Two of the nation's top financial regulators said Tuesday that Congress may need to grant them new powers if they are to protect consumers from fraud on cryptocurrency exchanges, the digital trading platforms where investors swap dollars for bitcoin or other virtual currencies.
Asked by federal lawmakers Tuesday whether they had enough authority to shield cryptocurrency investors from scams, market manipulation and abuse, top officials from the Securities and Exchange Commission and the Commodity Futures Trading Commission said that the agencies were still consulting with other U.S. officials but that they may need more legislative authority.
“When you have an unregulated exchange, the ability to manipulate prices goes up significantly,” said SEC Chairman Jay Clayton. “Just a few coordinated sales can change the price.”
The SEC and the CFTC have broad jurisdiction over stock markets and investment products. But that authority does not extend to currency markets, officials said Tuesday, meaning regulators cannot impose the same rules on cryptocurrency exchanges that apply to, say, the New York Stock Exchange.
For example, the SEC requires stock exchanges to adhere to cybersecurity regulations. By contrast, said CFTC Chairman J. Christopher Giancarlo, regulators lack the authority to demand the same of cryptocurrency exchanges, which have fallen victim to multiple devastating hacks and thefts in recent years. Japan said this week that it was launching a probe of all cryptocurrency exchanges after $530 million worth of virtual currency was stolen from a major exchange, Coincheck.
“We may be back with our friends from Treasury and the Fed to ask for additional legislation,” Giancarlo said Tuesday in testimony before the Senate Banking Committee. He added that the federal government is still studying how cryptocurrencies differ from traditional investments — in some cases appearing to function as a security like stocks, while at other times as a commodity like gold, and at still other times as a conventional currency like the dollar.
The two chairmen, along with a number of lawmakers, acknowledged the potential benefits of cryptocurrency and cautioned against regulating the technology too harshly. Giancarlo even suggested that cryptocurrency's underlying technology, blockchain, could have helped avert the 2008 financial crisis by giving regulators the ability “to do real close market surveillance,” in real time, of problematic transactions between lenders and borrowers. As the hearing wore on, the price of bitcoin briefly rose past $7,300, and cryptocurrency enthusiasts on Reddit — a popular venue for discussions about the technology — celebrated the remarks.
“Super bullish news,” wrote user jayjayzian. “I'm actually really surprised.”
Other securities regulators have said they have witnessed an explosion in scams and solicitations targeting rookie cryptocurrency investors as demand for bitcoin has surged. And many investors have been eager to invest in “initial coin offerings,” or ICOs, which have come under increased scrutiny in recent months as their popularity has skyrocketed.
When done properly, ICOs can give entrepreneurs the funding they need to launch a successful cryptocurrency project. They also give investors the chance to buy a new token or coin at a bargain price before — hopefully — the experiment takes off. But while there may be many examples of legitimate ICOs, Clayton said, there are also many that seek to skirt regulations by misrepresenting themselves as something other than a security.
“If you’re giving people money in exchange for future development of a business in hope of a return,” Clayton told lawmakers, “it’s a security.”
In December, the SEC moved to block an ICO that had promised investors profits of more than 1,350 percent in a month. The ICO had allegedly raised more than $15 million from thousands of people since August.
Clayton said that because it views ICOs as a traditional securities offering, his agency has clear authority to take action against ICOs that violate securities law. But protecting investors on cryptocurrency exchanges remains a very different matter.
“The SEC doesn’t have jurisdiction over pure cryptocurrencies — but we have to watch it because they’re integrated with the markets we do oversee,” he said.