reduced to date these assertions have proved elusive in many areas icos from what I've seen initial coin offerings are securities offerings they are interesting companies much like stocks and bonds under a new label promoters use the term coin based on the fact that the security being offered is represented by a digital entry or coin on an electronic ledger as compared with a stock certificate and a related entry in a company's records you can call it a coin but if it functions out of security it is a security also importantly an ICO have may have nothing to do with distributed ledger technology beyond the coin itself buying an IC o—- does not mean you are investing in blockchain related ventures there are many problems with the way cryptocurrency and IC o—- markets are operating but two are worth particular attention first the markets for these products have substantially less oversight than are additional securities markets to be blood if you are trading cryptocurrencies on a platform that looks like a Stock Exchange do not take any comfort from that look our stock exchanges have extensive rule sets and they are required to conduct surveillance also broker dealers who facilitate securities trading have capital and conduct requirements these requirements and others without a doubt are necessary to protect those markets and our investors second many icos are being conducted illegally their promoters and other participants are not following our securities laws some say this is because the law is not clear I do not buy that for a moment the analysis is simple are you offering a security if so you have a choice follow our private placement rules or conduct a public offering registered with the SEC a note for professionals in these markets those who engage in semantic gymnastics are elaborate structuring exercises in an effort to avoid having a coin B as security are squarely within the crosshairs of our Enforcement Division so what are we doing about these problems I look forward to discussing with you that question in more detail but will can't we'll start with a comment on jurisdiction and a comment on enforcement we the SEC and the CFTC do not have direct jurisdiction over the popular markets that trade true cryptocurrencies this is not an oversight it is the result of a new product and market the traditional currency markets did not need direct regulation by market regulators such as the SEC or the CFTC they are sovereign backed and regulated with the long history cryptocurrencies on the other hand have no sovereign backing or oversight and again to be blunt our currently functioning as assets for trading and investment much more than as mediums for exchange please do not view this description as a request for expanded SEC jurisdiction if asked we will work with other regulators to evaluate and address this issue including our friends at the Fed our friends at the CFTC and the state regulators they all have a keen interest in this market I'll close I've now my time is short to the extent that digital assets like icos are securities and I believe every ICO I have seen is a security we have jurisdiction and our federal securities laws apply we will enforce these laws many of these laws also include private rights of action we are working with the DOJ and other regulators to enforce these laws thank you for your opportunity to testify before you today thanks for the opportunity to testify before you today and I stand ready to work with Congress on these issues and look forward to your questions Thank You chairman Clayton chairman giancarlo Thank You chairman Crapo ranking member Brown and distinguished members of the committee I've submitted a written statement for the record that details the CFTC's work and authority over virtual currencies but with your permission I'd like to get begin briefly with a slightly different perspective and that is as a dad I'm the father of three college-age children a senior a junior and a freshman during their high school years we tried to interest them in financial markets my wife and I set up small brokerage accounts with a few hundred dollars that they could use to buy stocks yet other than my youngest son who own shares in a video game company we haven't been able to pique their interest in the stock market I guess they're not much different than most kids their age well something changed in the last year suddenly they were all talking about Bitcoin they were asking me what I thought and should they buy it one of their older cousins who owns Bitcoin was telling them about it and they got all excited and I imagine that maybe members of this committee may have some had some similar experiences in your own families of late it strikes me that we owe it to this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response not a dismissive one and yet we must crack down hard on those who try to abuse their enthusiasm with fraud and manipulation I mean we must thoroughly educate ourselves in the public about this new innovation and we must make good policy choices and put in place sound regulatory framework to reduce risks for consumers putting my CFTC hat back on I suggest that the right regulatory response to virtual currencies has at least several elements and the first is to learn everything we can at the CFTC we've launched a new initiative called lab CFTC to engage with these innovators and inform the agency about virtual currencies and other financial technology next is to put things in perspective as of 8 a.m. this morning the total value of all outstanding Bitcoin is about a hundred and thirteen billion dollars we have a slightly different figure than you have a chairman but close but the point is that that's less than the market cap of one large publicly traded company McDonald's the total value of all virtual currency in the world is around three hundred and thirteen billion in comparison global money supply is around seven point six trillion and because bitcoin is sometimes compared to gold as an investment asset the value of all the gold in the world is around eight trillion which Dwarfs the size of the virtual currency market the next task is to tell the public what we learn and educate consumers there's a lot of noise around virtual currency and regulators must help set the record straight the CFTC has produced a large amount of consumer education materials and virtual currencies including written statements podcasts webinars and a dedicated Bitcoin website we've even scheduled visits to libraries and briefings for seniors we've never conducted this much outreach for any other financial product another element is regulatory coordination because no one agency has direct authority over virtual currencies we have to work together that includes us the SEC the Fed the IRS the Treasury's FinCEN Network and even state banking officials and the next element is to exercise our legal authority over derivatives on virtual currencies while clarifying our statutory limitations to be clear the CFTC does not regulate the does a virtual currency trading platforms here and abroad we cannot require them to meet requirements like trade reporting and market surveillance standards for conduct capital requirements or even cyber protections or platform safeguards that these are all standard regulations in the futures markets we oversee yet through our authority over commodity derivative markets we do have enforcement power over spot coin markets and with newly launched Bitcoin futures the CFTC can now obtain trading data and analyze it for fraud and manipulation in five underlying spot markets and that leads to the final element and that is tough enforcement led by the CFTC's virtual currency Enforcement Task Force we've launched several civil actions over the past few weeks cracking down on fraudsters and manipulators and more will follow in closing I want to quote something that