Summary
- Many people are interested in cryptocurrencies, but are concerned about government intervention.
- The SECs Chairman Jay Clayton made a statement about cryptos last month that was largely overlooked.
- Clayton is doubling down on the “21(A) Report” at a time when his regulatory counterpart is embracing Bitcoin.
- It appears a showdown is brewing: who controls the regulation of the fastest growing asset in the world.
I
enjoy talking to people about the viability of bitcoin. It appears to
have a different value proposition for everyone. For some, there is no
value proposition because they are certain
the government is going to shut it all down. These people are not
stupid — they know their government. For this reason, I think it’s
important to track statements made by government institutions like the
Federal Reserve and the SEC pertaining to Bitcoin, cryptocurrencies and
ICOs.
SEC Chairman Jay Clayton
On December 11, 2017, the SEC issued a statement regarding Bitcoin and cryptocurrency.
“This statement,” said SEC Chairman Jay Clayton sworn in by Trump in January of 2017, “provides my general views on the cryptocurrency and ICO markets…
Among the more interesting points Clayton points out in his statement are the following:
1) “to date no initial coin offerings have been registered with the SEC.”
2) “The
SEC also has not to date approved for listing and trading any
exchange-traded
products (such as ETFs) holding cryptocurrencies or
other assets related to cryptocurrencies.”
3) “If any person today tells you otherwise, be especially wary.”
Translation: The SEC has not approved any crypto or ETF.
“Please also recognize,” Clayton goes on to say,
that these markets span national borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge. As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds.
It
is Clayton’s job to protect investors, but I think he goes beyond that
role here. In particular, he tells investors to be weary because at any
point in time someone could run away with your money overseas — as if
this can’t happen with other investments.
This
is a specious argument. Your invested funds may quickly travel overseas
if you invest in stocks as well. In fact, they very likely do.
Corporations spend the money we invest with them overseas all the time,
why not? So yeah, this is a risk, but nothing we aren’t already very
much accustomed to with our current system of currency, which is over
90% digital.
On a good note, regarding ICOs, Clayton believes that:
initial coin offerings — whether they represent offerings of securities or not — can be effective ways for entrepreneurs and others to raise funding, including for innovative projects.
So that’s good, but he goes on to say that:
replacing a traditional corporate interest recorded in a central ledger with an enterprise interest recorded through a blockchain entry on a distributed ledger may change the form of the transaction, but it does not change the substance.
Translation:
“The reason I like ICOs is because they’re essentially IPOs. If these
are really IPOs, I (the SEC) should be regulating them.”
The 21(A) Report
Clayton
has two options regarding his views on crypto. He can say that ICOs and
cryptos are legal or illegal. Here Clayton does not mix words. He urges
market professionals to use a document referred to as (the “21(A) Report”) as legal precedent. The 21 Report is an investigative report released in July of 2017 in the SEC vs. The DAO.
“In the 21(A) Report,” Clayton says,
the Commission applied longstanding securities law principles to demonstrate that a particular token constituted an investment contract and therefore was a security under our federal securities laws.
He goes on to say that,
brokers, dealers and other market participants that allow for payments in cryptocurrencies, allow customers to purchase cryptocurrencies on margin, or otherwise use cryptocurrencies to facilitate securities transactions should exercise particular caution, including ensuring that their cryptocurrency activities are not undermining their anti-money laundering and know-your-customer obligations.
Or
what? This statement may sound threatening to those worried about
government intervention, but it’s more like the roar of a toothless
tiger. Money laundering disclosures are a joke in the financial
industry. Just during the week of Christmas, the Federal Register
announced that the Trump Administration would be waiving fraud and
corruption fines for Citigroup (5-year exemption), JPMorgan (5-year
exemption), Barclays (5-year exemption), UBS (3-year exemption), and
Deutsche Bank (3-year exemption). This is the same list of megabanks
that the Obama Administration extended one-year waivers to as well,
though it is
particularly troubling that Trump, unlike Obama, owes these banks a
large amount of money. Even if the exemptions weren’t in place, any
fines rendered are a tenth of a percent of the profits made. What’s
ironic is that the SEC has been rendered impotent over the last five
years by the very institutions that are asking for its protections
today.
What’s Next: Wall Street Is At Odds With Itself Over Bitcoin
In
my next article we’ll continue to look at the battle brewing between
the CFTC and the SEC. Both want control over this growing industry. On
the one hand government regulators like the SEC want to shut Bitcoin
down. On the other hand, the CFTC recently approved bitcoin futures
contracts for several institutions including the CME, CBOE and Cantor
Fitzgerald. Both sides have many stakeholders with deep pockets. My
money is on Bitcoin.
Disclosure: I am/we are long cryptos. I wrote this article myself, and it expresses my own opinions.
