Crypto Does DC: The SEC+CFTC Heads Meet Senate Banking Committee on Crypto Reform


Date: February 6th, 2018

Location: US Senate, Washington, DC

Key Attendees:  Chairman of SEC, Jay Clayton &  Chairman of CFTC, J. Christopher Giancarlo

Senate Members:  Sen. Michael Crapo (ID. Chairman of Committee on Banking, Housing, Urban affairs), Sen. Brown (OH) , Sen. Shelby (AL), Sen. Rounds (SD), Sen. Reed (RI), Sen. Warren (MA), Sen. Perdue (GA),  Sen. Shultz (OK) , Sen. Kennedy (MS), Sen. Warner (IN), Sen. Cotton (AR), Sen. Menendez (NJ), Sen. Moran (KS),  Sen. Masto (NV)

Overall Tone

Surprisingly, there was an overarching positive light shed on the emerging technology of blockchain and distributed ledgers.  Heightened focus on removing fraudulent activities in the ICO market was evident along with an increased warning for investors putting money on unregulated exchanges.  General skepticism and uninformed questions by most of the Senate members was not shocking, with many of them referring to the “old days” when they wrote down everything on pencil and paper.  CFTC Chairman Giancarlo was by far the most articulate person in the room when it came to cryptocurrencies.  Giancarlo clearly understands the wide ranging benefits of blockchain technology and the tidal wave of support behind cryptocurrencies at the moment.    SEC Chairman Clayton was primarily focused on ICO’s and the lack of oversight on offerings in the past year.  While he repeatedly stated the ICO’s should be treated like security offerings, he did admit that zero crypto companies have registered their offerings with the SEC to date.

Headline Quotes

  • “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” – CFTC Chairman Giancarlo during opening remarks
  • “It’s also important to note that the technology innovation and ideas underlying these 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 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 evolve” – Chairman Crapo during opening remarks
  • “That growth has shown us the interaction of ingenuity and too often greed sometimes it appears that scam artists and hackers may understand more about the technology than most market participants” -Sen. Brown during opening remarks
  • “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 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 cryptocurrencies and ICO’s which are subsets of the products seeking to take advantage of the commercial opportunities presented by blockchain technology.  One is promoted to be a replace for dollars the other is like a stock offering.”- SEC Chairman Clayton during opening remarks
  • “Without bitcoin there wouldn’t be Bitcoin or DLT (Distributed Ledger Technology).  Applications range from enormous potential in FinServices and banking right down to the way charity dollars are spent.  DLT for 2.5 billion people that don’t have access to banking services.  Agriculture futures of 66 million tons were just handled through a blockchain transaction by Dreyfus company for a sale to China.  Used in logistics.  Potential for regulators to be able to do really close market surveillance.  If it would have been available in 2008, if we would have been able to see the credit exposure of one bank to another bank in real time with precision, that would have enabled much more precise policy choices that had to be made without good data.  DLT has enormous potential, when and how, we can’t say but the potential is extraordinary” – CFTC Chairman Giancarlo when asked about the potential of blockchain / DLT

Senate Questions (in order of relevance to crypto)

Question 19 (Sen. Warner) “We are onto something that is transformational and I don’t think you can separate the underlying DLT blockchain from some of these crypto assets.  If we had the same rate of inquiries that we’ve had the last couple years.  We’d be north of 20 Trillion caught up in this area by 2020.   1/3 of bitcoin exchange have been cyber hacked. This is the reason we created FSOC as a systemically relevant event/ analaysis, is this a FSOC level event?

  • Clayton There’s a big rise here, if it continues is it a FSOC level event.  Separate ICO’s and cryptos and we should regulate them as securities. 33 and 34 act we were going to rely on gatekeepers to help us enforce those acts- same thing for cryptos.
  • Giancarlo = important we coordinate on this. Bitcoin futures is institutional and high net worth and regulated. Now we have visibility and data into the spot markets

Question 1 (Chairman Crapo): do you have sufficient jurisdiction. Should congress revise financial law so that one or group of agencies have complete jurisdiction?