chairman Clayton and I wrote recently in the Wall Street Journal these markets are new evolving and international they require us to be nimble and forward-looking and coordinated with state federal and international colleagues and engage with important stakeholders including Congress I'm glad to be with you today and I hope my kids are listening thank you very much Thank You chairman Gian Carlo and I'll begin the questioning first I will say I've had those dinner conversations with my own children and you're right this is an incredibly interesting but growing new area of financial challenge particularly among our these my children and yours both of you have said in one way or another that neither of you neither of your agencies have complete jurisdiction over cryptocurrencies the question I have is whether you have sufficient jurisdiction and I'd like both of you to address that question should Congress address revising and refining our financial law so that one agency or a group of agencies have complete jurisdiction or if you look at the jurisdiction of all agencies today do we have the sufficient jurisdiction in place today chairman Clayton well thank you and in my position you're always cautious about speaking for other agencies so I I thank you understood for saying that we should all come to this Verret to be very direct we should all come together the federal banking regulators the CFTC the SEC there are there are states involved as well and have a coordinated plan for dealing with the virtual currency trading market I think our Main Street investors look at these virtual virtual currency trading platforms and assume that they are regulated in the same way that a Stock Exchange is regulated and as I said it's far from that and I think we should address that issue so I am i hearing you say that you don't think we need to have additional legislative authorities I think we may I think we may so first you should get together and tell us what you can and can't do and then advise us I think that's a very good way to put it senator chairman giancarlo I think that's exactly right I think the first step is to recognize where the gap is so there is as we both said in different ways the that's what we call the spot market for Bitcoin is not a regulated marketplace now for us at the CFTC we're familiar with that because we generally don't have regulatory supervision over the spot markets for which derivatives apply that is a long-standing basis we regulate derivative markets the underlying markets we surveil and we will take enforcement action for fraud and manipulation but we don't we don't have the ability to set the standards in those markets and that's what we have today in Bitcoin and unless it's an ICO then as chairman Clayton described he also doesn't have the jurisdiction so there is that gap and I think the starting point for an informed conversation is there is that now there are other elements to it there are other agencies that come to bear on this so state regulators there's a patchwork of state regulation the nation some states have been very assertive in this area other states less so and some states have nothing FinCEN as you referenced has also been active in the area in terms of anti money money laundering and and know your customer requirements so there are there is a patchwork here but there's not a comprehensive structure and that's something that I think is a it's a policy discussion an important one to be had alright thank you and and you've led to my next question much of the activity in the virtual currency markets is cross-border and international and so that raises obviously the question of what challenges does that present and what is the appropriate role for Vincent and that both of you I'd like to respond I only have about a minute left so take about 30 seconds each if you would I will try to be quick the international nature of this market is why a patchwork is probably not sufficient if it's going to continue to develop as a as a significant market and one that our our Main Street investors access from Vincennes perspective there there are reports that we all have heard that this currency these cryptocurrencies are used for illicit activity I think Vincent has been stepping up in that regard and I encourage them to continue to do so and this challenge of global markets is a challenge that I think we face now in many regards in the 21st century with the dawn of the internet markets have become truly global and not just in virtual currencies but so many things and it does become a challenge as we think about regulation we certainly have had that challenge working with overseas regulators in the area of derivatives regulation as a result of the dodd-frank act the challenge of bringing these regulations together in a comprehensive whole is is really a tremendous challenge for all of us so in this area it requires a lot of new thinking well thank you I appreciate your remarks from both of you on these issues and I would encourage you to form that workgroup get together between yourselves the state regulators other appropriate federal regulators and evaluate exactly what our regulatory structures should look like in Amer to deal with this and let us know your thoughts your further thoughts on that I'd appreciate that thank you senator Brown you mr. chairman i Sharon Clayton again nice to see you the last year initial coin offerings raised about four billion dollars globally you've testified that SEC is focused on policing these transaction to protect investors how much of that four billion dollars was was raised in the US it's not clear it's hard to get it it's hard to get a number on that because this is this has been conducted on unregulated basis but I imagine I imagine senator a significant enough portion of where we should be paying attention and my understanding is during the last few months the SEC is taken for enforcement actions targeting coin offers for serious violations of law I mean that speaks volumes about the work that the challenges in front of you the chairman in response to the chairs question you both talked leading with you sure Clayton about agencies working together and the importance of that on on this and other issues your testimony highlights cooperation between the SEC and CFTC chair clean regulating Bitcoin other virtual currencies it doesn't mention any cooperation with the Consumer Financial Protection Bureau hundreds of consumers have filed complaints with the bureau about virtual currencies how have you been coordinating your work specifically on this but in other areas too with CFPB on this area largely through the F sake at the eff sock I believe I have made it very clear my views in this area and that this is an area that we should all be on the lookout for on the lookout with regard to from each of our perspectives the CFPB is a member of F sock and they have heard my comments there on a on an enforcement perspective we're in the securities area I don't we don't see the CFPB on the securities side of this I'm not aware of any direct coordination on a on a particular enforcement action but I could check on that in the past few months Joyce a bank credit Swiss UBS HSBC have been fined over 300 million dollars by other regulators for various forms of market manipulation but SEC has been quiet under your watch one study by Georgetown Law Professor found that SEC as quote virtually stopped enforcement actions against large entities often mentioned often referred to as Wall Street firms huh how do we have confidence mr. chairman and that the SEC is willing to hold Wall Street accountable when the trend and penalties and actions is going the wrong way yeah I am I actually saw that I saw that report I probably doesn't come as a surprise to you that someone sent it to me I found it I found it annoying to be honest because it didn't reflect the fact that the