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SEC Chief Got Into 'Heated' Debate on Crypto

A newly released transcript from a Securities and Exchange Commission (SEC) roundtable in June showcased the sometimes passionate discussion around cryptocurrencies within the agency.

At the start of the June 4 roundtable on conduct standards for investment professionals, according to the transcript, SEC official Eric Werner introduced Jay Clayton, who currently serves as chairman of the SEC. Werner is the associate director of enforcement for the SEC’s Fort Worth regional office.

In discussing Clayton’s work at the agency, Werner highlighted an instance in which he walked into a “heated” discussion between the SEC chairman and an unnamed attorney about cryptocurrency – while also stressing Clayton’s commitment to the issue in question.

Werner was quoted as saying:

“In fact, the first time that I met the Chairman, I walked into a heated discussion he was having with an attorney in my office about the legitimacy and viability of cryptocurrencies. I was taken aback, honestly, about how much thought he had given to this space and the issues surrounding that. And what I have learned in the time working with him is that he has given every single issue that he has confronted that same dedication and thought process.”

Clayton, whose agency is one of several U.S. regulatory bodies taking a leading role in regulating the industry, particularly around initial coin offerings (ICOs), has remarked publicly on the technology in the past.

Indeed, it was during a hearing in February that Clayton stressed the difference between cryptocurrencies and ICO-derived tokens that are securities.

“I want to go back to separating ICOs and cryptocurrencies. ICOs that are securities offerings, we should regulate them like we regulate securities offerings. End of story,” he said at the time.

Jay Clayton image via YouTube/CSPAN

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Is Every ICO a Fraud? 'Absolutely Not' Says SEC Chief

Are all initial coin offerings (ICOs) bad? “Absolutely not,” according to SEC chairman Jay Clayton.

Clayton’s remark came during a talk on “Cryptocurrency and Initial Coin Offerings” at Princeton University Thursday, with that specific comment referencing his agency’s enforcement actions against the founders of projects that have run afoul of the U.S. securities laws his agency oversees.

The remark is notable given Clayton’s past statements, including his most famous, issued in February, in which he said that he believes “every ICO” he’s seen qualifies as a security. Indeed, Clayton, who testified before a U.S. Senate committee in February, opened the talk by telling the assembled students he believes that “distributed ledger technology has incredible promise for the financial industry.”

The SEC chairman went on to argue during the Thursday event that the steps taken by the agency in recent months could actually help the industry mature overall.

He told attendees:

“Is the approach taken in Washington by the SEC adversely affecting distributed ledger technology in other areas? My quick answer is that my hope is that it’s actually helping – because this technology is being used for fraud and to the extent that it’s being used for fraud, history shows that government comes down harshly on that technology later.”

Clayton continued: “I think if we don’t stop the fraudsters, there is a serious risk that the regulatory pendulum – the regulatory actions will be so severe that they will restrict the capacity of this new security.”

One of the issues with token sales, Clayton remarked, is the attempt to classify them as so-called “utility tokens,”
which would ostensibly free them from any kind of designation as a security – and, thus, put them out of the SEC’s reach. As such, he reiterated his view that almost all token sales purport to sell such products, despite the fact that they actually fit the description of securities.

If a startup is “offering something that depends on the efforts of others, it should be regulated as a security,” he told the gathering of students on Thursday.

Clayton used an analogy to describe the difference between a utility token and a security token.

“If I have a laundry token for washing my clothes, that’s not a security. But if I have a set of 10 laundry tokens and the laundromats are to be developed and those are offered to me as something I can use for the future and I’m buying them because I can sell them to next year’s incoming class, that’s a security,” he explained.

Still, he suggested that such a definition can evolve over time.

“What we find in the regulatory world [is that] the use of a laundry token evolves over time,” he continued. “The use can evolve toward or away from a security.”

Clayton later said that he sees the cryptocurrency space as one which will continue to evolve over time. Nations may experiment with sovereign cryptocurrencies, while startups might develop different kinds applications with the underlying technology, he added.

Whether a token qualifies as a security could also change as the industry evolves, he said, adding:

“Just because it’s a security today doesn’t mean it’ll be a security tomorrow, and vice-versa.”

Jay Clayton photo by Mahishan Gnanaseharan for CoinDesk

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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SEC Chair Says 'We Are Watching' As Companies Launch ICOs

Jay Clayton, the chairman of the U.S. Securities and Exchange Commission, has issued new remarks about the regulatory risks of launching an initial coin offering (ICO).

Speaking to Fox Business on Tuesday, Clayton commented that he “loves this technology” – but that said, he believes companies shouldn’t ignore existing securities law, regardless of whether a token sale is conducted privately or publicly.

Notably, he highlighted how some companies are turning to the blockchain funding model after having issues trying to raise money through more common means, calling the trend “troubling.”