  • Clayton = we should all come together, we’re worried about protections on exchanges. we may need additional powers. Get together then re-advise Congress
  • Giancarlo = recognize where the gap in regulation is. The spot market is not a regulated marketplace.  Exists a patchwork of state regulators. Use FInCEN for anti money laundering and KYC

Question 2 (Chairman Crapo): What are the cross border and cross-national challenges?

  • Clayton = patchwork is not sufficient for mainStreet investors. FinCEN says they are used for illicit activity
  • Giancarlo = global markets is a 21st century issue for many things.

Question 4a (Sen. Shelby) The SEC losing staffing, isn’t this troubling?

  • Clayton = There’s a hiring freeze.  I want more bodies but we’re not asleep at the switch

Question 4b: (Sen Shelby) How to put together a task force to deal with cryptocurrencies?

  • Clayton = Treasury Secretary has brought us together.  Cryptocurrencies only work if they are integrated with the financial system.
  • Giancarlo = Treasury Secretary is setting up work streams for coordinating cryptocurrency and oversight.  Find out what we do need to do and what we don’t need to do. Emphasizes need to find the gaps.

Question 5: (Sen Shelby) Do you need additional legislation or will a task force suffice?  Crypto has a lack of intrisic value and liquidity. I Can’t see a bottom ?  

  • Clayton = no definitive answer, we may be back with Fed/Treasury for more legislation
  • Giancarlo = Some economist posit there’s a relationship between bitcoin value and the difficulty and cost of mining.  Price broke free of this correlation over the summer and came back end of the year.  Economists state there is a floor (not endorsing just sharing).
  • Clayton:  A lot of smart people that think there’s value but I’m not seeing the benefits manifesting themselves in the marketplace.  Mainstream investors should understand that.

Question 6: (Sen Shelby)  How do you put a value on cryptocurrencies?

  • Clayton = What something is worth is what someone is willing to pay you for it.  In our world, the securities world, there are rules dictate how much you have to tell somebody about what you’re selling them.
  • Giancarlo = Market integrity is the core mandate for futures.

Question 7: (Sen Reed) Do you have the technologists and cryptologists to understand this?  This is the direction it’s going. Do you have anyone on staff like that?

  • Clayton = Started crypto / cyber group to learn about this.  Needs more horsepower to look internationally and see where it’s going to land.  Combo of economists and technologists (DHIRA/Enforcement) [looked nervous that he’s understaffed]
  • Giancarlo = Hired first Chief Innovation Officer, Lab CFTC (innovation hub in NYC), virtual currency task force (took down 3 bitcoin fraudsters already). Requested 13% over budget for next year (fintech/cyber division)

Question 8: (Sen Reed) Bitcoin is only 1 currency.  Sheer expansion is worrisome, are you tracking this? Is someone looking long-term at a systemic effect (worried about the 90-2000’s crash)?

  • Clayton = Does 10 cryptocurrencies make sense, does 15-20 make sense?  Probably not.  On systemic risk, there’s not any yet but people getting ripped off does have effects.
  • Giancarlo = There are a handful with significant traction. Mentions “my big coin Ponzi scheme”.  Still a relatively small market (NOT A BUBBLE)

Question 9: (Sen Rounds) Fascinating evolution, it comes back to dollars and cents. Sounds like bartering? How do you tax it? How do you recognize income? [rambling] Do you have control over an ICO- what is that thread you utilize to oversee this?  Is bitcoin a commodity, security, or both?

  • Clayton = If the purpose is to profit (coin for money exchange) and it increases the value of the coin and you can trade it to someone else. That’s a security.
  • Giancarlo = See’s three subsets of classification. Medium of exchange (currency), store of value (commodity/asset), or means of account (Fed/currency).  Mentions HODL.  Buy it and hold it, if there’s derivative on it we’ll regulate it. Looking for fraud and manipulation and will be aggressive on this

Question 12 (Sen Perdue) Opportunity in tax jurisdictional arbitrage-do you guys see that today in this developing cryptocurrency market and ICO’s?  Who pays for frivolous class action lawsuits (goes off South Korea and Japan that have increased regulation and have the largest volumes). How do we combat arbitrage?

