SEC, CFTC: Senate Hearing on Cryptocurrency, Blockchain, Bitcoin, ICO's – 2/6/2018 (FULL)



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 were 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 of Bitcoin just for perspective On January 2 of last year Bitcoin broke the $1,000 barrier then peaked in December of 2017 at almost 20,000 dollars and as of this morning was 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 Boeing I welcome to Chair Clayton in Chariton Carlo good to have you both here virt virtually is 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 it's nothing short of remarkable to be sure it's critical for our regulators to understand innovation and technology so the markets can grow and evolve while investors and consumers are protected under the risks of emerging technologies is no easy task but will 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 a 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 imposed 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 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 crypto currencies 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 ce o–'s 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 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 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 as a 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 markets for these products have substantially less oversight that are true additional securities markets to be blood if you are trading crypto currencies 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 or elaborate structuring exercises in an effort to avoid having a coin be a 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 crypto currencies 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 crypto currencies on the other hand have no sovereign backing or oversight and again to be blunt 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 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 done my time is short to the extent that digital assets like icos are securities and I believe every ICO I have seen 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 thank 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 and 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 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 Dozen of 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 crypto currencies 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 think you understood for saying that we should all come to this ferret to be very direct we should all come together the federal banking regulators 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 Center German 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 across the nation some states have been very assertive in this area other states less so and some states have nothing FinCEN as you referenced there's 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 both of you I'd like to respond I only have about a minute left so think 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 structure should look like in got 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. chair what 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 unlaid basis but I imagine I imagine senator a significant enough portion 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 Clayton 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 deutsche 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 mention 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 that probably doesn't come as a surprise to you that someone sent it to me I found it I found that 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 it 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 co-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 headcount so how are you going to stay on top of developments and virtual currencies and the other enforcement all the other areas that we just talked about and to be able to fight traditional misconduct how are you gonna do that when you're not replacing that if in fact that's the case that that is senator Brown personnel is my biggest challenge at the moment and 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 okay there'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 want to defraud the system isn't the message as 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 and with your budget that's coming out our understanding is the budget I mean 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 you're chairman of two powerful regulatory bodies but you have different jurisdictions anything that smacks of security comes somewhere in your range is it not dealing with a commodity something that could be deemed a commodity clearly gums in your range the Federal Reserve is the biggest bank regulator we have and also the the 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 the securities perhaps some others if 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 some virtual in this is was not my world my start out pencil and paper in 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 lack liquidity sure people have probably made a lot of money going up and a lot of 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 in it but the the the point the economists are making is that there is some sort of floor that that the the level said is not zero that there is some floor there tied into the cost of mining a 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 a lot of smart people who think there's something to the the value of the cryptocurrency and the International exchange I'm not I'm not seeing those benefits manifesting themselves in the marketplace yet and from the perspective look I look at this aspect 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 or 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 or 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 on we talked the other day about this coach gets into REM 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 Reed 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 can begin to understand how these cryptocurrencies worked a 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 he is 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 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 13% 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 an out fortunately 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 shortened 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 cetera et cetera and then of course ten years later exploded so once you start with mr. Giancana and the Chairman and I'll finish up with the Chairman thank you very much so you're absolutely right bitcoin 