As governments and regulatory agencies around the world threaten regulation to limit cryptocurrencies, the heads of the two biggest trading venues in the United States maintained a largely conciliatory posture towards them. In their Senate testimonies to discuss cryptocurrency regulation, SEC Chair Jay Clayton and CFTC head Christopher Giancarlo did not deviate much from their testimonies released Monday.
“We owe it to this new generation to respect their interest in this new technology with a thoughtful regulatory approach,” said CFTC’s Christopher Giancarlo. In Monday’s documents, both came out in favor of cryptocurrencies and highlighted their efforts to curtail fraud and scams in the ecosystem.
Both agencies have cracked down on several cases where investors have been scammed or were offered incomplete information prior to investment. (See also: ICOs: Beginning Of The End.)
A critical testimony of cryptocurrency markets would have further roiled the crypto markets, which have already shed 35.6% of their market capitalization in the last week on the back of negative regulation news from China, South Korea, and India. At 17:02 UTC Tuesday, the price of a single bitcoin was $7,021.74, up 2.61% from 24 hours ago. (See more: Bitcoin Price Briefly Plunged Below $6,000.)
The list of topics addressed during the testimony before the Senate Banking Committee covered a broad range, from defining cryptocurrencies to the purpose of disclosures related to bitcoin.
Because they represent a new investment and asset class, cryptocurrencies have defied classification. As a result, they are regulated differently by different agencies. For example, SEC Chair Jay Clayton believes ICOs are essentially unregistered securities, while CFTC head Christopher Giancarlo views them as a commodity. (See also: How The New Tax Law Affects Cryptocurrencies.)
Today's Senate hearing did not provide further clarity. Giancarlo said bitcoin has the characteristics of both a commodity and a security. But that is a non-issue for the CFTC currently because it does not have regulatory power over cash markets for cryptocurrencies. Instead, the agency is focused on enforcement action in cryptocurrency markets.
“Individually and collectively, we (government agencies) are understanding our authority and this technology,” said Giancarlo. He also pointed to the agency’s Virtual Currency Enforcement Taskforce, which polices virtual currencies and pump-and-dump schemes.
Meanwhile, SEC Chair Clayton said he believes cryptocurrencies are basically unregistered securities. "I believe every ICO I’ve seen is a security," he testified Tuesday.
Peter Van Valkenburgh, director of CoinCenter and a crypto lawyer, summed up the SEC's stance on Twitter:
Clayton also highlighted the SEC’s cryptocurrency working group, which consists of a combination of economists and technologists, to predict the future directions of digital currencies. In the past, he has cautioned investors about the pitfalls of investing in initial coin offerings (ICOs). (See also: SEC Chair Warns Investors To Beware).
“If people are getting ripped off, that presents reputational and systemic risk,” Clayton testified. According to him, his warning about the liabilities regarding celebrity endorsement of ICOs has “tamped down” ICO promotions by stars.
Does This Mean The End Of Crypto Regulation?
But today’s relatively anodyne Senate testimony may not be the end of the regulation story for cryptocurrencies. Specifically, there are two problems that still need to be solved.
The first one is a comprehensive federal response to cryptocurrencies. The United States is the second-largest trading venue for virtual currencies. But the federal government is yet to issue a cohesive or definitive statement regarding their legal status or provide directions to regulate trading or businesses involving cryptocurrencies. Meanwhile, states have moved in to fill the void. To set up a cryptocurrency business in multiple states, startups have to deal with a patchwork of regulations.
The second issue relates to services provided by cryptocurrency businesses. A majority of them are registered as money-transmission services. But they provide services that go beyond the prescribed definition for such services. For example, they provide price quotations and functions similar to that of a brokerage house, such as purchase and trading of cryptocurrencies. In this gray area of fiduciary responsibilities, it is only a matter of time before they are embroiled in a lawsuit from a disgruntled customer.
In their statements, the chair of the CFTC and SEC alluded to this confusion. “Many of the internet-based cryptocurrency trading platforms have registered as payment services and are not subject to direct oversight by the SEC or the CFTC," wrote CFTC’s Giancarlo. "We would support policy efforts to revisit these frameworks and ensure they are effective and efficient for the digital era."
In a recent op-ed for American Banker, Peter Van Valkenburgh, the director of research at Coin Center, a Washington D.C.-based nonprofit, called for the establishment of a new agency under the CFTC to regulate cryptocurrencies.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin.