SEC & CFTC Bitcoin & Cryptocurrency Hearings



the crypto currency market receives some very positive and bullish news in regards to crypto currencies as it's viewed by regulatory committees and Jake Clayton Christopher giancarlo testified today and here is that portion of the testimony that might make sense if this were an isolated incident that the banks in question of something like 68 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 of your agency's service sanctuaries I've raced the issue of waivers over the years I 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 face of principles of going after the bad guys and being tough but they are repeat offenders Thank You senator Graham now we will turn to the testimony of our witnesses at first today we will receive testimony from the Honorable jeh 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 gentlemen again we welcome both of you here appreciate your sentence to share your knowledge and understanding on this issue with this interment Clayton you may proceed distinguished senators of the committee thank you to testify before 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 I SEOs initial coin offerings raised nearly 4 billion these markets are local national and international today I will attempt to lemma set where we stand from a market regulatory perspective my remarks may be viewed by some as overly simplistic but 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 icos which are subsets of the products seeking to take advantage of the commercial opportunities presented by blockchain technology what 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 today 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 they 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 IC o—- 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 market rules for these products have substantially less oversight than our traditional securities markets to be blunt 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 expensive rule sets and they are required to conduct surveillance also broker dealers who facilitate securities trading have capital and conduct for parties 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 from professionals in these markets those who engage in semantic gymnastics form elaborate structuring exercises and effort to avoid having a coin eeeh 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 wilcott will 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 blind are 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 of the Fed our friends at the CFTC in the state regulators they all have a keen interest in this market I'll close I've got my time is short to the extent that digital assets like I SEOs are securities I believe every IC o—- I have seen such 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 an these laws thank you for your opportunity to testify it before you today thank 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 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 should they buy it one of their older cousins who owns Bitcoin I was telling them about it and they got all excited and I imagine that maybe members of this committee may have some had had some similar experiences in their 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 when those who try to abuse their enthusiasm with fraud and manipulation and we must thoroughly educate ourselves in the public about this new innovation we must make good policy choices and put in place sound regulatory frameworks to reduce risks for consumers putting my CFTC hat back on I suggest that the right regulatory response to virtual parentheses 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 113 billion dollars we have a slightly different bigger than you have to remember close but the point is that that's less than the market cap of one large publicly traded company McDonough'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 big credit 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 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 witness statements podcasts webinars and a dedicated a 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 of a bunch of prancies we have to work together that cludes us SEC the Fed the IRS the Treasury spin said Network and even state banking officials and the next element is to exercise our legal authority over derivatives of virtual currencies walks clarifying our statutory limitations to be clear the CFTC does not regulate the dozens of virtual currency trading platforms here in the world we cannot require them to meet requirements like trade month warning and market surveillance standards for conduct capital requirements or even cyber protections with platform safeguards but these are all standard regulations in the futures markets we oversee if through our authority over commodity derivative markets we do have enforcement power over spot flowing waters and with newly launched Bitcoin futures the CFTC can now obtain training data and analyzed for fraud and manipulation in five underline 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 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 hope my kitchen asleep thank you very much Thank You chairman Giancarlo and I'll begin the questioning first I will say I've had those dinner conversations with my own children in your rate this is an incredibly interesting but growing new area of financial challenge particularly among our least my children and yours both of you have said in one way or another that neither of you neither juror agencies have complete jurisdiction over crypto currencies the question I have is whether you have sufficient prediction 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 a sufficient jurisdiction in place today Sherman Clayton thank you in my position you're always cautious about speaking for other agencies so I think understood for saying that we should all come to bear to be very direct we should all come