I wanted to put out a little summary of SEC Jay Clayton’s testimony on “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.” Mr. Clayton's testimony is in anticipation for the upcoming Senate Hearing which will take place in approximately nine hours for the purpose of examining the regulations of the cryptocurrency space.
The full version of Mr. Clayton's testimony is here: https://www.banking.senate.gov/public/_cache/files/a5e72ac6-4f8a-473f-9c9c-e2894573d57d/BF62433A09A9B95A269A29E1FF13D2BA.clayton-testimony-2-6-18.pdf
WHAT DOES THE SEC REGULATE?
Short Answer: A LOT!
The Hearing will look at cryptocurrencies and ICOs, and the SEC makes clear that its role is to (1) protect investors; (2) maintain fair, orderly and efficient markets; and (3) facilitate capital formation. For the sake of crypto innovation, I hope number 3 is weighted highly in this balancing test.
The SEC is a very busy organization, they oversee:
1. $75 trillion in securities trading annually on US equity markets;
2. Disclosures of 4,100 exchange-listed public companies with an approximate aggregate market cap of $31 Trillion
3. Activities of over 26,000 registered entities and self-regulatory organizations like investment advisers, broker dealers, transfer agents, securities exchanges, clearing agencies, mutual funds, ETFs, FINRA and Municipal securities rule-making board
WHO DOES THE SEC CARE ABOUT?
Short Answer: Main Street investors & fostering innovation
Mr. Clayton discussed the importance of protecting Main Street Investors 36 times and emphasized that to date, no ICO’s have been registered with the SEC, nor has the SEC approved a single listing for ETF’s to hodl any crypto.
On a positive note, “[t]hese warnings are not an effort to undermine the fostering of innovation through our capital markets – America was built on the ingenuity, vision and spirit of entrepreneurs who tackled old and new problems in new, innovative ways.” See Page 5. Mr. Clayton has committed to explore with Congress and the state regulators as to whether an increased regulation of crypto trading platforms is necessary.
ARE ICO’S UTILITY TOKENS OR SECURITIES?
Short Answer: It depends on the facts, but most are “Securities” within SEC’s jurisdiction to regulate.
Mr. Clayton highlighted that the majority of the assets he has seen in the space are being promoted as an investment opportunity that relies on the efforts of others, with their only effective utility being a medium for exchange. “Merely calling something a ‘utility’ token or structuring it to provide some utility does not prevent the token from being a security.” See Pg. 7. The main reason he purports for wanting to see ICO’s register with the SEC is to get greater disclosure requirements so Main Street investors will know the risks of their purchase.
BLOCKCHAIN FOR THE WORLD
Short Answer: Don’t add blockchain to your name just for the hype- this is misleading.
Interestingly, Mr. Clayton also makes note that he is concerned with existing publicly traded companies who have no background or use for blockchain technology and are capitalizing on the crypto-excitement to gain publicity. “I also have been increasingly concerned with recent instances of public companies, with no meaningful track record in pursuing distributed ledger or blockchain technology, changing their business models and names to reflect a focus on distributed ledger technology without adequate disclosure to investors about their business model changes and the risks involved.” See Pg. 9.
It’s possible I read this with a rose colored lens because I am so attached to the idea of a market free from regulation. My overall interpretation of Mr. Clayton’s sentiment is that (1) the SEC is a very busy organization and may not have the capacity to keep up with the number of ICOs taking place on a daily basis; (2) It is possibile to have a utility token outside the SEC’s jurisdiction, but it’s likely limited to things like Bitcorns and Rare Pepes; (3) Outright fraudsters will be prosecuted; (4) Misleading promotions that promise returns will also be prosecuted; (5) Disclosure and transparency is important; (6) If you limit your sale to Accredited Investors you by-pass the Main Street Investors that the SEC cares about protecting the most.
Disclosure: This blog is just my opinion and not legal advice.