Chairmen Jay Clayton of the SEC and J. Christopher Giancarlo of the CFTC collaborated in an op-ed for The Wall Street Journal. This write-up may shed light on which aspects of cryptocurrency regulations fall under which agency’s jurisdiction. In it, they describe DLT (Distributed Ledger Technology) as “the advancement that underpins an array of new financial products, including cryptocurrencies and digital payment services.”
As market regulators, their task is to create and enforce new rules with the desired result of reducing market manipulation, fraud and other nefarious activities conducted by bad actors, without stifling innovation. With regard to blockchain technology and cryptocurrencies, ICOs and other DLT initiatives are now on the radar of the CFTC and the SEC. They see related investments as high-risk, comparing the cryptocurrency market to the dot com bubble from the 1990s. In their article, the chairmen claim that only a fraction of the companies that “chased the dot com promise” survived, and most did not deliver life-changing returns to their investors.
On the positive side, the chairmen are quick to point out that they are not making a statement against investments in innovation, acknowledging that some of the surviving companies from the dot-com era are among the world’s top companies today, and that their regulatory efforts should embrace such innovation.
They believe that history “has proved that transparency, investor protection and market integrity are critical to ensuring that innovation continues.” They will receive no argument to that logic here. However, they continue to suggest that “substantial DLT-related market activity [that] shows little or no regard to our proven regulatory approach.” They are correct that in this unregulated market, there are a number of companies that do not follow protocol according to regulations that have been in place for more traditional markets. The point of contention, is whether enacting such regulations will produce the desired effect. Some investors embrace regulations, with the belief that people in government know better than individuals who make their own decisions with their own money, such that government agencies like the SEC and CFTC are designed to protect less sophisticated investors. Others see regulations as government overreach, such that a free market will naturally select winners and losers, where companies that create real value will thrive, while those that are based on nothing but hype will fail.
The chairmen suggest that cryptocurrencies lack “sovereign backing” as well as “governance standards, accountability and oversight, and regular and reliable reporting of trading and related financial data” when compared to fiat currencies. We would suggest that the blockchain is superior to “sovereign backing” – it’s a trustless system, rather than one based on the whim of bureaucrats who decide on interest rates and other factors that have a direct impact on the value of fiat currencies. The blockchain also has a distributed ledger; with the exception of privacy coins, you can literally track every single transaction related to a unit of cryptocurrency from inception.
The article goes on to describe certain policing efforts, including the Bank Secrecy Act and federal anti-money-laundering legislation. They also describe bitcoin futures products, where exchanges are permitted to self-certify without CFTC approval, and they issue a warning. Specifically, the “SEC will vigorously pursue those who seek to evade the registration, disclosure and antifraud requirements of our securities law.”
The CFTC and SEC, along with other government organizations will work together to deter and prosecute fraud and abuse. That said, the underlying message is actually a positive one. They acknowledge that this technology is necessary, and that they will consider such innovation when crafting new regulations.