US Senate Committee on Banking, Housing, and Urban Affairs held a fact-finding hearing today on how best to regulate cryptocurrency. Chairmen from the Securities and Exchange Commission (SEC), and the Commodities Futures Trading Commission (CFTC) fielded questions from Senators about how to understand digital currency, and how the agencies will address the emerging investment asset.
Chairman of the SEC, John Clayton, and CFTC Chairman J. Christopher Giancarlo presented what each of their agencies has already done to address market manipulation, and securities fraud. However, questions remain about how to understand cryptocurrency, and whose jurisdiction it falls under. Clayton views crypto as financial securities and while Giancarlo views them as commodities. Clayton was especially critical of fraudulent ICOs and pledged to go after actors who did not play by the SEC’s rules. Giancarlo meanwhile seems open to the technology.
We owe it to this new generation to respect their enthusiasm for virtual currencies, with a thoughtful and balanced response, and not a dismissive one, he said.
While the drift of US regulations sounds favorable, many Senators grappled with the idea of the technology.
One of the main themes of the hearing was how to define cryptocurrency. Many of the Senators struggled to grasp what cryptocurrency is, and how it should be understood. South Dakota Senator Mike Rounds asked whether the status of Bitcoin was a commodity as in oil or soybeans, A security as in stocks and bonds, or a medium of exchange as in money. Giancarlo responded:
What’s so challenging about Bitcoin is that there it has characteristics of multiple different things… 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… If there’s a derivative on that, then we regulate it.
He echoed many other regulators in his view that Bitcoin is not particularly useful as a currency and that many simply want to hold on to it because there might be value in the future. In this sense, it is a commodity.
Clayton meanwhile, argued that in some ways, cryptocurrency acts more like a security. He explains that the definition of a security is very broad. He explained:
When you’re offering me something — a coin– and I give you money and the purpose of me giving you money is to profit from your efforts going forward… I’m going to take the money and give you a coin and that money is going to grow a business… and by the way you can trade [the coin] to somebody else… That’s a security.
Clayton has been especially critical of fraudulent ICOs which employ creative lawyers to argue that the coin offerings do not fall under Federal securities laws. The SEC has targeted a few of these so-called private investment pools and vows to continue. ICOs that rely on investor funds to grow their business and publicly advertise their coins, are subject SEC oversight. Clayton’s remarks mark a reiterated crackdown on unregulated securities.Both Clayton and Giancarlo agreed to work together and coordinate efforts to reduce market manipulation and fraud.
How far should the government go?
Senator Kennedy of Louisiana took a more libertarian view. He posed a philosophical question: how far should the “government go to protect people from themselves?” He remained skeptical that more regulation and laws will not matter that much if investors fail to actually read the legal disclosures on investments.
It remains an open question how the US government will decide to regulate cryptocurrency. The hearing is the first step in the Senate process to better understand how to regulate the emerging digital assets.
Following the seemingly positive Senate committee hearing, cryptocurrency markets responded by surging upwards. Some snippets of good news on the cryptocurrency front bolstered investors’ confidence. In fact, today Bitcoin is back up and trading at $7,725 USD according to Coinmarketcap. As Bitcoin rose, many altcoins followed suit.
Cryptocurrency subreddits were overwhelmingly positive about Giancarlo’s comments this morning. Though his statements are remarkable, he is not alone in the decision-making process. It’s important to remember that this hearing is only the first step — a fact-finding mission for the Senate to gather information. While the drift of regulatory guidance seems positive, it’s still too early to tell.