gestation period for the cases we bring is roughly 22 to 24 months so any type of statistics you know necessarily have a latency period to them our Enforcement Division put out a report that talks about the numbers in a in a comprehensive way I'm happy with that report I'm also confident that the people who are in our enforcement division and leading it many of them former federal prosecutors two of them heads of the Securities task force in the Southern District of New York former heads are pursuing our securities laws vigorously I have I have no doubt they come to work every day and they have my full confidence well I hear you say that and I believe I believe you when you say that I remember the last SEC and it wasn't you the last SEC under a Republican president how they were asleep it's a switch so as the chair of the richer's the governor the Richmond Federal Reserve used to tell me watch us and let us know you're watching us but I'm further troubled by a statement by one of the FCC's enforcement code directors last fall that SEC might lose a hundred of its enforcement staff by not replacing those who leave compared to 2016 figures this would reflect a 7% reduction in force and head count so how are you going to stay on top of developments and virtual currencies and the other enforcement all the other areas we just talked about and in to be able to fight traditional misconduct how are you going to do that when you're not replacing the if in fact that's the case that is senator Brown personnel is my biggest challenge at the moment and if we have we have a we have a hiring freeze as a result of natural increases in costs a hiring freeze and people you know retiring or taking other jobs it reduces the size of the workforce at the SEC I could use more people and enforcement I could use more people in trading and markets those are the two areas where I think the American people would get the greatest return for additional bodies so when you come in front of us and I appreciate your candor when you come in front of us and tell us that you're having trouble filling those jobs and that no trouble I'm not I just can't well ok that's trouble that way all right because of the freeze isn't that message to those who those who want to game the system and those who wanted to fraud the system isn't the message is the SEC is is not the cop on the beat that even the new chair wants it to be do I do I want more bodies to do more yes as the message that somehow we're you know asleep at the switch absolutely not in with your budget that's coming out our understanding is the budget did you know I hope the freeze is lifted I hope the budget is enough and I hope that you will speak to us and and ask particularly people on the other side of the aisle for the dollars you need and the the flexibility you need to put those cops on the beat I I think I've I think I've been very straight about incremental amount of money and where I think value can be at it Thank You senator Shelby thank you Thank You mr. chairman chairman Clayton you and chairman Giancarlo you're chairman of two powerful regulatory bodies but you have different jurisdictions anything that smacks of security comes somewhere in your range it not dealing with a commodity something that could be deemed a commodity clearly comes in your range the Federal Reserve is the biggest bank regulator we have and also the thief and treasurer is involved in this how are you going to put together a task force to you can you do it on your own through the administration to deal with the crypto currencies because you got the Fed you got the Treasury you got the commodities you got securities perhaps some others that we hadn't thought about before this gets out of control somewhere in the world let me start yes sir by recognizing the Treasury secretary he he has brought us together I was good the CFTC the SEC and Representatives of the Federal Reserve to talk about this because senator you're exactly right that the the funny thing about these crypto currencies is they only work if they're integrated with they only work for their purported purpose if they're integrated with the financial system and so therefore it necessarily touches on all of our regulation but just reinforced that the Treasury Secretary has been out on front on this is formed a virtual currency working group of ourselves the SEC the Fed and FinCEN we've had a number of preliminary conversations and work streams developed I've had a number of bilateral conversations with the Treasury secretary on virtual currencies and we are going to be coordinating our various responses it's begun with just some broad conversations establishing our different jurisdictions so that we're all clear as to what we're doing but also what we're not doing where the gaps are do you need additional legislation in this area to both of you or can you think you can work it a task force together to get your arms around this without that I can't give you a definitive answer to that question because we should work together but senator we we we may be back with with our friends from Treasury and the to ask for additional legislation but you know we live in a virtual world we go the doctor and they give you a virtual examination you know you we go here and subvert rule and this is was not my world old man start out pencil and paper and school as you can imagine but in my day but at the same time this currency is crypto currencies they have they lack intrinsic value it seems to me they're lack liquidity sure people have probably made a lot of money going up and a lot of them made money or lost money going down but I don't know where the bottom is if if the bottom was ever reached in as opposed to a sovereign issued currency you have a you disagree no senator I don't know where the natural equilibrium point is in this but I will tell you there are some economists who posit that there is a relationship between Bitcoin value and the the the the difficulty or the cost of mining these the which is a process of electronically producing these and that there are some charts I've seen that have plotted that correlation that seemed to be readily correlated until last summer when the price broke free of that correlation and that they came back into correlation late at the end of the year last year now I'm not an economist I I find those things fascinating but I'm not an expert at it but the point the economists are making is that there is some sort of floor that the the level said is not zero that there is some floor there tied into the cost of mining in Bitcoin and I'm not endorsing that point of view I'm just sharing that with you chairman Clayton do you have any comment yeah look I there are a lot of smart people who think there's something to the the value of the cryptocurrency and the international exchange and I'm not I'm not seeing those benefits manifesting themselves in the marketplace yet and from the perspective look I look at this as suppressive of protecting Main Street investors they should understand that how do you put a value on cryptocurrency does the market put a value on it or does it go straight up and then straight down what well that's you know what's something worth it's what somebody's willing to pay you for it but in our world the securities world you know there are rules that dictate how much you have to tell somebody about what it is they're selling them but part of your mandate are you their security exchanges to protect the investor is that right that's right and the chairman of the Commodity Futures Trading he's he's seen obviously commodities just go wild at times and yours your mandate is to watch the commodities right market integrity is generally perceived to be our core mandate you also mentioned personnel you know you need personnel there's a hiring freeze oh and we talked the other day about this ghost gets in the realm