  • Clayton =  Regulatory arbitrage is one of many issues in this market.  Tax loss is there, record keeping are hard to trace.   Each country takes its own stance.  There’s a lot happening beyond the understanding of your average investor.
  • Giancarlo = Price arbitrage (kimchi premium in South Korea).  In early days of every market there was a cotton market in every city with different prices, thinks this will evolve and stabilize price.  Perception that bitcoin is off the regulatory grid but this isn’t true, regulation global is on the horizon.

Question 13 (Sen Perdue) What are the efforts to combat Pump and dump schemes?

  • Clayton =  It’s one of the things investors don’t understand, the ability to manipulate prices goes up significantly.
  • Giancarlo =  Has a virtual currency task force that is digging deep.  Working the beat hard with jurisdiction.

Question 14 (Sen Shultz) What ways can you help retail investors from falling victim to fraud and manipulation?  Are you concerned about online solicitations ?

  • Clayton = In terms of getting the word out: counting on existing parties to act responsibly.
  • Giancarlo = Partnership with the CFPB to educate public.  One of most common terms searched on a library computer is “bitcoin”.  Huge push for consumer education.

Question 15 (Sen Shultz) What warnings would you give to hard working Americans who seek to use Bitcoin as my “pension”?

  • Clayton =  Disruptive technologies will provide winners but there will be losers
  • Giancarlo = If it sounds to good to be true, it is.  If you are going to give them money you better be prepared to lose it

Question 16 (Sen Shultz) How can we prevent terrorist organizations or nations like North Korea from using these currencies?

  • Clayton =   We have a dark web team monitoring this
  • Giancarlo = work very closely with law enforcement, FBI. Requires cooperation amongst multiple agencies

Question 20 (Sen Cotton ) Putting aside bitcoin or other crypto’s, what’s the underlying value of blockchain to enterprise, governments?

  • Clayton wherever verification and record keeping has cost, it has opportunity.
  • Giancarlo = Without bitcoin there wouldn’t be Bitcoin or DLT (Distributed Ledger Technology).  Applications range from enormous potential in FinServices and banking right down to the way charity dollars are spent.  DLT for 2.5 billion people that don’t have access to banking services.  Agriculture futures of 66 million tons were just handled through a blockchain transaction by Dreyfus company for a sale to China.  Used in logistics.  Potential for regulators to be able to do really close market surveillance.  If it would have been available in 2008, if we would have been able to see the credit exposure of one bank to another bank in real time with precision, that would have enabled much more precise policy choices that had to be made without good data.  DLT has enormous potential, when and how, we can’t say but the potential is extraordinary.

Question 21 (Sen Cotton ) Dow jones had single largest point decline (4.6 is high).  The dollar has faced 2% inflation, but bitcoin has seen 32,000% increase in value over past 5 years. Declined 60% in last 30 days. What drives the extreme volatility vs the US dollar?

  • Clayton I don’t know, something different than what would drive the dollar.  It’s one of the issues compared to the medium they are a substitute for.
  • Giancarlo = volatility in bitcoin was not as much as in VIX products  (fear index) .  We have seen volatility, we’re used to volatility in asset classes. Provides a way of hedging and mitigating that risk and volatility.

Question 22 (Sen Cotton) What issues does this provide if it were to be used a national tender, currency? (Mentioned rogue nations, terrorist organizations use)

  • Clayton maybe it tamps down, but an asset that’s highly volatile is not a good means of exchange.  Significant risk

Question 23 (Sen Menendez ) Nations (Venezuela/Russia) are developing virtual currencies to evade US Sanctions? What role does the SEC / CFTC have in engaging or regulating proposed new petrol or crypto ruble and preventing the use of these to evade US sanctions?  Interacting with FInCEN, are there gaps that could create vulnerabilities?

  • Giancarlo = Very limited in that area, only an instrument to take authority for fraud or manipulation.  Will need to review where the gaps are and what jurisdiction we would need.

