March 15, 2018
The Congressional Hearing on Cryptocurrency Is a Cause for Celebration
The cryptocurrency community ought to be celebrating their victory at a congressional hearing on Feb. 6, 2018. The Securities and Exchange Commission (SEC) Chairman Jay Clayton and the Commodity Futures Trading Commission (CFTC) Chairman Christopher Giancarlo testified before the Senate Banking Committee, mapping out the future of cryptocurrencies. To the surprise of many, the hearing was surprisingly optimistic and lacked the ominous undertones many anti-regulators had worried about prior to it.
Seemingly the primary focus of both the SEC and the CFTC is, in this case, to protect Main Street investors from risks, such as fraudulent ICOs, while still encouraging robust growth in the new and innovative crypto space. The key takeaway is that cyrpotocurrencies, ICOs, and blockchain technologies are here to stay and likely will continue to see robust growth under the SEC and the CFTC. The cryptocurrency community can breathe a little easier — while federal regulations may be forthcoming, they will not cripple the cryptocurrency industry. In short: the future of cryptocurrencies is still bright and teeming with possibility.
A Regulatory Net
While it’s clear that the long-term health of the cryptocurrency industry is at no serious risk, certain concerns were voiced by SEC Chairman Clayton that could lead to new government regulation. The SEC chairman’s first area of concern is the largely unregulated cryptocurrency exchange platforms and their potential to mislead Main Street investors. Clayton stressed the risk involved: a naïve Main Street investor could “look at these virtual currency platforms and assume they are regulated in the same way that a stock is regulated” and engage unknowingly in excessively risky transactions, assuming some kind of regulatory net exists. Clayton believes that such a net is of upmost importance and thus called for interagency state and federal cooperation to address this concern.
Clayton’s additional area of concern is whether an ICO ought to be classified as a security and, if so, how to best protect these securities from fraud. Clayton repeatedly claimed during the hearing that cryptocurrencies (coins or tokens) function as securities and therefore should be regulated as such. Moreover, cryptocurrencies ought to be granted the same protections as any other security in the market. Clayton sent out a clear warning to those who seek to take advantage of the system: “Those who engage in semantic gymnastics or elaborate re-structuring exercises in an effort to avoid having a coin be a security are squarely in the crosshairs of our enforcement provision.” Stephen Palley, a member of counsel in the Washington D.C. office of Anderson Kill, nicely sums up the point that “if you’re somebody who’s an innovator and not afraid of the law, this was quite positive. If you’re running a $200 million ICO and didn’t follow the law, you might be a little worried now.” Legitimate ICOs should have nothing to worry about, in other words.
A Balancing Act
The more pro-cryptocurrency CFTC Chairman Giancarlo meanwhile affirmed the positive future that lies ahead for cryptocurrency and blockchain, highlighting the applications of blockchain while also dispelling common misconceptions of the new, emerging industry. “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,” Giancarlo said. He also made a point during the hearing to dispel the notion that cryptocurrencies are a capitalist scheme to get rich off the blockchain technology, reminding everyone “it’s important to remember that if there were no Bitcoin, there would be no distributed ledger technology.” The testimony that followed pointed to the usefulness of the distributed ledger (blockchain) technology — for example, it can facilitate the process of figuring out who owned which mortgages during the 2008 financial crisis. Giancarlo further applauded the Bitcoin future’s market, arguing that the “the CFTC can now obtain trading data and analyze it for fraud and manipulation.” Both Clayton and Giancarlo ultimately agreed that the cryptocurrency and blockchain industry has enormous potential that should be pursued vigorously.
The future of the industry probably will see a change in the status quo as the patchwork of regulations become more consolidated under the federal government. However, this should not be seen as a demeaning move. The congressional hearing proves that the federal government recognizes the immense potential and revolutionary power of cryptocurrencies and the blockchain. It would be unwise for regulators to try to hinder the industry’s robust growth.
Lastly, once regulatory oversight of cryptocurrencies by the CFTC and the SEC is established, cryptocurrency exchange-traded funds (ETFs) finally may come to fruition. Consolidated regulatory authority under the federal government could lead to a flourishing of similar media. Regulated or not, the future for cryptocurrencies and blockchain technology truly is teeming with boundless possibility.