How the SEC and CFTC can address cryptocurrency while preserving U.S. innovation
By all indications the agencies are taking the right approach. Here’s how they can take it a step further.
The chairmen of the CFTC and SEC, Christopher Giancarlo and Jay Clayton, have co-authored an op-ed published in the Wall Street Journal about what their agencies are doing in relation to cryptocurrency and token markets. It gives us a hint about what they will be telling the Senate Banking Committee when they testify before it in a hearing on cryptocurrencies scheduled for February 6. We think their stance, and their agencies’ actions to date, have been generally right on the mark. Here are some thoughts on what they said.
First, they are absolutely right to compare the activity we’re seeing today in crypto to the development of the early Internet and the accompanying dot-com frenzy. They write:
For perspective, look to the 1990s. Countless companies chased the dot-com promise, yet only a fraction survived. Fewer still provided their investors with life-changing returns.
This is not a statement against investments in innovation. The willingness to pursue the commercialization of innovation is one of America’s great strengths. Together Americans embrace new technology and contribute resources to developing it. Through great human effort and competition, strong companies emerge. Some of the dot-com survivors are the among the world’s leading companies today. This long standing, uniquely American characteristic is the envy of the world. Our regulatory efforts should embrace it.
To that end, policymakers today should look at what government did during the early days of the Internet’s commercialization, which self-evidently worked so well, and run that playbook again. That vision is probably best articulated in the Clinton Administration’s 1997 Framework for Electronic Commerce's five policy principles, among which are that “the private sector should lead,” that “governments should avoid undue restrictions on electronic commerce,” and that “where governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment for commerce.” This approach is probably best exemplified by Congress’s creation of several federal Internet safe harbors that limited state reach into interstate commerce in the emerging web.
So, we’re happy to see that Chairmen Giancarlo and Clayton have identified state money transmission law as a potential barrier to the flourishing of this technology. They write:
Check-cashing and money-transmission services that operate in the U.S. are primarily regulated by states. Many of the internet-based cryptocurrency-trading platforms have registered as payment services and are not subject to direct oversight by the SEC or the CFTC. We would support policy efforts to revisit these frameworks and ensure they are effective and efficient for the digital era.
As we have said before, the creation of a federal safe harbor for non-custodial uses of cryptocurrency, modeled on the 1990’s Internet safe harbors, would go a long way to address some of the drawbacks of the current state-based regime. To make a big difference, however, Congress should consider some form of federal preemption of state-by-state money transmission licensing, which no longer makes much sense in an age of global internet payment services. On that front, Coin Center next week will release a new report outlining why and how federal policymakers can pursue that path.
Of course, Chairmen Giancarlo and Clayton are no doubt interested in making sure that markets are well-regulated and investors protected. On that count we believe that their respective agencies have the authority to accomplish these goals, and we’ve been happy to see that they’ve been exercising that authority thoughtfully.
On the SEC side, clearly some crypto tokens are securities, while some are not, and that’s a determination that’s made based on the facts and circumstances of each case looking at the economic reality and not at marketing claims or labels placed on a product. As a result, the SEC has pursued through enforcement those who have issued tokens in violation of securities laws, and it’s done so carefully as we’ve written about before. They should continue to exercise that authority, especially against obvious frauds and scams.
There are two areas where we think it would be useful for the SEC to provide more clarity. The first is around the their thinking about what is and what is not a security, and how tokens that are securities can be responsibly brought to market. Second, given the fact that consumers today can easily buy and hold Bitcoin and other cryptocurrencies directly, whether allowing exchange traded funds for these might offer better protections for investors.
On the CFTC side, the Commission has authority to address fraud and market manipulation in spot markets for commodities, and it is appropriate that it exercise this authority, especially against frauds and scams as they’ve begun to do. That said, if a cryptocurrency like Bitcoin is a commodity, then spot markets in that commodity should be treated no differently than markets in other commodities like gold or pork bellies. As it is, they are in fact already more regulated than typical commodity spot markets because, as noted above, they are licensed as money transmitters. If it becomes apparent that investors are not sufficiently protected, however, then it may be appropriate to consider whether, as part of federal preemption of state money transmission licensing, a new digital asset category should be created in law.
We’re glad to see that the SEC and CFTC are giving as much thought as they are to this technology. In the early 90s, policymakers could have made the mistake of shoving the Internet into one regulatory box. After all, what was the Internet? Was it a new type of newspaper? A bulletin board? Was it telephone service? Was it a new kind of cable television? Regulated as any one of these, it wouldn’t have reached its full potential. Another of the Clinton Administration’s principles is important here: “Governments should recognize the unique qualities of the Internet.” The same is true about open blockchain networks.