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 mr. chairman 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 where I'm at on systemic look there's there's I don't I agree with I agree with chairman Chu Karlo but if people are getting ripped off that presents reputational risks they can have systemic effects we can go in a raft of questions money laundering evading et cetera but just changing gears one second and I'll make a comment and then follow up with a written question there is some consideration I heard of the SEC allowing in public offering initial public offerings bars to suit I eat forced arbitration I think that would be a very bad idea and I'll make the argument and right I'm happy to address the question if you well we're out of time on that right now so we'll have to do it wouldn't you you can we'll talk senator rounds thank thank you mr. chairman gentleman I'm just curious I I go 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 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 questioned 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 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 a 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 well those three things have different connotations to them if it's a means of a medium of exchange then it's 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 for registrants because they couldn't process the payments so but yet it's still spoken of as perhaps a means of account went 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 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 thirty 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 me but 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 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 mr. chairman your suggestion earlier that we bring them both back in at a later date after they've had an opportunity to look at the differences would be very appropriate thank you gentlemen thank you my cuman senator Warren Thank You mr. chairman so chairman Clayton On January 26 bloomberg published an article entitled SEC ways a big gift to companies blocking investor lawsuits now as you know class-action lawsuits or how investors can hold companies accountable when they defraud people and the article says the SEC is thinking about letting companies sell shares in initial public offerings while at the same time allowing those companies to prohibit investors from bringing class-action lawsuits against them Wow I mean forcing investors to give up class actions when they've been defrauded the SEC has never allowed corporations to bar investors who get cheated from bringing class-action lawsuits so I just want to get a straight yes or no answer from you on this do you support this enormous change in SEC policy I think you know that I can't prejudge an issue that may come before the SEC but I'd be happy to talk to you about this and let me get to them let me get to the bottom line I'm I'm not I can't I can't dictate whether this issue comes before us or not because of the way it has come before the SEC in the past but I'm not anxious to see a change in this area okay so I'm reading tea leaves here you are in ideas I'm not you you run this agency that if Ange can't happen without your approval I think that's actually not right if it came up before the agency I'm only one of five votes I'm gonna guess they're gonna be at least two votes against that and that you at best will be I deciding vote senator I don't want to prejudge the issue if this issue look I want to be practical if this issue were to come up before the agency it would take a long time for it to be decided because it would be the subject of a great deal of debate and like I said in terms of in terms of where we can do better this is not an area that is on my list for where we can do better okay so I tell you what chairman Clayton I'm gonna let you get away with that well because because what I'm reading is real skepticism about a rule like this yeah the SE C's mission is to protect investors not throw them under the bus and I can't think of anything that would do more harm to investors than saying they have to pre waive their rights to sue a company in a class action when that company cheats them so like I said it's not it's not a it's not a change that's on its I hear you so let me ask you about something else and that's the fiduciary rule financial advisors who put the high fees the Commission's the kickbacks the prizes they can get for recommending a specific product ahead of the interests of their clients cost hardworking American Americans trying to save through their retirements about seventeen billion dollars every year and that's why President Obama and the Department of Labor put the fiduciary rule in place to eliminate these conflicts of interest in retirement accounts like 401ks and IRAs now less than a month after you were sworn in as chairman of the SEC you issued a request for information asking for public comment on rulemaking relate it to the standards of conduct for investment investment advisers and broker dealers can you state to this committee that any rulemaking you do on this topic will not weaken the existing protections for retirement savers I'm making it making an absolute statement like that yeah an absolute statement you are not going to wait on rules for people are trying to save for their retirement based from what from what baseline that's what we have it we have a rule from the Department of Labor now you could strengthen the rule you could pass the same rule or you could weaken the rule I want to know that you're not going to weaken the rule that's all I'm asking here's what I'm trying to do let me tell you what I'm trying to do the relationship between an investment advisor Broker Dealer and their client in a very simple area they have a 401k they have an annuity and they have a few stocks is regulated throughout the banking regulars it's regulated by no less than five people and and they all have different standards but my main objective is to bring clarity to that without jeopardizing investor protection well you don't but that's the question I'm asking about it about whether or not you're jeopardizing the protection that people are trying to save for their retirement yet I get it I don't bring that Larry clarity could be do whatever you want clarity is what is right now has cost American investors saving for their retirement seventeen billion dollars I think it's a combination of an insufficient standard in some places which we are looking to increase I'm glad I hear that a lack of clarity and also the standard is only as good as the remedy available and one of the things that I'm also looking at I