together the federal banking regulators CFTC SEC there are states involved as well and having coordinated plan 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 for them 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 met 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 asunder Gerry 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 it's what we call the spot market the word 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 I just want to interject something really profound that he just said that he got into the cell phone market when it was a really small market people thought that he was crazy wasting his money and he ended up getting rich you go back to the dot-com after that it was the same situation people lost money but the investing and the right things at the right time produce major prosperity for many people and this is what we're looking at right now people are dismissing it people like Warren Buffett who also dismissed the the Internet as pixie dust or something like that but he and also technology stocks as well he doesn't invest in him fana anyway I just wanted to point that out it was pretty profound statement I'm not exactly sure what the light was you ought to be but I would argue that commend Treasury secretary for putting a working group together I would argue this is the reason we permeated 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 that you believe and I commend what both of you are trying to do but I whether this oughta elevate to an s sock level analysis I I had the same question you had business there's a there's a big rise here if it does keep going is this a systemic issue which is one of the reasons the lot about bit upside talk to better know sock I think again commended the Treasury secretary for foreign in the working I want to go back to separating I SEOs and crypto currencies I cos they're securities offerings we should regulate them like they regulate securities Islands Edisto I'm actually I got a couple more points away Thank You senator just real quickly on these should disclosures sometimes what receipt is not a problem of absence of disclosure it's false disgorge false disclosure is often fraud and I think we need to step in there but just in terms of discussion chairman clay dimension we have begun discussions that have sought in addition there's also been discussions led by each other claim that the Financial Stability Board and also at IOSCO which is the traditional rosacea securities commissioners so these discussions are taking place at the right levels of debate but there's so much more to be done but again to my friend liaison point we've got this we were focusing a lot on Bitcoin and crypto assets cryptocurrencies and I think there's even definitional issues here and you've got a whole new platform called etherion where they're creating a 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 of a tokenization exchange between excess computer time not sure what we the people who wrote the 34 react it was fun they they did it on a principle basis it basically said if you're giving people money in exchange for a future developed in the business with the hope of a return and one thing that returned comes in the form of server time or your ability to sell server time it's a security if there have been and I concur with the approach you've taken in terms of the IC OS and I think there's been some very bad behavior yeah certain i ciose the sec has not stopped others they have stopped and you go back and read review the ones that that have gone forward let me let me say another thing about the 33 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 the countless lawyers underwriters sellers and the like i'm counting on those people to do their job and I made that clear yes Chivington Carlyle in 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 gender futures trading on Bitcoin and I just wonder we move allowed through trading contracts on Bitcoin yet we've the SEC is not allowed ets 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 boxing could be as transformational as Wireless what she was developing I think we're gonna need a much more coordinated active I know my times expired but if you could both quickly comment on that appreciated I believe it is quickly important than the coordinators I believe that we are all both in the religion literally and collectively understanding our authorities understanding this new technology working party wanted there was a communication amongst my cell children Clayton the Treasury secretary and others in connection with Bitcoin futures and you know Bitcoin teachers have done are quite different than the Bitcoin the Bitcoin is an anonymous area Bitcoin futures is fully transparent to the regulator Bitcoin retail Bitcoin futures mostly institutional and high-net-worth and Bitcoin futures regulated Bitcoin teachers regulated Bitcoin unregulated in with Bitcoin futures we're now having visibility into underlying spot markets and data to those markets and we would not otherwise I've worked 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 need to take a look at across fit seven Treasury CFTC fed and then there are securities offerings that are called icos that should be to be undertaken as securities offerings consistent with our regulatory regime senator cotton thank you thank you gentlemen for your appearance today all right can continue on a lot of questioning that's in our world again 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 perhaps to government agencies it's important to remember that if the word no Bitcoin there would be no distribute 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 dream right just report what I read but 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 or accounted for across the globe there was an article just this morning about the use of distributed ledger technology for 2 and 1/2 million people around the world who don't have access to banking services