of appropriations and so forth I'm hoping that we will give you every tool you need to do your job and to hire the people that you need to execute that thank you very much thank you Senator Reid thank very much thank you gentlemen for your testimony and following on the questions of Senator Brown and Senator Shelby you do need more personnel but very specifically do you have the technologists the computer experts that you begin to understand how these cryptocurrencies work the cryptologist and not just to sort of on a day to day basis sort of you know give you the temperature but look ahead and say this is the direction it's going which could have very significant deleterious effects the do you have anyone like that on the staff the answer to your question is we formed a cryptocurrency working group a the cyber group they've done it they've done an exceptional job getting up to speed on this in a short amount of time and identifying some of the very issues you talk about could you know in an emerging area like this could you use more horsepower always I but I you you make a very good point senator on looking looking out across the International nature of this and trying to understand where it's going to land and do that do the things that people say add up that's that is a very important word just where the technology is located if you don't have them I presume you down is it we have we have we have what I would say it's a combination of economists and technologists it's a question of you know here's what the technology is and does it make economic sense we have those people in our economics division dhira and we also have some of them enforcement and they work together but you need more yeah I'll take that as yes mr. Chinn caller same question do you have the technologists are you working together Thank You Senator Reid we've done a couple of things in 2017 to as Senator Brown said to get ahead of the curve we hire the agency's first ever chief innovation officer someone who comes with a deep background in a lot of these new financial technology innovations we also created something called labs CFTC which is our innovation hub and you asked where is it located it's actually located in New York City because so much of this innovation is taking place there we wanted to be close to these innovators to learn from them but but in terms of protecting consumers we also formed a virtual currency Enforcement Task Force it was actually that Task Force that recently brought three civil actions against Bitcoin fraudsters and and and as I said in my testimony there's more to come and as to the resource questions we do need more resource I used our bypass Authority last year to put forward a budget request 30 percent over our budget we had been flat funded for three years and we do need additional resources and built in those resources or additional resources for FinTech generally and in cyber and and cryptocurrencies specifically let me just elaborate a bit we continue refer to Bitcoin that is just one cryptocurrency they seem to me and proliferating that every day there's a new variety of cryptocurrency from how not fortunate some of them based on the same Bitcoin technology or processes but just the sheer expansion of these cryptocurrencies is an issue one and then two because my time is run I have one other unrelated questions Jim Clayton is are you tracking all these different daily emerging currencies one and two is again it goes back to my sort of step back question is someone looking long-term at the systemic effects you know where are we going to be this is eerily reminiscent of the late 90s and derivatives which were nominally small parts of the market that were esoteric to etc and then of course ten years later exploded so why don't you stop with mr. Jun Carlin the Chairman and I'll finish up with the Chairman thank you very much so your episode is one of many however of the many there's really you know a handful that have gotten a significant traction and there and so that's important though for listeners to know because so many of these are fraudulent as you said we went after one it just mentioned it because I think it's interesting called my big coin which became known as my big con by people that were defrauded by it it was people that really were taking it was a Ponzi scheme they were taking consumers money and use it to buy houses and and and furniture and jewelry and we went after them and went after them are hard and we will continue to do that in terms of systemic risk right now this is still a relatively small market just by ratio but as you say we have to watch it and watch it carefully mr. yeah so as I mentioned the SEC doesn't have direct jurisdiction over cryptocurrency but we have had to watch it because of course they're integrated with the markets that we do over something and your to your question of does 10 make sense or 15 or 20 makes sense you know I have a hard time getting my head around that because if it's an efficient if it's efficient medium of exchange 15 of them fluctuating different places probably doesn't make a lot of sense to me but you know that's that's right on systemic look there's there's I don't I agree with I agree with chairman Joe Carlo but if people are getting ripped off that presents reputational risks they can have systemic effects senator rounds thank Thank You mr. chairman gentleman I'm just curious I back to where I learned with a pen and pencil to begin with as well and we did not have a quill at that time but we what we did have number to lead and as I get into this and learn more about this thing it's fascinating to see how quickly things are moving and yet everything that we talked about seems to translate back into dollars and cents yet that has not changed until now and suddenly we're talking about a new type of exchange and it sounds almost like bartering to me and it's a bartering in which could avoid the determination of a value in dollars and cents which brings up the question of how do you tax it if you need to how do you recognize income but also in this particular case I've I noticed both of you identified that you have additional or you have existing resources and regulatory oversight capabilities that you are utilizing today and while I question whether or not there are seams that have to be filled it would appear that some basics that maybe a lot of us don't quite understand still have to be answered and I just want to just start out because I think mr. Clayton he started with this discussion with regard to the the um the issue of whether or not you had control over Nico and the fact that if they were issuing in this particular case Bitcoin or the opportunity to market it you had identified it as a stock or at least a value of something what is in this particular case that thread that you utilized once again and can you delve into that little bit more about how your agency responds to the regulatory mean in this particular case what is the specific item that you look at as being an item which is subject to your review a security in what the definition of a security is broad and it includes I'm gonna I'm trying I'm gonna not use the technical terms there's Supreme Court cases and things but it includes when if you were offering me a security or offering me something a coin and I give you money and the purpose of me giving you that money is to profit from your efforts going forward so if I give you if I give you money you give me a coin and you say I'm gonna I'm gonna take the money and I'm gonna grow a business and that's gonna increase the value of that coin and by the way chairman Clayton you can trade it to somebody else so you may be able to get value for it tomorrow in fact you probably will get value for it tomorrow by now so you can get more value for it in a few days that's a security so commodity wise if we're looking at trading