believe me it's been a lot of time in this space trying to get it right one of the things we're looking at is what what dollars do you actually collect what somebody has done you harm because you could have a really strong standard but if there are no dollars there that's a problem so I I agree with you mr. chairman if you want to strengthen enforcement of this rule or strengthen the rule itself count me in but that's what the American people look to the SEC for I thank you I do thank you thank you mr. Perdue I want to go change the subject a little bit back to Bitcoin here are two 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 when I see use I CEOs general Clayton you wanna 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 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 to the US 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 our 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 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 there's a lot happening that is beyond the kind of understanding of your average investor how how would you know how can we in two agencies here I understand there's interaction between all of our regulatory agencies but there's also another axis here that you have to coordinating that's other country regulators as well correct so I'm asking both of you what are you seeing and what what are you anticipating we needed to make sure either legislatively or rulemaking to combat that Chris do you wanna let me jump in I just identified two areas of arbitrage we're seeing one is regulatory which I want to come to you 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 they're 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 a singular price may develop in terms of regulation there's I unfortunately I think that some time ago perhaps in 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 a 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 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 fraud and email I've mentioned we formed this virtual currency Enforcement Task Force I mean we've got some really good people on this and as we've brought 3 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 to 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 when 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 yeah 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 it's 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 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 someone 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 you if you are you going to give them money you'd better be prepared to lose it I agree with everything that chairman G Carlos said I also would say say 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 both 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 three years ago yes okay when you bought it would you buy equity or bond index funds most indexed ones okay when you bought it did you sit down and read the prospectus for the index fund well you know I'm not covered 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 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 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 was people are violating our our 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 we're talking now a couple hundred billion we be at north of 20 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 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 a working group 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 that you believe and I commend what both of you are trying to do but whether this oughta 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 separating icos and and cryptocurrencies icos that are securities offerings we should regulate them like we regulate securities offerings end of story make sure because I've 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 and 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 friend from Louisiana point we've got this we will focus on a lot of Bitcoin and crypto assets cryptocurrencies 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 tokenization exchange between excess computer time I'm not sure 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 did it 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 IC OS and I think there's been some very bad behavior yet certain I see owes 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 is 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 watching could be as transformational as Wireless was years ago and I think we're gonna need a much more coordinated effort I know my time is 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 than the Bitcoin market the Bitcoin is an anonymous area Bitcoin futures is fully transparent to the regulator Bitcoin retail Bitcoin futures mostly institutional and high-net-worth know Bitcoin futures regulated Bitcoin futures regulated Bitcoin unregulated and with Bitcoin futures we're now having visibility into underlying spot markets and data from those markets we would not otherwise have completely agree on coordination I 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 to 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 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 agricultural futures sixty six 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 what are 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 it's 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 crypto currency and to bitcoins and it's the most prominent yesterday the Dow Jones had its single largest decline in a point scale four point six percent as a percent which is high not the highest ever that obviously generated a lot of news coverage the dollar has based 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 sixty percent I think and they'll just the last 30 days what are the factors driving that kind of extreme price volatility in Bitcoin relative to securities of public traded companies or the US dollar well just recently the the vault Luc the vid Cohen was not as as large as volatility we've seen did some other asset class such as the Vicks product which is known as the fear index of volatility gage 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 their 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 thank you my time is expired I do when I associate myself the remarks of Senator Donnelly at the end of his remarks about the risks that cryptocurrencies are currently posing as a way for rogue nations terrorist organizations criminal organizations to evade sanctions not just in trading but in hacking as well as we've seen media reports from North Korea so I'm glad to hear that you are working closely with our law