SEC and CFTC Express Concerns About Virtual Currency Regulation in Testimony Before Senate Banking Committee | Practical Law

SEC and CFTC Express Concerns About Virtual Currency Regulation in Testimony Before Senate Banking Committee | Practical Law

An update covering new developments regarding the regulation of virtual currencies by the SEC and CFTC and their respective oversight roles in the space.

SEC and CFTC Express Concerns About Virtual Currency Regulation in Testimony Before Senate Banking Committee

by Practical Law Corporate & Securities
Published on 08 Feb 2018 • USA (National/Federal)
An update covering new developments regarding the regulation of virtual currencies by the SEC and CFTC and their respective oversight roles in the space.
On February 6, 2018, the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) testified before the Senate Banking Committee (the Committee) to address their agencies' roles in federal oversight of virtual currencies. Among the rainbow of topics addressed in the two-hour hearing, a number of topics surfaced as crucial threshold concerns or action items related to the regulation of cryptocurrencies and Initial Coin Offerings (ICOs):
  • Jurisdiction.
  • Regulatory and price arbitrage.
  • Regulatory staffing.
  • Investor education.
  • Gatekeepers.
While CFTC Chairman Chris Giancarlo unequivocally stated that the CFTC has jurisdiction over virtual currencies, SEC Chairman Jay Clayton was more measured, stating that the SEC maintained jurisdiction over certain aspects of the market, such as ICOs. Clayton added, however, that legislation might be needed to fill gaps in the regulation of this "new asset class." Similarly, the chairmen expressed concerns about systemic and problematic regulatory and price arbitrage due to, among other factors:
  • The number of exchanges on which cryptocurrencies are actively traded.
  • The absence of custody requirements, regulation, or insurance for assets held by retail investors through platforms designed to facilitate buying, selling, transferring, or storing digital currencies.
  • The lack of uniform domestic and international regulation.
  • The lack of SEC and CFTC jurisdiction over foreign markets, where many of cryptocurrency exchanges are based.
  • Challenges to imposing restrictions or effective prohibitions on "pump and dump" schemes and other manipulative practices.
  • The self-selection of the Financial Crimes Enforcement Network (FinCEN) as the regulator-of-choice by US-based cryptocurrency trading platforms, who have elected to be regulated as money-transmission services.
  • The need for coordination between the CFTC, which has allowed futures trading, with the SEC, which currently does not allow crypto-backed ETFs.
The Committee expressed concern about staffing and the ability of the CFTC and, particularly, the SEC to regulate cryptocurrencies and ICOs due to hiring freezes and a lack of in-house technical knowledge. The Committee also questioned the CFTC and SEC about programs designed to educate the investing community about the risks associated with virtual currencies.
Clayton took the opportunity to reiterate his warning to market gatekeepers, such as lawyers and accountants. Specifically, Clayton stated that gatekeepers "have not done their job," and noted that he disagrees with practitioners who advise their clients that the securities laws do not apply to an ICO.
Shortly before the hearing, the SEC and CFTC published, respectively, the Written Testimony of the Honorable Jay Clayton, Chairman, SEC and the Written Testimony of the Honorable J. Christopher Giancarlo, Chairman, CFTC. The written testimony, together with the webcast, are available on the Senate Banking Committee's webpage.
For more information about SEC and CFTC oversight of virtual currencies, see Legal Updates, SEC and CFTC Issue Statements on Cryptocurrencies and Initial Coin Offerings and SEC Chairman Warns Legal Advisors on ICOs.