The Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Tuesday on virtual currencies and the role of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) in overseeing the virtual currency industry. Witnesses included SEC Chairman Jay Clayton and CFTC Chairman Christopher Giancarlo.
A key takeaway of the hearing was a concern among regulators and Committee members of opportunistic fraud taking place amid the hype around virtual currencies, also commonly known as cryptocurrencies.
Among these concerns were those involving celebrity endorsements of token sales in Initial Coin Offerings (ICOs). In some cases these sales may be fraudulent. CFTC Chairman Giancarlo noted one example where his agency took action against a company that solicited customers for a virtual currency known as My Big Coin. Mr. Giancarlo stated that within the agency that coin came to be known as “My Big Con,” as the company used the funds to purchase personal luxury items rather than using the funds for their purported purposes.
However, even when the offering is not fraudulent, members of the Senate Banking Committee voiced concern over the use of celebrity endorsements, fearing that proper disclosures are not being made. Senator Menendez raised Floyd Mayweather’s promotion of a token known as “Centra” on Instagram as one potential example.
The SEC previously released a statement on these promotions by celebrities, explaining that any “celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.”
While readers of this blog are probably well aware of similar restrictions in the social media influencer space with regard to promoting fashion items or other physical goods, the stakes here are a bit different as SEC Chairman Jay Clayton has expressed that, in his view, many of these ICOs are securities offerings. Thus, a failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws.
Chairman Clayton similarly indicated that companies should not change their name to reference blockchain technology if the company is not undertaking a sincere blockchain endeavor, and that doing so conveys misleading information to potential investors.
Another key focus of the hearing was to get a better sense of the exact scope of each agency’s jurisdiction over virtual currencies to identify gaps in the existing regulatory structure, and evaluate whether congressional action is needed to address ongoing concerns.
To that end, both chairmen emphasized a need for a multifaceted, multiregulatory approach to address the various consumer and market protection concerns facing the industry, especially with regard to regulating cryptocurrency trading platforms. Chairman Clayton, while not asking for any specific SEC authority, indicated that he was open to exploring whether increased federal regulation of cryptocurrency trading platforms would be needed.
Finally, both chairmen emphasized that the underlying blockchain technology holds enormous potential. Chairman Clayton’s testimony noted that these technological innovations have the potential to improve capital markets and the financial services industry, and to provide investors with opportunities to offer support and capital to novel concepts and ideas. Chairman Giancarlo similarly provided in his testimony that blockchain technology is “likely to have a broad and lasting impact on global financial markets in payments, banking, securities settlement, title recording, cyber security and trade reporting and analysis.” Chairman Giancarlo therefore emphasized that the industry merited a thoughtful regulatory response and not a dismissive one.