SEC Chair Jay Clayton and CFTC Chair J. Christopher Giancarlo vowed to support and scrutinize distributed ledger technology ("DLT") and cryptocurrency-related market activity. In a joint op-ed published in The Wall Street Journal, the agency heads cautioned investors on the risks of investing in cryptocurrencies, given limited regulation and "substantial DLT-related market activity that shows little or no regard to our proven regulatory approach." Mr. Clayton and Mr. Giancarlo also signaled support for efforts by Congress and others to revisit the existing regulatory structures to provide more effective regulation of cryptocurrencies, particularly spot market trading.
In the op-ed, Mr. Clayton and Mr. Giancarlo acknowledged that advances in DLT are driving important innovations in various areas, such as cryptocurrencies and digital payment systems. They argued that history has shown that the transparency, investor protection and market integrity that come from appropriate regulation are critical for innovation to continue as well as to prevent abuse. They noted widespread retail investor participation in cryptocurrency-related investments, and warned that the risk to all investors in the current environment is high.
Mr. Giancarlo and Mr. Clayton also explained that cryptocurrencies were initially promoted as payment facilitation alternatives to traditional currencies but are now primarily investment assets. Much DLT-related market activity in today's markets operates outside of regulated venues. They underscored the prevalence of unregistered, offshore "spot market" platforms outside of the SEC and CFTC regulatory umbrellas.
In response to these developments, Mr. Clayton and Mr. Giancarlo called for reconsideration of current regulatory frameworks, and highlighted the activities of their respective Commissions to police cryptocurrency markets where they have authority. With respect to initial coin offerings ("ICOs"), the agency leaders also warned that coins that have the characteristics of securities will be regulated as such, and that the SEC "will vigorously pursue those who seek to evade the registration, disclosure and antifraud requirements of our securities laws."
Commentary / Jeff Robins
Other than the fact that it was jointly authored by two Commission Chairmen and published in The Wall Street Journal, what's most striking about this editorial is how far it tilts in the direction of advocating for greater regulation. While both Clayton and Giancarlo have previously issued strong public warnings about fraud and abuse in the nascent cryptocurrency markets, previous policy statements on "FinTech" financial products signaled an intention to apply a light touch to allow space for experimentation and innovation. Although this op-ed acknowledges the importance of continued innovation in DLT, it is a fairly clear statement that Clayton and Giancarlo now intend to do what they can to increase federal oversight of primary and secondary cryptocurrency markets.
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