As the Senate Banking Committee gathered to discuss cryptocurrencies last week, the room was thick with uncertainty. A Japanese cryptocurrency exchange had just suffered a theft of $500 million in digital tokens, spurring calls for regulation. Meanwhile, China added foreign crypto exchanges and initial coin offering (ICO) websites to its “great firewall,” cutting off access to its citizens. And the price of Bitcoin, which had stirred exuberance among the masses, seemed to be in freefall.
The big question that hung in the air: could the hearing’s two star witnesses–SEC Chair Jay Clayton and CFTC Chair Christopher Giancarlo–provide clarity on how the U.S. regulatory regime would respond to all the tumult in cryptocurrencies? Senators may not have had all of their questions answered, but there are five concrete takeaways for the investing public.
The SEC and CFTC Presented a United Front
Giancarlo and Clayton have a bit of a good cop-bad cop thing going on with regard to cryptocurrency. Giancarlo of the CFTC has struck a tone of enthusiasm and curiosity about cryptocurrencies, while Clayton, for all his free-market street cred, has emerged as an unlikely skeptic. While they stuck to those roles, the regulatory duo had their talking points in line. Even before the hearing, they penned a joint op-ed in the Wall Street Journal. In that piece, and in response to questioning, they hit one consistent theme: that while blockchain technology holds the promise of innovation they wish to foster, “we will not allow it or any other advancement to disrupt our commitment to fair and sound markets.”
Neither the SEC Nor the CFTC Are the Bitcoin Police
While the regulators have a great interest in alt-coins, they have both explicitly stated that they lack the authority to directly regulate cryptocurrencies. The CFTC has said it doesn’t power over the underlying bitcoin cash market, and Clayton said in his testimony: “The SEC does not have direct oversight of transactions in currencies or commodities, including currency trading platforms.”
Crypto Investors Liked What They Heard
Before the hearing started, Bitcoin had slipped below $6,000, falling 17% on the day. Throughout the hearing, however, the price of Bitcoin rallied, erasing all losses and hitting a high of more than $7,400.
The SEC and CFTC Pushed Subtly for a Federal Licensing Scheme
The Banking Committee hearing was necessary, in part, to clarify the Swiss cheese nature of cryptocurrency regulation. That is, no one governmental body has authority that covers cryptocurrency as a whole. The SEC has aggressively asserted authority over ICOs, which it characterizes as securities and which have been the source of considerable fraud. The CFTC, meanwhile, has declared dominion over derivative products like futures. But as noted, cryptocurrency and trading platforms themselves are outside the reach of the SEC and CFTC. Clayton testified that many “U.S.-based cryptocurrency trading platforms have elected to be regulated as money-transmission services,” which typically fall under state oversight.
Those trading platforms, including the Japanese platform recently in the news, have been a source of significant concern. Both Clayton and Giancarlo suggested an openness to some form of federal licensing scheme for the trading platforms, with Clayton saying: “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.”
The SEC Isn’t Ready to Greenlight Cryptocurrency ETFs
In rejecting previous attempts to create exchange-traded funds (ETFs) for Bitcoin, the SEC has pointed to the unregulated nature of the coin. This raised the possibility that the CFTC’s decision to authorize a futures market in bitcoin would remove that objection, and, thus, give the SEC cover to bless a crypto ETF. But at the hearing, Clayton took a hard pass. “While we appreciate the importance of continuing innovation in our retail fund space,” he said, “there are a number of issues that need to be examined and resolved before we permit ETFs and other retail investor-oriented funds to invest in cryptocurrencies in a manner consistent with their obligations under the federal securities laws.”