Clayton said in the interview:

“We have seen instances where companies seem to have had trouble raising money in a traditional private placement and then have switched to an ICO in order to raise the money. The business hasn’t changed substantively, but it’s a form-over-substance way to raise money. That is troubling.”

The SEC chair also repeated his argument that many of the tokens his agency has reviewed fall under the definition of a security.

“Many ICOs and many of the ones I’ve looked at specifically are securities,” he told the network. “They are offerings of interest in an enterprise where the buyer of the ICO of the token, you can call it a token you can call it a security, is basically saying I’m investing with you with the promise of a future return.”

Ultimately, Clayton demurred when asked how the SEC would enforce its regulations, saying that there are both public and private solutions for violations of federal securities laws.

On the other hand, he had a message for firms looking to launch their own token sales: “We are watching.”

Image Credit: Brookings Institute/Flickr

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Lawmakers Renew Calls for US to Lead on Crypto Innovation

“Cryptocurrency networks are much more than alternatives to the dollar or payment mechanisms.”

That was the message delivered to the heads of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) Wednesday by three lawmakers and members of the Congressional Blockchain Caucus (CBC), a bipartisan group launched last year in a bid to support the technology and its interests on Capitol Hill.

Penned by Jared Polis (D.-CO), Tom Emmer (R.-MN) and David Schweikert (R.-CA), the letter does much to repeat the CBC’s past public statements, but notably comes weeks after both agency heads testified on cryptocurrencies, explaining to the U.S. Congress what they saw as their potential amid what was then a tremendous spike in their market valuations.

In this way, the letter encouraged SEC chair Jay Clayton and CFTC chair J. Christopher Giancarlo to follow through on efforts to collaborate with the U.S. Treasury Department and the Federal Reserve on legislative actions. The signatories went on to thank the regulators for their testimony, while also warning them to continue maintaining a “light touch” on the space.

The letter said:

“The U.S. should be the home to this innovation, and should embrace these new technologies. In order for these efforts to be successful, it is imperative that we adopt a deliberate, flexible and unified approach to regulation.”

Additional dialogue was given to the question of token sales and initial coin offerings (ICOs), or funding mechanisms that rely on the use of custom cryptocurrencies.

Going forward, new proposed regulation or legislation should be “narrowly tailored,” the letter said, so as to balance consumer protection with the need for experimentation and domestic job creation.

Additional steps, it stated, should be “to avoid unnecessary concern and uncertainty,” concluding:

“We encourage you to allow continued innovation in the market, and devote more creative analysis into the ways cryptocurrencies can be utilized.”

Read the full letter below:

SEC CFTC Emmer Letter by CoinDesk on Scribd

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SEC, CFTC Chiefs Eye Closer Scrutiny of US Cryptocurrency Industry

Two U.S. financial regulators are increasing their agencies’ commitment to bringing closer scrutiny to the country’s cryptocurrency industry.

In a Wall Street Journal op-ed published yesterday, both the Securities and Exchange Commission (SEC) ands the Commodity and Futures Trading Commission (CFTC) voiced that they are devoting a significant portion of resources to monitoring the industry. And along with other authorities, they will continue to stamp down on fraudulent activities in the market.

The article was co-written by Jay Clayton and J. Christopher Giancarlo – chairs of the SEC and CFTC, respectively – and is the latest public statement from the financial regulators indicating the increasingly strident efforts being made to oversee the industry.

In July last year, the SEC issued the notable announcement that the agency may consider tokens issued during initial coin offerings (ICO) as securities that must be registered with the agency.

Yet, in the WSJ piece, Clayton and Giancarlo warned those who might try and circumvent the guidance, saying:

“The SEC is devoting a significant portion of its resources to the ICO market … Market participants, including lawyers, trading venues and financial services firms, should be aware that we are disturbed by many examples of form being elevated over substance, with form-based arguments depriving investors of mandatory protections.”

Further, cryptocurrencies are now being “promoted, pursued and traded as investment assets,” while their much-touted utility as an efficient medium of exchange now a “distant secondary characteristic,” they added.

The comments are also in line with recent moves by the SEC in halting ICO activities and filing charges against their organizers. Just last week, the CFTC, which treats cryptocurrencies as commodities, has also notably brought up legal cases to sue allegedly fraudulent cryptocurrency investment schemes.

In addition, Clayton and Giancarlo also voiced support in the article for policies that seek to review existing laws to ensure they can efficiently regulate activities pertaining to cryptocurrency.

“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. We would support policy efforts to revisit these frameworks and ensure they are effective and efficient for the digital era,” the regulators concluded.

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SEC 'Looking Closely' at Public Company Blockchain Pivots, Says Chairman

The head of the U.S. Securities and Exchange Commission said today that the securities market regulator is “looking closely” at the trend of public companies that have announced new focuses on blockchain.

As previously reported by CoinDesk, a number of firms in recent months have made waves by announcing that they are shifting to blockchain business ventures, including a firm previously dedicated the sale of iced tea. And while those announcements have often sparked price increases, the trend itself has sparked warnings from both the agency as well as groups like FINRA as one potentially ripe for abuse by would-be fraudsters.

