On Eve of Crypto Senate Hearing, Regulators Look to Fix the System
When it comes to the future of cryptocurrency regulation, few events are as consequential as Tuesday’s Senate Banking Committee hearing. On this day, Capitol Hill will be the venue of multiple hearings on cryptocurrencies, focusing on the oversight role of the nation’s securities regulators.
Securities and Exchange Commission (SEC) and Commodity and Futures Trading Commission (CFTC), the nation’s top securities regulators.
What to Expect
The Senate Banking Committee has invited senior officials from the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) to speak at the event, which is scheduled to kick off at 10:00 a.m. ET. SEC Chairman Jay Clayton and CFTC counterpart Christopher Giancarlo have each published their prepared remarks , giving market participants full disclosure of the issues they plan to tackle.
Jay Clayton’s testimony highlights a combination of skepticism and concern over whether cryptocurrencies can be governed using the Commission’s historic approach to currency transactions. He also highlighted the SEC’s enforcement actions concerning initial coin offerings (ICOs), a segment of the market that is coming under more intense scrutiny.
The SEC has expanded its oversight of ICOs significantly over the past year, beginning in July with a landmark ruling that DAO tokens were securities and therefore subject to federal regulations. On Tuesday, Clayton will issue a reminder that merely calling a token a “utility” is insufficient to sidestep federal regulations. Many crowdraises simply aren’t taking that chance and are instead avoiding the U.S. market entirely.
Even with the skepticism, the SEC’s top regulator says he remains committed to exploring whether cryptocurrency exchanges would benefit from federal regulation. According to the prepared remarks:
“[W]e 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. We also are supportive of regulatory and policy efforts to bring clarity and fairness to this space.”
Crypto exchanges fall outside federal regulation, and are instead governed by state licenses. Domestic exchanges must therefore apply with each individual state to access local markets.
Christopher Giancarlo argues that cryptocurrencies have presented “novel challenges for regulators,” but that his agency has the power to investigate domestic exchanges that may pose risks to investor safety. According to Bloomberg, the commodities regulator has already subpoenaed two high-profile cryptocurrency companies, possibly over suspicions that they were colluding to boost the value of bitcoin. The companies in question are crypto exchange Bitfinex and Tether, a startup whose tokens provide a convenient substitute for the U.S. dollar.
Giancarlo’s remarks also show that the CFTC is confident it protect traders involved in bitcoin futures and other derivatives products. However, the same guarantees cannot be provided for retail investors.
The outcome of the hearings could have major implications on cryptocurrency regulation, especially if the CFTC is granted a wider mandate to govern cash transactions involving cryptos. Although this would require a legislative amendment, Giancarlo says such a step would help overcome “shortcomings of the current approach,” namely, “state-by-state money transmitter licensure that leaves gaps in protection for virtual currency traders and investors.”
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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