commodities you would not have an interest in the subject of investigating or reviewing whether or not the trading of an Ag commodity that was something and yet when we talked about the CFTC we're talking about a different story where commodities most certainly are an item of interest to you is Bitcoin or are these as currently being traded are they a commodity or are they a security or are they both what's so challenging about Bitcoin is it has characteristics of multiple different things one of the phrases that's often used is that Bitcoin is a medium of exchange a store of value or a means of account where those three things have different connotations to them if it's a means of a medium of exchange then it's like a currency like instrument and yet as we've seen a number of means of exchanges haven't been closed a Bitcoin there was recently a Bitcoin conference that stopped accepting Bitcoin from registrants because they couldn't process the payments so but yet it's still spoken of as perhaps a means of account when and in that case it has implications from the Fed and currency from our point of view when it's used as a store of value then it's very much like an asset like a commodity and in fact what we hear a lot of is people buying and holding if you if you go on to the Twitter universe you'll see a phrase H odl which means hold on for dear life and the thinking is is that they buy it and hold it in fact I mentioned in my opening remarks my 30 year old niece who bought Bitcoin years ago and she's an h o dl she says I'm gonna own it I don't know what's gonna come of it but I want to hang on to it and she's not a fraudster or manipulation she's just a kid and and and believes in it and you know I was fascinated talking to her and I think she represents a lot of folks that think there's something in this I want to hold on to it and so in that regard it's a from our point of view it's a commodity and if there's a derivative on that we regulate it the problem is in the cash market we don't have regulatory authority means we can't set the standards but what we will do and we are doing is looking for fraud and manipulation and we intend to be very aggressive if nothing else so that people like my niece can have some security that there's not fraudsters and manipulators out there and there are a lot too many far too many of them I think you must I want to go change the subject a little bit back to Bitcoin here or to crypto currencies you know we see in IPOs and in tax jurisdictional arbitrage do you guys see that today in this developing cryptocurrency and also an icy use I cos chairman Clayton you want to start with a well yeah by the way who pays for frivolous class-action lawsuits who pays for that shareholders yeah and investors I would argue customers employees all of the above right yeah would you answer that question for me please so regulatory arbitrage is one of many issues that I see in this market to be to be frank you know tax loss and things like that are there of course they are because it's record-keeping it's difficult to trace so we're the kind of South Korea and China are the ones that predominantly play in this world you said before most of the current most of the current investment comes in the u.s. I'm not sure I don't know if we all know enough yet to know that right South Korea and China are really heavily invested in fact China now or South Korea has a new rule that says you have to use real name bank accounts in order to trade in this yeah and those are the kinds of things I'm asking for is that there's there arbitrage really going on around the world here there there is certainly regulatory arbitrage but what you're making a great point because this was this was a largely unregulated space across the world and now what you're seeing is each country taking a perspective of you action etc which also goes to how functional is this asset class and how and how would we regulate it and how does it work um there's a lot happening that is beyond the kind of understanding of your average investor how how would you know how can we into agencies here I understand there's interaction between all of our regulatory agencies where there's also another axis here that you have to coordinating that's the other country regulators as well correct so I'm asking both of you what are you seeing and what what are you anticipating we need to do to make sure either legislatively or rulemaking to combat that Chris do you want me jump in I just identified two areas of arbitrage proceeding one is regulatory which I want to come to but actually we're also seeing price arbitrage as well there's something known as the kimchi kimchi premium for Bitcoin traded in South Korea because there's so much interest there that it drives the price up there slightly higher so price arbitrage but you know in the early days of many markets every American city had a cotton exchange and the prices were different there before you developed a national market so here we have different regional and international markets and perhaps as this market matures if it matures ooh a singular price may develop in terms of regulation there's I unfortunately I think that some time ago perhaps middle of last year there was this perception that Bitcoin was off the regulatory grid and one of the things that the Chairman Clayton and I have been working so hard to do is to dispute that notion now we are limited in our regulatory authority to set regulatory standards on these underlying platforms but when it comes to enforcement when it comes to icos we're using our full authority to drive the message and other countries are doing that as well and we've had frequent conversations I spoke recently or have communication recently with the head of the Japan financial service agency about some things that were going on there Jake Layton spoke very eloquently at the FSB meeting recently in Basel Switzerland we are beginning our communication with other regulators and I think the message is getting through that this is not off the grid and I think part of that is now you're seeing it in the Bitcoin price as the word is getting out that we will go after misconduct I think you're starting to see that reflect in the price and I think that's an important step well what little time we have left I'd like both of you to respond to the pump-and-dump efforts that are underway right now you see this beginning to develop and can you I know you're both involved in this can you both address what your agencies are doing to combat that Senator Pru this is this is one of the things that I'm worried that investors don't understand which is when you have when you have an unregulated exchange the ability to manipulate prices right goes up significantly and you know just a few coordinated sales can change a price we write email for a fraudulent email I've mentioned we formed this virtual currency Enforcement Task Force I mean we've got some really good people on this and we brought three actions in the last few weeks I said there are more to come there are more to come we are digging deep and learning a lot and seeing a lot and I don't want to get ahead of that other than to say that we are we are working the beat hard right and you have jurisdictional right to do that right we have enforcement jurisdiction yes we do great Thank You mr. chairman senator Donnelly Thank You mr. chairman thanks to both the witnesses and this would be to both of you now that the SEC and the CFTC have asserted jurisdiction and warned the public of the risks posed by virtual currency operators what other ways can your agencies prevent retail investors from falling victim to fraud and manipulation I'm happy to take this question senator earlier senator ranking member Brown mentioned what are we doing with the CFPB we've actually formed a partnership with the CFPB to consumer education in the area Bitcoin one of the things I've learned recently is that America's libraries are a place where a lot of people go and research Bitcoin in fact they use the library computers one of the most frequently searched items from a library computer is a Bitcoin and so we're teaming up with CFPB to go out to America's libraries to educate librarians who often get some of the questions asked to be able to direct library patrons to use our resources our Bitcoin website and other resources so we are really getting very creative in the area of consumer education I've mentioned we've got several podcasts on this subject which are with thousands of downloads we are working as hard as we've ever where we've never done as much work on consumer education as we've done with virtual currency we also have an office of investor education that has been engaged with it with a number of groups on this and I think they've done a terrific job getting the word out in terms of like getting the word out though there are financial intermediaries and other actors that we're counting on to act responsibly in this area okay well let me ask you a follow up and it goes to the point you just made about the libraries and others are you concerned that retail investors will remain vulnerable to fraudulent and manipulative online solicitations that are sometimes more difficult for you guys to pick up in the broad range of marketplaces seniors seem to be that the choice the prey of choice for fraudsters and manipulators whether it's in precious metals whether it's in foreign exchange whether it's in a whole range of products we see and we prosecute continuously fraudsters would seek to prey on either the less sophisticated seniors who maybe have don't quite have the retirement nest egg that they believe they need and and fall prey to get rich quick schemes or schemes that say we'll guarantee 100% returns and all kinds of nonsense like that and it's a it's a big part of our enforcement effort at the age let me ask you this and this goes to perspective and into hopes and dreams but what warnings would you give there is an article in The Washington Post yesterday and it was about good hardworking Americans people who have worked really hard and want to have a pension was about a group of our friends and neighbors from Kentucky and the title the article was Bitcoin as my potential pension what would you what would you say to them to help protect them from winding up in a situation a few years from now where it didn't quite work out the way they were hoping it's it's such a troubling developments that are unquestionably which is why we're putting out so much so much materials but what I would say them is it's the same advice I'd give my children if it sounds too good to be true it is if they're promising ridiculous returns they're ridiculous if if if you if you are you going to give them money you'd better be prepared to lose it yeah I agree with everything that chairman G Carlos said I also would say save this to them which is there are things like disruptive technologies that come along but they shouldn't disrupt the way you look at markets for us or the way you look at investing but pumping all of your money into a disruptive technology has a very high likelihood of not working out for you as an individual when we see disruptive technologies come along you know there are there will be winners but there will be many losers that's the way it works let me ask you one other question how can both of you best assist law enforcement and federal authorities to ensure these virtual currencies are not used by terrorist groups or nations like North Korea to evade sanctions so we work very closely with law enforcement we recently commenced a program with the FBI where we actually have FBI agents on secondment with our agency in order to look at this at the end of the day the use of these cash markets for that it's going to require cooperation amongst multiple agencies especially with FinCEN who often because of their anti money laundering operation may see some of these issues before we can and then bring our expertise to bear and coordinate with our law enforcement agencies same here I would supplement that with we also have a dark web working group that tries to monitor what's going on in that space in order to identify these types of issues Thank You mr. chair senator Kennedy Thank You mr. chairman welcome gentlemen I think you're doing a terrific job chairman Giancarlo when is the last time you bought a stock exchange traded fund mutual fund or a bond so I hold generally traded funds when's the last time you bought one probably before I pretty much put my investing year ago well probably before I started at the Commission who years ago yes okay when you bought it would you buy equity or bond index funds most index funds okay when you bought it did you sit down and read the prospectus for the index fund well you know I'm not cover Davis as a lawyer I'm not supposed to say that I probably didn't read it cover-to-cover but I will confess that I didn't read it cover-to-cover how many investors do you think do that don't read it I think most okay so what's the point I mean we're talking about all the dangers and the risks of crypto currencies like Bitcoin I'm putting I'm putting aside the shyster fraud issue I mean what's the point of all this over disclosure if nobody's reading it well and why do we want to do the same thing with Bitcoin I'll say historically it's been one of the foundational principles of our securities laws that adequacy of disclosure full disclosure is one of the building blocks I will tell you having been in business that most business people will tell you it's they study the prospectus only to see what they can sue on if they need to sue on something if something goes wrong I mean I think you see where I'm going I'm gonna ask you both a philosophical question in a second about how far you think we ought to go to protect people from themselves but I don't think the disclosure we have right now works I think it it's good for the lawyers and it's good for the financial advisors but I think I think we over disclose and and I don't I think you can I'll bet you each hat you each have a smart lawyer on your staff you could go to them and say write me a good disclosure for Bitcoin and you would get it back and look at it and then pick 50 names from the Washington DC phonebook and to ask them to come in and say read this and tell me if it makes sense to you I mean what's the point how far do you think well to go here in terms of cryptocurrency but I'm separating this from the blockchain technology I mean China outlawed a lot it so I think South Korea is – what are you suggesting that we just go after the shysters and fully disclose I mean is that what you think we ought to do well secretary yeah Sherman said I think that is exactly the question we're here – we're here to pose and take forward which is you know what is the right way to deal with this new technology I'm I'm not as just a person watching it I'm not satisfied when I see people thinking that these trading platforms of crypto currencies have the same kind of protections that a stock exchange would and I'm very unhappy that people are conducting I SEOs like public offerings of stock when they should know that they should be following the private placement rules unless they're registering with us those two things make me unhappy we figure out how to deal with them is is why we're here I I agree with you that we should be careful not to go too far but for me in the just to be clear for me in this ico space it's pretty clear that when people are violating our are our securities laws work pretty well disclosure can be improved it can really be a bruit well I make this suggestion because I don't want to go over last time I I I asked questions I got a little carried away I think I went over