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S. HRG. 115–176 

VIRTUAL CURRENCIES: THE OVERSIGHT ROLE OF 

THE U.S. SECURITIES AND EXCHANGE COMMISSION AND THE U.S. COMMODITY FUTURES 

TRADING COMMISSION 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE GROWING WORLD OF VIRTUAL CURRENCIES AND THE 

OVERSIGHT CONDUCTED BY THE U.S. SECURITIES AND EXCHANGE 

COMMISSION AND THE U.S. COMMODITY FUTURES TRADING COMMISSION 

FEBRUARY 6, 2018 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.govinfo.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

DOUG JONES, Alabama 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

JOHN O’HARA, Chief Counsel for National Security Policy 

KRISTINE JOHNSON, Economist 

ELISHA TUKU, Democratic Chief Counsel 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Deputy Clerk 

JAMES GUILIANO, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, FEBRUARY 6, 2018 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Prepared statement .......................................................................................... 36 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESSES 

Jay Clayton, Chairman, U.S. Securities and Exchange Commission .................. 4 

Prepared statement .......................................................................................... 36 

Responses to written questions of: 

Senator Brown ........................................................................................... 138 

Senator Sasse ............................................................................................ 143 

Senator Reed .............................................................................................. 146 

Senator Schatz ........................................................................................... 151 

J. Christopher Giancarlo, Chairman, U.S. Commodity Futures Trading 

Commission ........................................................................................................... 6 

Prepared statement .......................................................................................... 101 

Responses to written questions of: 

Senator Brown ........................................................................................... 156 

Senator Sasse ............................................................................................ 160 

Senator Schatz ........................................................................................... 161 

(III)

(1) 

VIRTUAL CURRENCIES: THE OVERSIGHT 

ROLE OF THE U.S. SECURITIES AND EXCHANGE COMMISSION AND THE U.S. COMMODITY FUTURES TRADING COMMISSION 

TUESDAY, FEBRUARY 6, 2018 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:04 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. The Committee will come to order. 

This morning we will receive testimony from SEC Chairman Jay 

Clayton and CFTC Chairman Chris Giancarlo on the growing 

world of virtual currencies and the oversight conducted by their 

two agencies. And welcome, gentlemen. 

Virtual currencies are meant to act as a type of money that can 

be traded on online exchanges for conventional currencies, such as 

dollars, or used to purchase goods or services, predominantly online. 

Additionally, developers, businesses, and individuals are selling 

virtual coins or tokens through initial coin offerings, also known as 

ICOs, to raise capital. 

Over the last year, many Americans have become increasingly interested in virtual currencies, especially given the meteoric rise in 

valuation and recent fall of Bitcoin. 

Just for perspective, on January 2 of last year, Bitcoin broke the $1,000 barrier, then peaked in December of 2017 at almost 

$20,000, and as of this morning is trading at roughly $6,900. Today the market capitalization of Bitcoin is roughly $115 billion. This is an incredible rise given that in 2013, when this Committee had subcommittee hearings on the topic, the total value of 

Bitcoin in circulation was approximately $5 billion. 

As virtual currencies have become more widespread, financial 

regulators and heads of financial institutions have noticed and 

voiced their opinions. 

Regulators and heads of industry have tried to educate investors 

so that they make informed decisions and ensure that the markets 

they oversee and participate in are working appropriately. 

For its part, the SEC has put forth many statements and guideposts to help the markets and investors. Namely, the SEC has 

2 

issued investor bulletins on initial coin offerings; issued an investigative report on what characteristics make an ICO a security offering; issued several statements by Chairman Clayton on the 

issue; brought enforcement actions against fraudsters; and issued 

joint statements with the CFTC about enforcement of virtual currency-related products. 

The CFTC has also been helping inform the markets by launching a dedicated website on virtual currencies to educate investors; 

bringing enforcement actions against individuals involved in 

cryptocurrency-related scams; issuing several statements by Chairman Giancarlo and other Commissioners on the issue; and scheduling hearings on the topic. 

