Federal regulators are working on a unified approach to regulating the developing market for virtual currencies. To support their efforts, they plan to provide a common set of recommendations to Congress about the legal changes they need, the Securities and Exchange Commission (SEC) Chair Jay Clayton, told the Senate Banking Committee during a Feb. 6, 2018, hearing.
Clayton testified alongside Commodity Futures Trading Commission Chair Christopher Giancarlo, and the regulators told lawmakers they had participated in an early-stage working group convened by Treasury Secretary Steven Mnuchin. But the group is not prepared to come forward with policy recommendations until it does more work. When U.S. regulators do put together their recommendations, they may seek cooperation from overseas counterparts, given the market’s international reach.
In response to Banking Committee Chairman, Sen. Mike Crapo, an Idaho Republican, Giancarlo said that because of the manner in which digital currencies interact with mainstream financial products and cross international borders that the regulatory approach will need to be comprehensive.
“This area requires a lot of new thinking,” Giancarlo said.
Digital currencies have become a regulatory concern because the market is growing rapidly. Bitcoin and other digital currencies are being touted as substitutes for established currencies like the U.S. dollar, the British pound, or the euro, and as a means to facilitate commerce in the digital world. But they are little understood beyond a few circles of insiders in Silicon Valley and Wall Street. In addition, the market’s volatility and some recent incidents that have resulted in the loss of hundreds of millions of dollars create the perception that the market is ripe for fraud.
Coin offerings raised $4 billion from investors in 2017, and, as an indication of regulators’ lack of a grasp on the market, the SEC is unable to say how many of the offerings originated in the U.S. and how much was raised from U.S. investors.
Clayton said his concerns about the market are significant enough that he has raised the issue at meetings of the Financial Stability Oversight Council, the interagency panel established by the Dodd-Frank Act to monitor risk in the financial system. Clayton and Giancarlo told the lawmakers of their concerns that the digital currencies pose a risk to the system at large.
“Our Main Street investors look at these virtual currency trading platforms and assume that they are regulated in the same way that a stock exchange is regulated, and, as I said, it’s far from that. And I think we should address that issue,” Clayton said.
In response to questions from Massachusetts Democrat Sen. Elizabeth Warren, Clayton said none of the initial coin offerings to date, and none that are being planned, have registered with the SEC. The lack of registration and reporting runs counter to the statements Clayton and other SEC officials, including Chief Accountant Wesley Bricker, have made in recent months that the coin offerings are no different than securities offerings and should be registered as such.
When Warren said, “I am understanding you to say it is a violation of the law,” Clayton agreed.
“I don’t think the gatekeepers that we rely on to assist us in making sure our securities laws are followed have done their job,” Clayton said. “What ICOs do is they take the disclosure-light benefits of a private placement and then add to it the public general solicitation and retail investor promise of a secondary market without registering with us, and folks somehow got comfortable that this was new, and it was okay, and it was not a security, it was just some other way to make money. Well I disagree with that.”
Clayton said the regulatory regime created by the Securities Act of 1933 worked on the assumption that the gatekeepers — securities underwriters and brokers, lawyers and auditors — were performing the roles assigned to them without being spurred to act by regulators.
“I think we’re going to need a much more coordinated effort,” Clayton said. “I’m counting on those people to do their job.”
A spokesperson for the Center for Audit Quality, the American Institute of Certified Public Accountants (AICPA) sponsored group that often speaks for the accounting profession on legislative and regulatory matters, said the group had not developed a policy for digital currencies. Similarly, a spokesperson for the Securities Industry and Financial Markets Association, which includes many of the investment banks that underwrite securities, said the group had not taken a position in regard to initial coin offerings.
A spokesperson for the Financial Industry Regulatory Authority (FINRA), which is the self-regulatory organization for broker-dealers, said the group is monitoring the activity in the digital currency market and working to combat fraud in it. A December investor alert from FINRA warned investors to be wary of digital currency stock scams. The SEC has also issued a series of similar warnings.
What happens next and how soon it happens is unclear.
Clayton and Giancarlo said they are not ready to make policy recommendations until they have the cooperation of their counterparts from the Federal Reserve, the Treasury Department and state securities regulators. Warren and some of the panel’s other Democrats pressed the regulators to be alert to fraud, but none of them had specific policies either. Crapo said he expects to revisit the issue but offered no timetable.
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