three minutes and a ranking member put me on double-secret probation so I'm not gonna do that today like I have the power to do that he does I'm I just the disclosure I mean you can extend the disclosure we have now to Bitcoin and you haven't done anything I'm not suggesting we shouldn't have disclosure but you got to have disclosure that that that makes sense and helps people other than the lawyers I agree senator senator Warner I usually agree with my friend from Louisiana I think we may be on top of something that is transformational and I don't think you can separate the underlying distributed ledger or blockchain from some of these crypto assets and if we looked if we had the same rate of increase that we've the next two years that we've had the last couple years where we're talking now a couple hundred billion we be at north of twenty trillion dollars caught up in this area by 2020 and I just I think you I remember back I was lucky enough to get into cell phone business back in the early 80s and everybody thought it was gonna be a small business and they were wrong and I got rich I think we're looking at the same kind of transformation about to take place and we are gonna have to wrap our arms around we've talked about some of the consumer protection issues but we've got money laundering issues we've got cyber security issues a third of the the Bitcoin exchanges have been cyber half between 2009 and 2015 I'm not exactly sure what the right regime we ought to be but I would argue that while I commend the Treasury secretary for putting a working together I would argue this is the reason we created F sock in the first place that this rises potentially to the level of a systemically relevant event and I'd just be curious whether the you believe and I commend what both of you are trying to do but I whether this ought to elevate to an F sock level analysis so sir I I had the same question you had which is there's a there's a big rise here if it does keep going so is this a systemic issue which is one of the reasons we brought it up at F sock talk to better than F sock I again commend the Treasury Secretary for forming the working group I want to go back to separate it i cos and and crypto currencies i cos that are securities offerings we should regulate them like we regulate securities offerings end of story wanna make sure because i got a couple more points you thank you senator just real quickly on the issue of disclosure sometimes what we're seeing is not a problem of absence of disclosure it's false disclosure false disclosure is often fraud and i think we need to step in there but just in terms of discussion its chairman clayton mentioned we have begun discussions that have sought in addition there's also been discussions led by chairman clayton if the Financial Stability Board and also at IOSCO which is the international organization of securities commissioners so these discussions are taking place at the right levels of debate but there's so much more to be done but and again to my friends Louisiana point we've got this we will focus on a lot of Bitcoin and crypto assets crypto currencies and I think there's even definitional issues here but you've got a whole new platform called aetherium where they're creating you know file sharing or extra computer time I'm not sure what what kind of assets those fall into are they are they potentially regulated within your realm or if there is a trade a trading exchange a tokenization exchange between excess computer time that's where we where that fits at this point I the definition of a security I believe the people who wrote the 34 act in the 33 act they were smart they they on a principle basis and they they basically said if you're giving people money in exchange for a future development of a business with the hope of a return and whether that return comes in the form of server time or your ability to sell server time it's a security but there are Ben and I concur with the approach you've taken in terms of the icos and I think there's been some very bad behavior yet certain I SEOs the sec has not stopped others they have stopped you know and are you gonna go back and re review the ones that that have gone forward let me let me say another thing about the 33 and 34 act when they were written there was a great recognition that there was a tremendous amount of securities activity in this country and that we were going to rely on gatekeepers to help us enforce those and liability to help us enforce those rules accountants lawyers underwriters sellers and the like I'm counting on those people to do their job and I've made that clear let me ask chairman jean-carlo you know what we did and one of the things I'm concerned about was that we I think we may have moved too fast on allowing for example futures trading on Bitcoin and I just wonder you know you've allowed future trading contracts on Bitcoin yet we've the SEC has not allowed ETFs I'm just worried that we need a much more coordinated effort because I think the potential writ large amongst crypto assets and the underlying botching could be as transformational as Wireless was years ago and I think we're gonna need a much more coordinated effort I know my times expired but if you could both quickly comment on that appreciate it I believe it is critically important that we coordinated this I believe that we are all both individually and collectively understanding our authorities understanding this new technology working working around it there was a communication amongst myself chairman Clayton the Treasury secretary and others in connection with Bitcoin futures and you know Bitcoin futures have dumped are quite different the Bitcoin market the Bitcoin is an anonymous area Bitcoin futures is fully transparent to the regulator Bitcoin retail Bitcoin future is mostly institutional and high-net-worth no Bitcoin futures regulated Bitcoin futures regulated Bitcoin unregulated and with Bitcoin futures we're now having visibility into underlined spot markets and data from those markets and we would not otherwise have completely agree on coordination like I said I break it down into three areas there's this great technology that I agree with you has promised there are these pure crypto currencies which we need to we need to take a look at across FinCEN Treasury CFTC Fed and then there are securities offerings that are called icos that should be should be undertaken as securities offerings consistent with our regulatory regime senator cotton thank you and thank you gentlemen for your appearance today I want to continue on a lot of questioning that Senator Warner began so putting aside Bitcoin or other kinds of crypto currencies that are based on blockchain or distributed ledger technology what are your thoughts on the potential value of that underlying technology of blockchain and distributive ledger technology both the enterprises and consumers and perhaps to government agencies it's important to remember that if there were no Bitcoin there would be no distributed ledger technology it grew out of that technology initiative in the application potential applications and by the way I'm no pie in the sky dreamer I've just report what I read and and and but the the applications range from enormous potential in financial services industry in the banking industry but right down to the way charity dollars are spent the way perhaps refugees are accounted for across the globe there was an article just this morning about the use of distributed ledger technology for two and a half billion people around the world who don't have access to banking services one of the areas that in our own area of agriculture futures 66 million tons of American soybeans were just handled through a blockchain transaction by the dreyfus company for sale to China so Bitcoin is now being used it's used in our American transportation logistics system and