enforcement and intelligence agencies and I hope that continues to thank you Senator Menendez Thank You mr. chairman thank you to both and it's good to welcome a fellow in New Jerseyan in your ohms channeling I have been actively following both Venezuela and rushers interest in developing virtual currencies for the purposes of evading US sanctions last month I sent a letter to Secretary minuchin on this subject and I asked under Santa Kateri mandal ker about this a few weeks ago when she was here before the committee under what circumstances would the SEC and the CFTC have a role in engaging or regulating the proposed new petrol or crypto rouble currencies more broadly does the SEC and CFTC have a role to play in preventing the use of digital currencies by foreign governments to evade US sanctions our jurisdiction should be very limited in that area senator we haven't fought as I've spoken about before we do have enforcement authority for fraud and manipulation and so if we thought that that instrument was being used for fraudulent purposes manipulation purposes we would not hesitate to take authority but this you you're probably touching on an area where the the jurisdictional laps is probably greatest for the for the two agencies sitting before you today and so let me ask you manipulation what if you're manipulating to avoid US sanctions you know I'd have to speak to our enforcement counsel I see how that fits in but we would certainly look at it and and I'd like to have you do so and I would love to hear back thank you the committee are are you interacting with Vincent to the extent that you may have limited jurisdiction or you adequately integrated into the financial regulatory network that watches for illicit activities or their gaps that could create vulnerabilities so as we mentioned before senator Turman Clayton and I are part of a 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 and beginning meeting to set out some work streams we will have more to come and it just so happens that I'm actually meeting with Vincennes the spiritual currency team this week and on a previously scheduled meeting to get some introductory discussion started that we have cooperation between our agencies and so I look forward to actually asking them this question as well okay and I would just say to both of you to the extent that you have a role to play and you liked the present authorities to do so I would I would love to know about that if you determine that is necessary because I get my sense of crypto currencies largely driven to evade US sanctions and to undermine sovereign currencies both of them are challenge to the national interest of the United States 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 ICS are relying on celebrity promoters to gin up the sales for example last year Floyd Mayweather the boxer used Instagram to promote the purchase of central 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 on a specific instance but some are 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 ETFs with significant investments in crypto currencies our our ETF products base 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 you know 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 thank you thank you senator Moran mr. chairman thank you very much I'm sorry you both have to Crane you're next to the left so so hard to have a conversation with me but I'm delighted to be back on the committee mr. chairman thank you very much let me first start by suggesting to you that if you have suggestions I will probably not have the chance to see you in the financial services appropriations subcommittee before we take a look at FY 19 assuming that we're successful in the next few days on FY 18 and budget caps we'll have an opportunity to reconsider spending levels for FY 18 you've made your request through the budgetary process and appearance before our subcommittee but if there are priorities in which as we go back to potentially increase funding in any levels of jurisdiction within FS GG I would welcome your input as to what it is the highest priority I heard the commentary earlier the one of the questions I think to Senator Reid was the the hiring freeze has created challenges I don't know that we can overcome that but if it is personnel in a particular way or other things would be useful for me to know thank you very much nr I didn't want to get ahead of the process and I'm rfy 19 requests reflects the the sentiment I've expressed today I don't know that we'll see the FY 19 request before we are taking a look at the potential increase in funding for FY 18 thing depending on when the President's budget is released but I would offer that it doesn't need to be today if there's any suggestions you'd like to convey to me the issue of maybe you may have answered this question just now with Senator Menendez mr. chairman chairman Clayton but doesn't the doesn't 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 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 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 very good let me raise a different topic than then cryptocurrency one of the things that I've tried to pay attention to and often in in cooperation with the senator from Mexico Senator Udall is trying to monitor modernize our IT system particularly within the federal government and you indicated chairman Clayton about the 500 million dollar loss in a Japanese crypto currency in your in your written testimony we've now passed as part of the National Defense Authorization bill what what's been labeled as MGT Act it's the modernizing government technology and what it does is create a fund for federal agencies to rid themselves of their legacy technologies and have access to dollars to replace that legacy it encourages moving to the cloud again with the opportunities for us to have better technologies and safer technology systems to reduce our vulnerabilities I just would encourage you you have a lot at risk in the safety and security of the data that you hold and I welcome your reassurances that I'm sure you'll will tell me that you're spending many millions of dollars and working diligently and you have the right personnel in place but I would guess if we asked agencies of the federal government who have been hacked themselves and whose data has been released they would have told us the same thing prior to that occurring to them I'd be first of all delighted to be reassured that we will not be reading in tomorrow's paper or next month's papers that there's been a hack at CFTC or SEC and then secondly I just would offer you the opportunity to take a look at that legislation and see how it might be of benefit to your