Wednesday, February 07,
2018 03.31PM / SEC / By Jay Clayton and J. Christopher Giancarlo (Issued
Jan. 24, 2018)
At the SEC and CFTC, we
take our responsibility seriously.
Distributed ledger technology, or DLT,
is the advancement that underpins an array of new financial products, including
cryptocurrencies and digital payment services. Many have identified DLT as the
next great driver of economic efficiency. Some have even compared it to
productivity-driving innovations such as the steam engine and personal
Our task, as market regulators, is to
set and enforce rules that foster innovation while promoting market integrity
and confidence. In recent months we have seen a wide range of market
participants, including retail investors, seeking to invest in DLT initiatives,
including through cryptocurrencies and so-called ICOs, initial coin offerings.
Experience tells us that while some market participants may make fortunes, the
risks to all investors are high. Caution is merited.
For perspective, look to the 1990s.
Countless companies chased the dot-com promise, yet only a fraction survived.
Fewer still provided their investors with life-changing returns.
This is not a statement against
investments in innovation. The willingness to pursue the commercialization of
innovation is one of America’s great strengths. Together Americans embrace new
technology and contribute resources to developing it. Through great human
effort and competition, strong companies emerge. Some of the dot-com survivors
are the among the world’s leading companies today. This longstanding, uniquely
American characteristic is the envy of the world. Our regulatory efforts should
History also has proved that
transparency, investor protection and market integrity are critical to ensuring
that innovation continues. But today we are seeing substantial DLT-related
market activity that shows little or no regard to our proven regulatory
approach. This concerns us.
Earlier this month, the collective
market capitalization of cryptocurrencies topped $700 billion. Direct participation by U.S. investors
in cryptocurrencies is significant. The prices for these currencies are set by
trading on “spot” platforms. Many of these platforms are based offshore—and
none are registered with the Commodity Futures Trading Commission or the
Securities and Exchange Commission.
Advocates and investors initially
promoted cryptocurrencies as a payment-facilitation alternative to traditional
currencies such as the dollar and the euro. But cryptocurrencies lack a
fundamental characteristic of traditional currencies, namely sovereign backing.
They also lack other hallmarks of traditional currencies, such as governance
standards, accountability and oversight, and regular and reliable reporting of
trading and related financial data. Significantly, cryptocurrencies are now
being promoted, pursued and traded as investment assets, with their purported
utility as an efficient medium of exchange being a distant secondary
A key issue before market regulators
is whether our historical approach to the regulation of currency transactions
is appropriate for the cryptocurrency markets. Check-cashing and
money-transmission services that operate in the U.S. are primarily regulated by
states. Many of the internet-based cryptocurrency-trading platforms have
registered as payment services and are not subject to direct oversight by the SEC
or the CFTC. We would support policy efforts to revisit these frameworks and
ensure they are effective and efficient for the digital era.
In some areas, federal authority to
police cryptocurrencies is clear. The Bank Secrecy Act and its implementing regulations
establish federal anti-money-laundering obligations that apply to most people
engaged in the business of accepting and transmitting, selling or storing
cryptocurrencies. In other areas, some say, federal authority is murkier. Some
proponents of cryptocurrencies note that the jurisdiction of the CFTC and SEC
over cryptocurrency transactions is limited and cite the absence of U.S. and
other government market regulation as an investment attribute. Such claims
should give prospective investors pause.
Recently, two of the largest
CFTC-regulated exchanges listed bitcoin futures products. Although the
exchanges are permitted to “self-certify” and commence trading futures products
without CFTC approval, for bitcoin futures they spent significant time engaging
with CFTC staff and agreed to implement risk-mitigation and oversight measures,
including heightened margin requirements and a requirement that the exchanges
have information-sharing agreements in place with underlying bitcoin trading
platforms. As a result, the CFTC gained oversight over the U.S. bitcoin futures
market and access to data that can facilitate the detection and pursuit of bad
actors in underlying spot markets.
The SEC does not have direct oversight
of transactions in currencies or commodities. Yet some products that are
labeled cryptocurrencies have characteristics that make them securities. The
offer, sale and trading of such products must be carried out in compliance with
securities law. The SEC will vigorously pursue those who seek to evade the
registration, disclosure and antifraud requirements of our securities laws. In
addition, the SEC is monitoring the cryptocurrency-related activities of the
market participants it regulates, including broker-dealers, investment advisers
and trading platforms.
The SEC is devoting a significant
portion of its resources to the ICO market. Through statements, reports and
enforcement actions the SEC has made it clear that federal securities laws
apply regardless of whether the offered security—a purposefully broad and
flexible term—is labeled a “coin” or “utility token” rather than a stock, bond
or investment contract. Market participants, including lawyers, trading venues
and financial services firms, should be aware that we are disturbed by many examples
of form being elevated over substance, with form-based arguments depriving
investors of mandatory protections.
The CFTC and SEC, along with other
federal and state regulators and criminal authorities, will continue to work
together to bring transparency and integrity to these markets and, importantly,
to deter and prosecute fraud and abuse. These markets are new, evolving and
international. As such they require us to be nimble and forward-looking;
coordinated with our state, federal and international colleagues; and engaged
with important stakeholders, including Congress.
Distributed ledger technology may in
fact be the next great disruptive and productivity-enhancing economic
development. If history is any guide, DLT is likely to be followed by many more
life-changing innovations. But we will not allow it or any other advancement to
disrupt our commitment to fair and sound markets.
Mr. Clayton is
chairman of the Securities and Exchange Commission. Mr. Giancarlo is chairman
of the Commodity Futures Trading Commission.
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