In statements issued earlier today during an event in Washington, D.C., SEC chairman Jay Clayton said that the agency is looking into the issue, honing in on the subject of investor disclosures specifically.

“The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the securities laws, particularly in the case of an offering,” Clayton remarked.

He also said:

“I doubt anyone in this audience thinks it would be acceptable for a public company with no meaningful track record in pursuing the commercialization of distributed ledger or blockchain technology to (1) start to dabble in blockchain activities, (2) change its name to something like “Blockchain-R-Us,” and (3) immediately offer securities, without providing adequate disclosure to Main Street investors about those changes and the risks involved.”

Earlier this month, for example, the SEC moved to halt trading of UBI Blockchain, a public firm that saw its price soar in the past year thanks to its crypto-oriented branding. Data from MarketWatch suggests that the stock remains frozen.

Taking lawyers to task

Elsewhere in his speech, Clayton also took aim at some of the lawyers providing advice to would-be ICO organizers, including those he suggested of taking a more lax approach to compliance with U.S. securities laws.

“First, and most disturbing to me, there are ICOs where the lawyers involved appear to be, on the one hand, assisting promoters in structuring offerings of products that have many of the key features of a securities offering, but call it an “ICO,” which sounds pretty close to an ‘IPO,'” said Clayton.

Nearly as problematic, according to Clayton, are lawyers that “appear to provide the ‘it depends’ equivocal advice” regarding the blockchain use case, regardless of whether the associated token bears similarities to a security under U.S. law.

“With respect to these two scenarios, I have instructed the SEC staff to be on high alert for approaches to ICOs that may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar,” he concluded.

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CFTC Chair: Cryptocurrencies 'Unlike Any Commodity' Agency Has Seen

Cryptocurrencies have proven to be a unique challenge for the Commodity Futures Trading Commission (CFTC), according to the agency’s chairman.

In a statement made yesterday, J. Christopher Giancarlo, remarked on the risks posed by cryptocurrencies and initial coin offerings (ICOs).

His comments were a response to Securities and Exchange Commission (SEC) chairman Jay Clayton, whose comments on cryptocurrencies, also made yesterday, followed the latest enforcement action by the that agency.

Giancarlo commended his SEC counterpart for encouraging market participants and investors to “recognize risks and legal responsibilities they have regarding cryptocurrencies and [ICOs].”

He went on to say:

“I have said consistently that virtual currencies are unlike any commodity that the CFTC has dealt with in the past, and I know they pose challenges for the SEC as well.”

Notably, Giancarlo added that the two agencies are in “regular communication” with each other regarding both digital currencies and ICOs, highlighting the degree of inter-agency cooperation within the U.S. government on issues around cryptocurrencies.

Giancarlo further noted that his agency cannot effectively regulate cryptocurrencies, saying “the relatively nascent underlying cash markets and exchanges for bitcoin remain largely unregulated markets over which the CFTC has limited statutory authority.”

He concluded with a warning for investors, saying, they should “be aware of the potentially high level of volatility and risk in these markets.”

In his Dec. 11 comments, Clayton stated that the SEC would examine any asset impacts to the U.S. securities market, including cryptocurrencies if they fit the profile for securities.

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SEC Chair 'Optimistic' on Efforts to Catch ICO Bad Buys

The nature of initial coin offerings (ICOs) makes it harder to catch fraudsters compared to penny-stock scams, the chairman of the Securities and Exchange Commission (SEC) told a Congressional committee today.

Jay Clayton appeared before the House Financial Services Committee during a session dedicated to the SEC. The event covered a range of topics, including a hack of the ageny’s corporate filing system, EDGAR, last year.

Yet just after the recess, Congressman Ed Perlmutter (D-CO) asked about Clayton’s position on ICOs, remarking that “it reminds me of the old days with these penny stocks.”

Clayton – who said last week that he is “concerned” about the risk of the funding use case being used to facilitate pump-and-dump frauds – echoed those comments, stating that he believes his agency is up to the task of policing token sales.

He told the committee:

“I’m cautiously optimistic about the division’s enforcement of this. They know this is a ripe area for pump-and-dump. Pump-and-dump – it’s actually easier here than it is in the penny stock area, because it’s all electronic, it’s all anonymous, [and] it’s harder to catch the bad guys at the end of the day.”

The SEC chair also suggested that the prevalence of potential fraud could hamper wider adoption of the tech in capital markets. Outside of the ICO use case – through which startups or other parties can issue cryptographic tokens in an effort to fund or bootstrap a new blockchain network – market operators have looked at the tech as potential replacements for existing trading and post-settlement systems.

But according to Clayton, that work could be impaired – particularly in the absence of wider education on the risks involved with ICOs.

“It’s going to be a lot harder to get the benefits of this kind of technology, technological advancement,” said Clayton.

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