agencies and to suggest any ideas that you would have for what Congress can do to further strengthen cybersecurity within your worlds thank you well thank you very much mr. chairman thank you Thank You senator Cortes Masto thank you gentlemen thank you I apologize Ben had another committee hearing going on the same time but I appreciate your written comments and the conversation today is so important and as somebody who was the Attorney General of state of Nevada and worked on consumer protection issues obviously weeding out any type of fraud is important in this space as well so let me though start with a couple of questions I that I have I understand that companies that originated outside the cryptocurrency space like Kodak and Burger King have recently jumped into the cryptocurrency space however some critics have warned that companies are using blockchain as an opportunistic venture to pump up stock prices without having a clear business plan one company Long Island iced tea I understand change its name to long blockchain and watched its stocks or so are you concerned that companies may be utilizing blockchain as a scheme to pump up their stock prices and I'm gonna just open it up to both of you the short answer is yes the longer answer is I've put out a warning in this space and I've put out a warning to securities lawyers as well which is nobody should think it's okay to change your name to something that involves blockchain when you have no real underlying blockchain business plan and try to sell securities based on the hype around blockchain and when you say you put out a warning what does that mean specifically what it well we put out a public published the it's on the SEC website I made a speech regarding this but this is this is an area of concern to us but anytime there's something new that people seek to know raise the value of their securities without the underlying goods being there right is problematic so so so as you know the jurisdiction of the CFTC and the SEC is slightly different in this regard and so chairman Clayton is rightfully concerned with initial coin offerings that are misrepresenting the affiliation whether it be with Kodak or otherwise we we focus on fraud and manipulation broadly in instruments where there is wild claims for them and I mentioned earlier a case we recently brought again a Long Island firm called my big coin which turned out to be my big con there there was nothing there they were taking people's money and not investing in anything other than their own jewelry and houses and fancy cars and this kind of thing we've been a very aggressive in in our using our enforcement authority we've recently brought three cases just this just last month alone I've said there will be more and we are looking into this and monitoring markets very carefully we believe that our big task is bringing enforcement cases and letting people see that as well as consumer education which I've also yes because it has a deterrent effect you hope it does right yes okay thank you it's also been reported that more than 3 million bitcoins have been stolen that is about 14% of the bitcoins or 1 in 7 bitcoins stolen and on January 26 coin check a Japanese currency exchange was hacked and minutes 430 million was lost to hackers this follows another theft of more than 500 million from another exchange amount GOx if people put money into a stalker bond and it was stolen they would have helped for example the federal government's still trying to help investors recover the money stolen by Bernie Madoff when virtual currencies are stolen by hackers what combiners do to get their money back if anything this is this is a very good point and it's one that we've emphasized in our investor alerts that when you engage in investing online with an offshore entity the chances that we can do anything practical to get your money back are very very low in our futures market for example we have what we call system safeguards requirements that futures exchanges have cyber protections in place and they adopt best practices for these underlying spot markets which we don't regulate we don't have the authority to require them to have cyber safeguards in place and you know a lot of these companies are young they're startups there they're focused on putting what resources they have into developing their technology and in the case of some of the cases you mentioned them what I understand was the cyber protections just weren't there now I know that the J FSA has been aggressive on this we've had some conversations with them we've asked questions what are they doing about it but unfortunately the theft has already happened and so this is a problem these underlying it changes while we do have enforcement authority we don't have the same regulatory authority that we have in the markets that we oversee that's our day job as one of your colleagues mentioned earlier and and so therefore this is a gap or the same kind of protection rules like custody it was going yeah so it's the old axiom buyer beware I mean so around this space a lot of education is important I would imagine from all of the federal agencies to buy or so they know until something else can be done which I think we're still trying to figure that out I noticed my time is up thank you very much thank you thank you Thank You senator I had not planned on having a second round but I have agreed to have to allow senator Shelby and Senator Warren to each have one brief question senator Shelby I want to get in the area what so a lot of people's minds today and I know you don't control it of the stock market you know what goes up comes down as we all know and we don't know when and so forth is this perhaps more than an ordinary correction or do you have a judgment on that at all chairman so your question is exactly the question I asked my staff and some of my colleagues across the federal government because we should be asking those questions they're small by this morning there was nothing to indicate that any of our systems didn't function as they were expected to function yesterday there was a this was the largest volume since November 2016 yeah there was a significant price change but it was not a priced we have do you mind we have two types of limits we have single stock limits and then we have market limits the circuit breakers neither one of those were hit in any great detail at the area great detail the single stock was nine the mark the circuit breakers didn't get hit so as I sit here today there's nothing that came out of this that concerns me from a functioning standpoint but days like yesterday our job is to look at them from from a regulatory standpoint you are you saying that you