and most importantly the potential of distributed ledger technology for regulators to be able to do really close market surveillance and if it had been available in 2008 if we had been able to see the counterparty credit exposure of one bank to another bank in real time with precision that would enable much more precise policy choices that were had to be made in a rush without good data so I think distributed ledger technology's got an enormous potential now how it will be realized when will be realized one of the other challenges in it those we can't say but the potential seems extraordinary Thank You mr. Clayton I agree that the potential seems very significant and just look around anywhere in our economy where verification and record-keeping has cost that is potentially reduced is an opportunity for this technology that's just one of them at night.i I hope people pursue it vigorously thank you let's let's turn our attention now to cryptocurrency into bitcoins and it's the most prominent yesterday the Dow Jones had its single largest decline in a point scale 4.6 percent as a percent which is high not the highest ever that obviously generated a lot of news coverage the dollar has base 2% inflation or less now for many years Bitcoin however has seen a 32,000 percent increase in its value over the last five years it's declined by some 60% I think you know just the last 30 days what what are the factors driving a kind of extreme price volatility in Bitcoin relative to securities and public traded companies or the US dollar well just recently the the volatile you see the vid corn was not as as large as volatility we've seen in some other asset classes such as the VIX product which is known as the fear volatility gauge and so we have seen extraordinary volatility in Bitcoin but you know you know in our world and commodity derivatives we're used to volatility in asset classes and that's one of the things that the emergence of a futures product is meant to do is to provide those who are exposed that volatility means of hedging and and mitigating the risk to that volatility mr. Clayton I don't really know what's driving the volatility in Bitcoin and crypto currencies it's they're not correlated with sovereign currencies so it must be something different from what would drive the dollar but that's one of that's one of the issues before us is there does appear to be a lot of volatility compared to the the medium they are supposed to be a substitute for know what so what does that kind of volatility portend for a crypto currencies future as a potential alternative to legal tender of nation-states or in the use case of transnational organization you raise a great point now maybe that volatility tamps down to it to a stable but a an asset that is highly volatile is not a very effective means of exchange because you don't know how much you're getting by the time you receive it or how much you're paying at the time you have to pay it if you agree a price on day one but have to source it on day ten you expose yourself to significant risk let me ask you this with we've seen a dramatic increase in the number of initial coin offerings where private companies are using digital tokens to raise money instead of going through the capital markets The Wall Street Journal reported that initial coin offerings grew from about 96 million in 2016 to over 4 billion in 2017 many of these ICL's are relying on celebrity promoters to gin up the sales for example last year of Floyd Mayweather the boxer used Instagram the purchase of Center tokens now I've done extensive work on consumer protections in the prepaid card space where we've seen celebrities like the Kardashians use their status to sell products that come at a steep cost to consumers and this feels eerily similar to that just the next avenue of exploitation and I worry about unsuspecting investors that don't have the resources to understand the true risks what can the SEC do to better protect investors who may be persuaded by celebrity promoters to purchase tokens offered in initial coin offerings without fully understanding the risks senator I'm not gonna comment on a specific instance but sometime a broadly some time ago we put out an alert that said if you are promoting securities you're taking on securities law liability I'm I believe that that has tamp down some of this endorsement activity I will say it again right here if you are promoting securities you're potentially taking on securities law liability well let me ask you I hope I appreciate that and I hope that you will think about doing more to protect consumers can you walk us through why the SEC at this point is not comfortable with approving ETS with significant investments in crypto currencies our ETF product space is largely a retail product space and we've made it clear to the marketplace that there are a couple of issues with having an ETF that's based on a crypto currency they go to price discovery custody and some other issues around volatility we've let the industry know that those are issues that are of concern to us and that we don't want to approve an etf product with a crypto currency under lier until we can get comfortable with those issues the issue of maybe you may have answered this question just now with Senator Menendez mister chairman chairman Clayton but doesn't the you indicated why you were reluctant or unwilling at the moment to approve a ETF proposal but doesn't ETF's just as options do on its exchange reduced the mitigate the concerns reduce the volatility and increase price discovery and reduce risk so additional products my question really is don't additional products help alleviate some of the challenges we face or is Bitcoin or cryptocurrency so unique that it's different than other items that are traded on exchanges I think that the CFTC product has that effect it's largely an institutional product you can take both sides of the market and you know it gives people a chance etf's you you can take both sides of an ETF but predominantly they're offered for a loooong investor someone who wants exposure to the rise and fall of Bitcoin or other of currencies just as it would and that's it that that's a different dynamic than a futures product and we've we've long taken an investor protection view of approving those types of products which is embodied in our liquidity custody and pricing rules well if if we get comfortable with those rules then we can move forward with that this hearing is adjourned thank you

18 thoughts on “SEC & CFTC are PRO BITCOIN! (US SENATE Hearing) 02.06.18”

  1. Mr. Clayton: The only beneficiaries of your rigged system are attorneys and scammers. I have never been reimbursed for personal losses from investments that your organization regulated, including Enron, Worldcom, Lehman, etc. Your bureaucratic arguments ring hollow. Caveat emptor. We don't trust. We verify. #bitcoin

    Mr. Giancarlo: Two thumbs up, sir.

    Sen. Kennedy: Straight to the point, as always.

  2. 14:48 Protect them from what bailouts? If you want to "invest" in bitconnect after doing all your homework, knock yourself out. Not to be harsh but dumb money needs to be shot dead like a lame horse. Money is a tool, if you misuse it, you lose it.

  3. Giancarlo – 2:48: "thoughtful and balanced response, not a dismissive one" would gladly trade this guy for Trump.

  4. 20 trillion in a couple of years.. you heard him say that right? ( my expectation was about 7trillion ) HODL for 2 yrs and you won't be disappointed.

  5. I saw part live today, it seemed that SEC is quite helpless against ico scams and manipulation at exchanges, so sad.

  6. Interesting comment starting at 15:35 on how they just let a big bank get away with violations even though that bank had 68 violations in the last 10 years … what’s new 😐

Leave a Reply

Your email address will not be published. Required fields are marked *