Much of the recent news about virtual currencies has been negative. Between the enforcement actions brought by your agencies, 

the hack of the international Coincheck exchange, and the concerns 

raised by various regulators and market participants, there is no 

shortage of examples that increase investor concerns. 

It is also important to note that the technology, innovation, and 

ideas underlying these markets present significant positive potential. 

These aspects underpinning virtual currencies have the ability to 

transform for investors the composition of, and the ability to access, 

the financial landscape, thus changing and modernizing capital formation and transfer of risk. 

Technology is forward-looking, and we look to our regulators to 

continue carrying out their mandates, including investor protection, 

as markets evolve. 

I look forward to hearing more and learning more about virtual 

currency oversight from our two witnesses today, including what 

their agencies are doing to ensure appropriate disclosures and safeguards for investors. 

Senator Brown. 

OPENING STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Chairman Crapo, and welcome to 

Chair Clayton and Chair Giancarlo. Good to have you both here. 

Virtual currencies, and Bitcoin specifically, have captured the attention of investors and speculators and computer programmers 

and regulators all over the world. I do not know how many people 

imagined how quickly and broadly Bitcoin, and the technology it is 

based on, would spread. To most of us, it is nothing short of remarkable. 

To be sure, it is critical for our regulators to understand innovation and technology so that markets can grow and evolve while investors and consumers are protected. Understanding the risks of 

emerging technologies is no easy task, but we are relying on you 

to maintain the integrity of these new markets and minimize the 

risks to Americans who want to participate in them. 

The volatility of Bitcoin has also been remarkable, defying attempts to think of it as a traditional currency. Bitcoin’s 1,000-percent rise last year and 60-percent decline last month makes yesterday’s Dow Jones record point drop look almost like a rounding 

error. 

3 

But that growth has shown us the intersection of ingenuity and, 

too often, greed. Sometimes it appears that scam artists and hackers may understand more about the technology than most market 

participants. That should concern all of us. 

I hope our witnesses today can help us understand the evolution 

of the markets related to virtual currencies, raise awareness of the 

many threats involved, and identify the regulatory gaps. 

Each of you has made several public statements recently explaining the threats to investor protection and the potential for abuses 

in virtual currency markets. 

I understand that neither the SEC nor the CFTC has sufficient 

authority to police all aspects of virtual currencies, but you must 

make the most of the authority you have. 

As you both noted in the Wall Street Journal, Bitcoin mania has 

some analogies to the dot-com bubble of the late 1990s. I hope 

there are lessons from that era that you draw on to do your job to 

protect investors. 

In addition to the investment risk, virtual currency may be used 

to fund illicit activity, especially outside the United States. I know 

the regulatory framework in many other countries is still in development. I am pleased that the U.S., and FinCEN in particular, has 

been a leader. But we can do more. 

I hope the Chairman agrees with me that the Committee needs 

to look closely at the gaps in regulation in this area and to review 

your agencies’ ability to get ahead of the curve. 

As you begin to adapt to the unique enforcement and regulatory 

demands posed by virtual currencies, I call on both of you not to 

forget your day jobs—as Chair Clayton and I talked the other 

day—not to forget your day jobs: to pursue and punish misconduct, 

more traditional misconduct but very serious misconduct, wherever 

it might appear. That means Main Street; it also means Wall 

Street. 

I am concerned that it is business as usual when it comes to violations by the big banks. Just last week the CFTC imposed penalties on three big banks for market manipulation—good—but then 

decided those firms deserved waivers from bad actor provisions 

under the securities laws. That might make sense if this were an 

isolated incident, but the banks in question have something like 68 

violations over the last 10 years. So it is very, very serious. 

Too often we see big banks pay fines and move right along, with 

little contrition and, frankly, no serious punishment. Recidivist violators will not stop breaking the law if your agencies serve as sanctuaries. I have raised the issue of waivers over the years. I am disappointed in your unwillingness to pursue every avenue available. 

It is clear that virtual currencies bring us into a new age, but that 

does not mean we overlook the basic principles of going after the 

bad guys and being tough when they are repeat offenders. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. Senator Brown. 