one of the areas that in our own area of agricultural 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 using our American transportation logistics system and and most importantly the potential of distributing 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 counterpart of credit exposure with one bank to another Bank in real time with precision that wouldn't let them able do much more precise policy choices that were had to be made in a rush without good data so I think distributed ledger technology has got an enormous potential now how it would be realized why don't we realized one of the other challenges in it those we can't say that the potential seems exploding I agree seems very significant in just look around anywhere in our economy where verification and record-keeping has cost that is potentially reducing there's an opportunity for this technology that's just what I hope people pursue it vigorously thank you but let's turn our attention now to cryptocurrency and a Bitcoin since it's the most prominent yesterday the Dow Jones had its single largest to find in a point 4.6 percent as a percent which is highly not the highest ever that obviously generated a lot of news coverage the dollar has placed 2% inflation or less now for many years Bitcoin however has seen a 32,000 percent increase in value of lasted five years it's declined by some sixty percent I think just the last 30 days what what are the factors driving a kind of extreme my spell Atilla T in Bitcoin relative to securities and public trading companies or the US dollar well just recently the vault NBC the vid coin 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 index at volatility gauge and so we have seen extraordinary volatility in Bitcoin but 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 original futures product is meant to do is to provide those who are exposed to that volatility means of hedging and mitigating the risk to that volatility I don't really know it's they're not correlated with sovereign crisis so it must be something I've got everything out that I was going to interject anymore here let me answer the question for the committee in terms of what is driving the volatility you guys are driving the volatility okay regulation banning you guys are driving volatility okay please continue different from what would drive the dollar but that's what that's one of the issues before us is that does appear to be a lot of volatility compared to the the medium they are supposed to be a substitute for what so what does that kind of volatility portend for cryptocurrencies future as a potential alternative to legal tender of nation-states or the the English case of transnational organization if you raise a great point now maybe that volatility hands down but a an asset is highly volatile it's not a very effective means of exchange because you don't know how much you get time you receive it if you agree a price on day one they have to source it on day 10 you expose yourself to significant risk thank you my time is expired I do when I associate myself the remarks of Senator Donnelly at the individual marks about the risks that cryptocurrencies are currently posing as a way for rogue nations terrorist organizations criminal organizations to pay attentions not just in traded but in hacking as well as we've seen media reports will vote for you so I'm glad to hear that you're working closely with our law enforcement and intelligence agency it's not okay continues Thank You senator Menendez Thank You mr. chairman thank you to both and it's good to welcome a fellow in New Jerseyan I have been actively following both Venezuela in Russia's interest in developing virtual currencies for the purposes of evading us sanctions last month I sent a letter to secretary monition on this subject and I asked understands cataria mental care about this a few weeks ago she was here before the committee under what circumstances would the SEC and the CFTC have enrolled in engaging or regulating proposed new petrol or crypto ruble currencies more broadly does the SEC and CFTC a role to play in preventing the use of digital currencies by foreign governments to invade us Ames's our Churston should be very limited senator we haven't for as I sense it's about before we do have enforcement authority for fraud and manipulation and so forth like that for that instrument was being used for some purposes manipulation purposes we would not hesitate to take authority at this you're probably touching on an area where the jurisdictional laps is probably greatest for the for the two agencies sitting before you tonight and so let me ask you a manipulation what if you're manipulating to avoid us Angeles you know what I'd have to speak to our horseman camps and I see how that fits in but we would certainly look at it and if I'd like to have you do so and I would love to hear back to the committee are are you interacting with Vincent and the extent that you may have limited jurisdiction or you adequately integrated into the financial regulatory network that Roxas for illicit activities or their gaps that could create vulnerabilities so as you mentioned and before senator and chairman Clayton and I are part of a the virtual currency task force that has been put together by the Treasury secretary that includes the Fed and FinCEN and we have already had our first meeting image beginning meeting to set up some work streams we will have more to come and it just so happens that I'm actually meeting with Vince's spiritual currency team this week and a previously scheduled meeting to get some introductory discussion started that we of cooperation between our agencies and so I look forward to actually and asking them of this question is well okay and I would just say it's both of you to the extent that you have a role to play and you like the present authorities to do so I would love to know about that to determine that is necessary

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