On February 6th, 2018, there was a hearing about cryptocurrencies with the chair of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). SEC chairman Jay Clayton and CFTC chairman Christopher Giancarlo both testified that more effort should be combined through federal agencies to regulate digital currencies and to educate investors and the public about the risks. Optimism was felt from both sides during the testimonies, even with the recent fall of the cryptocurrency market.
During the open hearing, Giancarlo and Clayton spoke about what can be regulated, but mostly what should be regulated by the federal departments. They also brought a up a bigger look on the whole industry of cryptocurrencies and blockchain technologies on a long-term horizon. The testimony showed an interesting distinction between three major bases of the virtual currencies structure: digital currencies can be an alternative for fiat currencies, the future of blockchain technology and initial coin offerings (ICOs).
ICOs as a Security
Recently, there’s been many controversies regarding ICOs because of the fraudulent nature of some of them. Like Mr. Clayton said, “initial coin offerings are securities offerings. They are interesting companies much like stocks and bonds under a new label. Promoters use the term coin based on the fact that the security being offered is represented by a digital entry or coin on an electronic ledger as opposed to a stock certificate and their related entries in a company’s record. You can call it a coin but if it functions as a security it is a security. There are two major problems in the way cryptocurrency and ICOs market are operating. First, the markets for these products have subsequently less oversight than our traditional security’s markets. Second, many ICOs are being conducted illegally. Their promoters aren’t following our securities laws. If you are offering a security you have a choice, either you follow our private placement rules or conduct a public offering registered with the SEC.” With some regulations, authorities could make sure ICOs follow legislative guidelines and United States citizens could be able to participate in them.
Integral Value of Cryptocurrency
The market of cryptocurrencies is very low if we compare it to the stock market. As M. Giancarlo pointed out, the value of Bitcoin is less than the market cap of one large publicly traded company McDonald’s. Also, he mentioned that bitcoin is often compared to gold as an investment asset. The total market cap of Bitcoin is approximately 140 billion dollars compared to an 8 trillion dollars market cap for gold. That big difference in terms of market cap demonstrates that there is still potential for cryptocurrencies and Bitcoin to grow in the long term.
Bitcoin Futures Market
As mentioned by M. Clayton, there is a big commercial opportunity with Bitcoin because it is easier and cheaper to buy and sell goods, especially across borders. The transaction and verification fees and costs will be eliminated or reduced. This is very interesting because banks can’t compete with these low fees, so it brings competition to an oligopoly that has never had any before.
M. Giancarlo brought a very interesting argument regarding Bitcoin: “With Bitcoin futures we are now having visibility into underlying markets and spot markets that we would not otherwise have.” The CFTC’s chairman means that Bitcoin and the whole cryptocurrency is a big opportunity to exploit new markets and technologies that could reshape our economy. Furthermore, he mentioned that, on the blockchain, the CFTC could obtain the whole trading data history and analyze it for fraud and manipulation. This makes the blockchain technology behind cryptocurrency safer than a centralized system.
Currently, cryptocurrencies trading platforms are regulated as money-transmission services and the licenses come from a state-by-state basis. One of the biggest cryptocurrency exchanges is Coinbase, which has obtained licenses from 35 states. M. Clayton and M. Giancarlo are bothered about the unregulated nature of cryptocurrency trading platforms and their lack of security. “The CFTC can’t require cyber protections, platform safeguards and other things that consumers might expect from traditional securities,” said M.Giancarlo. That’s why M. Clayton wants the SEC, the CFTC, the federal regulators and the states to regroup and regulate the market. By doing so, it would be much safer and reassuring for investors, which, in the long run, could cause the market to stabilize and allow corporate investors to put money into cryptocurrencies.
Globally, M. Clayton and M. Giancarlo asked for a more coordinated effort between all of the groups involved. “The potential is large amongst crypto assets and the underlying blockchain could be as transformational as wireless was years ago,” mentioned Senator Warner. Blockchain technology could be the successor of the internet as we know it. “These markets are new, evolving and international. They required us to be nimble, forward looking and coordinated with state, federal and international colleagues and engaged with important stakeholders, including congress,” said M. Giancarlo. The main goal of the SEC and the CFTC is to protect the consumers from fraudsters and vulnerable trading platforms. Everyone involved in cryptocurrencies who have a long term approach to their investment should be optimistic following this hearing, as bringing regulations to the market will allow cryptocurrencies and blockchain technology to become adopted by a larger portion of the population.