Now we will turn to the testimony of our witnesses, and first 

today we will receive testimony from the Honorable Jay Clayton, 

Chairman of the U.S. Securities and Exchange Commission. 

4 

Following him, we will then hear from the Honorable Chris 

Giancarlo, Chairman of the U.S. Commodity Futures Trading Commission. 

Gentlemen, again, we welcome both of you here, appreciate you 

coming to share your knowledge and understanding on this issue 

with us. And, Chairman Clayton, you may proceed. 

STATEMENT OF JAY CLAYTON, CHAIRMAN, U.S. SECURITIES 

AND EXCHANGE COMMISSION 

Mr. CLAYTON. Thank you. Chairman Crapo, Ranking Member 

Brown, distinguished Senators of the Committee, thank you for the 

opportunity to testify before you today on the important topic of 

cryptocurrencies, initial coin offerings, and related trading activities. 

The total market capitalization of all cryptocurrencies was estimated at $700 billion earlier this year. In 2017, ICOs—initial coin 

offerings—raised nearly $4 billion. These markets are local, national, and international. 

Today I will attempt to level-set where we stand from a market 

regulatory perspective. My remarks may be viewed by some as 

overly simplistic, but they reflect how I present these issues to 

Main Street investors. 

For ease of analysis, I break this space into three categories: 

First, a promising new technology referred to as distributed ledger technology or blockchain. Proponents of this technology assert 

that it will bring great efficiencies to our national and global economies, including our capital markets. I hope that it does. And the 

Commission looks forward to working with market participants 

who seek to bring efficiencies, including more effective oversight, to 

our markets. 

The second and third categories are cryptocurrencies and ICOs, 

which are subsets of the products seeking to take advantage of the 

commercial opportunities presented by blockchain technology. One 

is promoted to be a replacement for dollars. The other is like a 

stock offering. 

Cryptocurrencies: Some of the more widely known 

cryptocurrencies were introduced as substitutes for traditional currencies, such as the U.S. dollar or the euro. Those who promote 

these so-called virtual currencies have asserted that they will make 

it easier and cheaper to buy and sell goods, particularly across borders. They have asserted that transaction and verification fees and 

costs will be eliminated or reduced. To date, these assertions have 

proved elusive in many areas. 

ICOs: From what I have seen, initial coin offerings are securities 

offerings. They are interests in 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 compared with a stock 

certificate and a related entry in a company’s records. You can call 

it a coin, but if it functions as a security, it is a security. 

Also, importantly, an ICO may have nothing to do with distributed ledger technology beyond the coin itself. Buying an ICO does 

not mean you are investing in blockchain-related ventures. 

5 

There are many problems with the way cryptocurrency and ICO 

markets are operating, but two are worth particular attention. 

First, the markets for these products have substantially less 

oversight than our traditional securities markets. To be blunt, if 

you are trading cryptocurrencies on a platform that looks like a 

stock exchange, do not take any comfort from that look. Our stock 

exchanges have extensive rule sets, and they are required to conduct surveillance. Also, broker-dealers who facilitate securities 

trading have capital and conduct requirements. These requirements, and others, without a doubt are necessary to protect those 

markets and our investors. 

Second, many ICOs are being conducted illegally. Their promoters and other participants are not following our securities laws. 

Some say this is because the law is not clear. I do not buy that for 

a moment. The analysis is simple. Are you offering a security? If 

so, you have a choice: follow our private placement rules or conduct 

a public offering registered with the SEC. 

A note for professionals in these markets: Those who engage in 

semantic gymnastics or elaborate structuring exercises in an effort 

to avoid having a coin be a security are squarely within the crosshairs of our Enforcement Division. 

So what are we doing about these problems? I look forward to 

discussing with you that question in more detail, but will start 

with a comment on jurisdiction and a comment on enforcement. 

We—the SEC and the CFTC—do not have direct jurisdiction over 

the popular markets that trade true cryptocurrencies. This is not 

an oversight. It is the result of a new product and market. The traditional currency markets did not need direct regulation by market 

regulators such as the SEC or the CFTC. They are sovereignbacked and regulated with a long history. 

