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Testimony of US SEC and CFTC chairs released ahead of Senate’s hearing on cryptocurrencies
The chairs of the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) – Jay Clayton and J. Christopher Giancarlo, respectively, have prepared their testimonies for the Senate Banking Committee hearing on virtual currencies scheduled to hold today.
In his testimony, Clayton discussed digital currencies, initial coin offerings (ICOs), the associated risks, and law enforcement among others. Here are the key takeaways:
“There should be no misunderstanding about the law. When investors are offered and sold securities – which to date ICOs have largely been –they are entitled to the benefits of state and federal securities laws and sellers and other market participants must follow these laws.
“Investors should understand that to date no ICOs have been registered with the SEC, and the SEC also has not approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies. If any person today says otherwise, investors should be especially wary.
“…the currently applicable regulatory framework for cryptocurrency trading was not designed with trading of the type we are witnessing in mind. As Chairman Giancarlo and I stated recently, we are open to exploring with Congress, as well as with our federal and state colleagues, whether increased federal regulation of cryptocurrency trading platforms is necessary or appropriate. We also are supportive of regulatory and policy efforts to bring clarity and fairness to this space.
“…the SEC is monitoring the cryptocurrency-related activities of the market participants it regulates, including brokers, dealers, investment advisers and trading platforms. Brokers, dealers and other market participants that allow for payments in cryptocurrencies, allow customers to purchase cryptocurrencies (including on margin) or otherwise use cryptocurrencies to facilitate securities transactions should exercise particular caution, including ensuring that their cryptocurrency activities are not undermining their anti-money laundering and know-your-customer obligations.
“Certain market professionals have attempted to highlight the utility or voucher-like characteristics of their proposed ICOs in an effort to claim that their proposed tokens or coins are not securities… Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security.
“I do want to recognize that recently social media platforms have restricted the ability of users to promote ICOs and cryptocurrencies on their platforms. I appreciate the responsible step.
“The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the federal securities laws, particularly in the context of a securities offering.
In his testimony, Giancarlo noted that the CFTC determined that cryptocurrencies met the definition of “commodity” under the Commodity Exchange Act (CEA). He said that the CFTC does not have regulatory jurisdiction under the CEA over markets or platforms conducting cash or “spot” transactions in virtual currencies or other commodities or over participants on such platforms. However, Giancarlo said:
“However, the CFTC DOES have enforcement jurisdiction to investigate through subpoena and other investigative powers and, as appropriate, conduct civil enforcement action against fraud and manipulation in virtual currency derivatives markets and in underlying virtual currency spot markets. In contrast to the spot markets, the CFTC does have both regulatory and enforcement jurisdiction under the CEA over derivatives on virtual currencies traded in the United States.”
Here are the key takeaways from Giancarlo’s testimony:
“The CFTC has…formed an internal virtual currency enforcement task force to garner and deploy relevant expertise in this evolving asset class. The task force shares information and works cooperatively with counterparts at the SEC with similar virtual currency expertise.”
Speaking of bitcoin futures, Giancarlo said that the CFTC staff “conducted a “heightened review” of CME’s and Cboe’s responsibilities under the CEA and Commission regulations to ensure that their Bitcoin futures products and their cash-settlement processes were not readily susceptible to manipulation, and the risk management of the associated Derivatives Clearing Organizations (DCOs) to ensure that the products were sufficiently margined.”
Furthermore, he outlined the CFTC’s efforts towards educating investors and market participants on virtual currencies and related risks and its coordination with other governmental agencies on law enforcement activities. Giancarlo said that virtual currencies “likely require more attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space.”
Giancarlo also highlighted the potential of distributed ledger technology (DLT). He said, “DLT is likely to have a broad and lasting impact on global financial markets in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis.”
He concluded saying, “With the proper balance of sound policy, regulatory oversight and private sector innovation, new technologies will allow American markets to evolve in responsible ways and continue to grow our economy and increase prosperity. This hearing is an important part of finding that balance.”
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