don't see anything amiss yes I'm irregular towards them yes and you can't control what goes up and goes down but is what spooked the markets is it profit taken perhaps is it a willful maybe inflation out there because people that watch the markets and participate in the markets see that the Fed is beginning to raise interest rates dealing with price stability as they see it and the Fed has information perhaps we don't have then they're kind of the economy's high unemployment slow so forth there's a combination of all or can we really say well I can't really say because III you know there are a lot of opinions on those things our job is to look at the functioning absolutely and look at the systemic risks that's right and I'm and I'm asking myself is there anything that happened yesterday that gives me a different view of systemic risk than I had the day before and so far now but that's a question I ask myself almost every day because we all know that when the market is going up people are elated that's natural when it's going down some people profit but not a lot of people are elated tzedakah fair there you have any comment of mr. chairman Bob I'm just smiling cuz it's just a recollection of saying that a mentor of mine who actually was my introduction into the financial markets used to say when when I would ask him it was an old hand in the markets what drove the market up yesterday or down he'd say oh it was up Oh more more people bought and sold it was down more people Sultan bought and and and we laugh but he what he said to me he said you know when you listen to the pundits and they say well the market was up yesterday because of this that may have been why or may enough and why but but the reporters or or the or the pundit needed a reason so they picked something out and that becomes the reason for the day and I don't mean to be facetious but markets are very very complex very very complex in my and and sometimes it's oversimplifying and and you hear it on the news you hear it by people that are stock pickers and they say well it was because of this well I don't know how anybody really knows now if there are fundamental moves fundamental changes Mis that's where we have to do and I and I share sherman's Clayton's view is our job is to look at the structural underpinnings and see whether there's anything that's not functioning see if the fundamentals are saying see it was a fundamental sense so you won't be surprised to know that we had a late night last night and early morning this morning check it in with our exchanges to make sure that things are in order making sure that the margin levels held to make sure there was no significant margin breaches and and I can say that the system held the system worked as it was designed to do the margin levels worked as they were designed to work and so the the the the right systems the right policies are in place but the markets are always equal evolving always organic and we need to Swiney to stay very close to them the market always corrects the question is is this ordinary maybe not an ordinary correction but is it a correction the market will correct yourself and we go from there said fair yes thank you Matt you senator Warren Thank You mr. chairman so I want to go back to virtual currency and I want to ask about initial coin offerings I cos some ICS raise money for legitimate companies but others we know are just ponzi schemes and many of the investors in ICS are just everyday Americans lured by aggressive marketing promising very high returns in fact it is now so bad that Facebook recently banned all ads for virtual currency related products and icos because there were so many quote deceptive and misleading advertising that targeted regular consumers so I just want to ask a little bit of question around how we make AI SEOs safer chairman Clayton the SEC evidently recognized the risk so it announced last summer that it would consider certain coins to be securities under the Securities Act meaning that they have to be registered with the Commission and comply with disclosure requirements in 2017 companies raised more than four billion dollars in ICS how many of those companies registered their IC o—- with the SEC not one not one and as of today how many companies have registered for upcoming ICS not one not one so we're still at zero can you just say a word about why that's so yeah I don't I don't think the gatekeepers that we rely on to assist us in making sure our securities laws have are followed have done their job we've made it clear what the law is as I as I've said many times there are thousands and thousands of private placements that go on every year in the u.s. we want them to go on we want people to raise capital but we want them to do it right right what I SEOs do is they take the disclosure light benefits of a private placement and then add to it the public general solicitation and retail investor promise of a secondary market without registering with us and folks somehow got comfortable that this was new and it was okay and it was not a security it was just some other way to raise money well I disagree with them so it is not new it is no it is new but it is not okay and it is not another way to raise money correct I am understanding you to say it is violation of law yes you know registration really matters when companies don't register their tokens as securities they can hide information and the SEC does not have the information it needs I monitor this market I am perfectly happy for these people to do private placements but do them right don't don't try and do it as a private placement but get all the benefits of a public and then lever over into a public Nana gets there well good so I should I take today as you're sounding a warning bell for people maybe they better pay a little closer attention to the law or the SEC is going to pay closer attention to them yes and it's not the first time but I really appreciate the opportunity to do it today thank you Thank You mr. chairman Thank You senator and thank you to our witnesses we appreciate not only your testimony today but the work that you are doing in this critical area I would ask you to get back to me on recommendations as you have as you refine your evaluation of our current financial legislative system and and whether we need to provide further clarification from Congress with that this hearing is adjourned thank you you

One thought on “SEC, CFTC: Senate Hearing on Cryptocurrency, Blockchain, Bitcoin, ICO's – 2/6/2018 (FULL)”

  1. They are talking about everything but the actual problem. The federal reserve, which is the biggest fraud and theft system

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