Cryptocurrencies, on the other hand, have no sovereign backing 

or oversight and, again, to be blunt, are currently functioning as 

assets for trading and investment much more than as mediums for 

exchange. 

Please do not view this description as a request for expanded 

SEC jurisdiction. If asked, we will work with other regulators to 

evaluate and address this issue, including our friends at the Fed, 

our friends at the CFTC, and the State regulators. They all have 

a keen interest in this market. 

I will close. I know my time is short. To the extent that digital 

assets like ICOs are securities—and I believe every ICO I have 

seen is a security—we have jurisdiction and our Federal securities 

laws apply. We will enforce these laws. Many of these laws also include private rights of action. We are working with the DOJ and 

other regulators to enforce these laws. 

Thank you for the opportunity to testify before you today. I stand 

ready to work with Congress on these issues and look forward to 

your questions. 

Chairman CRAPO. Thank you, Chairman Clayton. 

Chairman Giancarlo. 

6 

STATEMENT OF J. CHRISTOPHER GIANCARLO, CHAIRMAN, U.S. 

COMMODITY FUTURES TRADING COMMISSION 

Mr. GIANCARLO. Thank you, Chairman Crapo, Ranking Member 

Brown, and distinguished Members of the Committee. I have submitted a written statement for the record that details the CFTC’s 

work and authority over virtual currencies, but with your permission, I would like to begin briefly with a slightly different perspective, and that is as a Dad. 

I am the father of three college-age children: a senior, a junior, 

and a freshman. During their high school years, we tried to interest them in financial markets. My wife and I set up small brokerage accounts with a few hundred dollars that they could use to buy 

stocks. Yet other than my youngest son, who owns shares in a 

video game company, we have not been able to pique their interest 

in the stock market. I guess they are not much different than most 

kids their age. 

Well, something changed in the last year. Suddenly they were all 

talking about Bitcoin. They were asking me what I thought and 

should they buy it. One of their older cousins, who owns Bitcoin, 

was telling them about it, and they got all excited. And I imagine 

that maybe Members of this Committee may have had some similar experiences in your own families of late. 

It strikes me that we owe it to this new generation to respect 

their enthusiasm about virtual currencies with a thoughtful and 

balanced response, not a dismissive one. And yet we must crack 

down hard on those who try to abuse their enthusiasm with fraud 

and manipulation. 

We must thoroughly educate ourselves and the public about this 

new innovation, and we must make good policy choices and put in 

place sound regulatory frameworks to reduce risks for consumers. 

Putting my CFTC hat back on, I suggest that the right regulatory response to virtual currencies has at least several elements, 

and the first is to learn everything we can. At the CFTC we have 

launched a new initiative called ‘‘LabCFTC’’ to engage with these 

innovators and inform the agency about virtual currencies and 

other financial technology. 

Next is to put things in perspective. As of 8 a.m. this morning, the total value of all outstanding Bitcoin is about $113 billion. We 

have a slightly different figure than you have, Chairman, but close. 

But the point is that that is less than the market cap of one large 

publicly traded company—McDonald’s. 

The total value of all virtual currency in the world is around $313 billion. In comparison, global money supply is around $7.6 

trillion. And because Bitcoin is sometimes compared to gold as an 

investment asset, the value of all the gold in the world is around 

$8 trillion, which dwarfs the size of the virtual currency market. 

The next task is to tell the public what we learn and educate 

consumers. There is a lot of noise around virtual currency, and regulators must help set the record straight. The CFTC has produced 

a large amount of consumer education materials on virtual currencies, including written statements, podcasts, webinars, and a 

dedicated Bitcoin website. We have even scheduled visits to libraries and briefings for seniors. We have never conducted this much 

outreach for any other financial product. 

7 

Another element is regulatory coordination. Because no one 

agency has direct authority over virtual currencies, we have to 

work together. That includes us, the SEC, the Fed, the IRS, the 

Treasury’s FinCEN network, and even State banking officials. 