Question 24 (Sen Menendez) ICO growth from 93 million to 4 Billion in 2017.  Mentioned Floyd Mayweather and Centracoin and Kardashian promoting on instagram.  What can SEC do to better protect consumers from ICO’s? Why not comfortable with ETFs?

  • Clayton If you are promoting securities, you are open to securities law liability.  It’s a largely retail ETF marketplace.  Issues are price discovery, custody, volatility. Don’t want to approve with a cryptocurrency underlying ETF until those issues are resolved.

Question 25 (Sen Moran) Funding request question on FY18 and FY19 for FSGG, whats the highest priority?   Don’t ETF ‘s mitigate risk ? Or is bitcoin / cryptocurrency so unique that it doesn’t do this?

  • Clayton Options are institutional mostly, can take both sides (long and short).  ETF’s are for a long investor, generally.  Which is a different dynamic than a future’s product.  (Liquidity, custody, pricing rules)

Question 30 (Sen Warren ) Some ICO’s raise money for legit companies, some are Ponzi schemes.  Investors are everyday Americans.  Its now so bad that Facebook banned all ads for VC and ICO’s due to deceptive and misleading advertising.  How do we make ICO’s safer?  How many registered ICO’s with the SEC? How many upcoming ICO’s have registered with the SEC? Why is that so?

  • Clayton Zero. Not one.  I don’t think the gatekeepers we rely on to assist us in making sure our securities laws are followed have done their job. We’ve made it clear what the law is. There are thousands and thousands of private placements in the US.  We want people to raise capital, but we want people to do it right.

Question 17 (Sen Kennedy ) I don’t think the disclosure we have now works.  We over disclose. Write me a good disclosure for Bitcoin. Ask 50 people from DC phone book and say read this.  How far should we even disclose? Or just outright ban it?  [made a mistake and said South Korea is banning it when they aren’t]

  • Clayton I’m not satisfied with trading exchanges and upset about skating rules with ICO’s

Question 18 (Send Kennedy ) We can extend disclosure to bitcoin but you haven’t done anything.  Must make sense and help people other than the lawyers.

  • No responses

Question 27 (Sen Masto ) Companies like Kodak are jumping into cryptocurrency.  Companies using blockchain to benefit from the technology hype. Mentioned LFIN and watched its stock soar after changing it’s name from Long Island Ice tea to Long Island Blockchain.  Are you concerned that companies are using blockchain as a scheme to pump up stock price?

  • Clayton Yes. I’ve put out a warning in the space.  Nobody should think its okay to change your name to blockchain when you have no underlying blockchain business plan and try to sell securities around the hype around blockchain,  (on the website, did a speech).  Its problematic.
  • Giancarlo =  we focus on fraud and manipulation where there are wild claims for them. Mentions “my big coin” scam again and how they shut them down.

Question 28 (Sen Masto ) It’s been reported that 13 million bitcoins have been stolen, about 14% or 1 in 7. On January 26th, CoinCheck, was hacked in minutes, in addition to Mt Gox hack.  When virtual currencies are stolen what can investors do to get their money back if anything?

  • Clayton very good point.  Addressed in investor alerts.  There are no practical chances we can get that money back if done offshore on unregulated exchanges. No custody protections.
  • Giancarlo =  Can’t regulate these companies to have cyber protections. JFSA has been aggressive on this. This is a problem. This is a gap.

Question 1 (Sen Brown) Ico’s raised 4 billion in early 2017, how much was raised in US?

  • Clayton = significant enough that we should pay attention

Question 2: Is there any Coordination for CFBP (Consumer Financial Protection Bureau)?

  • Clayton = FSOC, enforcement perspective = don’t see them on securities side. No direction coordination


Final Thoughts

We’ll come right out and say this. There will be no outright ban in the US.  However, regulation is coming. It is clear that the top agencies that are tasked with this regulation are playing catch up and undermanned to do this effectively.  We look to individuals like CFTC Chairman Giancarlo to keep spreading positive messaging about safe investing principles with regards to cryptocurrencies going forward.  For now we expect the markets to recover on this slightly positive (not negative) news but anticipate many future Senate Committee hearings in the months to come!