And the next element is to exercise our legal authority over derivatives on virtual currencies while clarifying our statutory limitations. To be clear, the CFTC does not regulate the dozens of virtual 

currency trading platforms here and abroad. We cannot require 

them to meet requirements like trade reporting and market surveillance, standards for conduct, capital requirements, or even 

cyberprotections or platform safeguards. But these are all standard 

regulations in the futures markets we oversee. Yet through our authority over commodity derivative markets, we do have enforcement power over spot coin markets. And with newly launched 

Bitcoin futures, the CFTC can now obtain trading data and analyze 

it for fraud and manipulation in five underlying spot markets. 

And that leads to the final element, and that is tough enforcement. Led by the CFTC’s Virtual Currency Enforcement Task 

Force, we have launched several civil actions over the past few 

weeks cracking down on fraudsters and manipulators, and more 

will follow. 

In closing, I want to quote something that Chairman Clayton and 

I wrote recently in the Wall Street Journal: ‘‘These markets are 

new, evolving, and international. They require us to be nimble and 

forward-looking, and coordinated with State, Federal, and international colleagues, and engaged with important stakeholders, including Congress.’’ 

I am glad to be with you today, and I hope my kids are listening. 

Thank you very much. 

Chairman CRAPO. Thank you, Chairman Giancarlo. 

I will begin the questioning. First I will say I have had those dinner conversations with my own children, and you are right, this is 

an incredibly interesting but growing new area of financial challenge, particularly among our—at least my children and yours. 

Both of you have said in one way or another that neither of you, 

neither of your agencies have complete jurisdiction over 

cryptocurrencies. The question I have is whether you have sufficient jurisdiction, and I would like both of you to address that 

question. Should Congress address revising and refining our financial law so that one agency or a group of agencies have complete 

jurisdiction? Or if you look at the jurisdiction of all agencies today, 

do we have sufficient jurisdiction in place today? Chairman Clayton? 

Mr. CLAYTON. Well, thank you, and in my position you are always cautious about speaking for other agencies, so I thank 

you—— 

Chairman CRAPO. Understood. 

Mr. CLAYTON. —for saying that we should all come to—to be very 

direct, we should all come together, the Federal banking regulators, the CFTC, the SEC—there are States involved as well—and 

have a coordinated plan for dealing with the virtual currency trading market. I think our Main Street investors look at these virtual 

currency trading platforms and assume that they are regulated in 

8 

the same way that a stock exchange is regulated. And as I said, 

it is far from that. And I think we should address that issue. 

Chairman CRAPO. So am I hearing you say that you do not think 

we need to have additional legislative authorities? 

Mr. CLAYTON. I think we may. I think we may. 

Chairman CRAPO. So first you should get together and tell us 

what you can and cannot do and then advise us. 

Mr. CLAYTON. I think that is a very good way to put it, Senator. 

Chairman CRAPO. Chairman Giancarlo. 

Mr. GIANCARLO. I think that is exactly right. I think the first 

step is to recognize where the gap is. So as we both said in different ways, what we call the spot market for Bitcoin is not a regulated marketplace. 

For us at the CFTC, we are familiar with that because we generally do not have regulatory supervision over the spot markets for 

which derivatives apply. That is a longstanding basis. We regulated derivative markets. The underlying markets we surveil, and 

we will take enforcement action for fraud and manipulation. But 

we do not have the ability to set the standards on those markets, 

and that is what we have today in Bitcoin. And unless it is an ICO, 

then, as Chairman Clayton described, he also does not have the jurisdiction. So there is that gap, and I think the starting point for 

an informed conversation is there is that. 

Now, there are other elements to it. There are other agencies 

that come to bear on this. So State regulators, there is a patchwork 

of State regulation across the Nation. Some States have been very 

assertive in this area, other States less so, and some States have 

nothing. 

FinCEN, as you referenced, has also been active in the area in 

terms of anti–money laundering and Know Your Customer requirements. So there is a patchwork here, but there is not a comprehensive structure, and that is something that I think is a policy discussion and an important one to be had. 

Chairman CRAPO. All right. Thank you. And you have led to my 

next question. Much of the activity in the virtual currency markets 

is cross-border and international, so that raises obviously the question of what challenges does that present and what is the appropriate role for FinCEN. I would like both of you to respond. I only 

have about a minute left so take about 30 seconds each, if you 

would. 

Mr. CLAYTON. I will try to be quick. The international nature of 

this market is why a patchwork is probably not sufficient if it is 

going to continue to develop as a significant market and one that 

our Main Street investors access. 

From FinCEN’s perspective, there are reports that we all have 

heard that these cryptocurrencies are used for illicit activity. I 

think FinCEN has been stepping up in that regard, and I encourage them to continue to do so. And this challenge of global markets 

is a challenge that I think we face now in many regards. In the 

21st century with the dawn of the Internet, markets have become 

truly global and not just in virtual currencies but so many things. 

And it does become a challenge as we think about regulation. We 

certainly have had that challenge working with overseas regulators 

in the area of derivatives regulation as a result of the Dodd–Frank 

9 

Act. The challenge of bringing these regulations together in a comprehensive whole is really a tremendous challenge for all of us. So 

in this area, it requires a lot of new thinking. 

Chairman CRAPO. Well, thank you. I appreciate your remarks 

from both of you on these issues, and I would encourage you to 

form that work group, get together between yourselves, State regulators, other appropriate Federal regulators, and evaluate exactly 

what our regulatory structure should like in America to deal with 

this and let us know your thoughts, your further thoughts on that. 

I would appreciate that. 

Mr. CLAYTON. Thank you. 

Chairman CRAPO. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Chair Clayton, again, nice to see you. Last year initial coin offerings raised about $4 billion globally. You have testified that the 

SEC is focused on policing these transactions to protect investors. 

How much of that $4 billion was raised in the U.S.? 

Mr. CLAYTON. It is not clear. It is hard to get a number on that 

because this has been conducted on largely an unregulated basis, 

but I imagine, Senator, a significant enough portion where we 

should be paying attention. 

Senator BROWN. And my understanding is that during the last 

few months the SEC has taken four enforcement actions targeting 

coin offers for serious violations of law. That speaks volumes about 

the work that—the challenges in front of you. 

In response to the Chair’s question, you both talked, leading with 

you, Chair Clayton, about agencies working together and the importance of that on this and other issues. Your testimony highlights cooperation between the SEC and CFTC, Chair Clayton, regulating Bitcoin and other virtual currencies. It does not mention 

any cooperation with the Consumer Financial Protection Bureau. 

Hundreds of consumers have filed complaints with the Bureau 

about virtual currencies. How have you been coordinating your 

work specifically on this but in other areas, too, with CFPB? 

Mr. CLAYTON. On this area, largely through the FSOC. At the 

FSOC I believe I have made very clear my views in this area and 

that this is an area that we should all be on the lookout for, on 

the lookout from each of our perspectives. The CFPB is a member 

of FSOC, and they have heard my comments there. 

From an enforcement perspective, we are in the securities area. 

We do not see the CFPB on the securities side of this. I am not 

aware of any direct coordination on a particular enforcement action, but I could check on that. 

Senator BROWN. OK. In the past few months, Deutsche Bank, 

Credit Suisse, UBS, and HSBC have been fined over $300 million 

by other regulators for various forms of market manipulation. But 

SEC has been quiet under your watch. One study by a Georgetown 

law professor found that SEC has ‘‘virtually stopped enforcement 

actions against large entities, often referred to as ‘Wall Street 

firms’. ’’ 

How do we have confidence, Mr. Chairman, that the SEC is willing to hold Wall Street accountable when the trend in penalties 

and actions is going the wrong way? 

10 

Mr. CLAYTON. I actually saw that report. That probably does not 

come as a surprise to you that someone sent it to me. I found it 

annoying, to be honest, because it did not reflect the fact that the 

gestation period for the cases we bring is roughly 22 to 24 months. 

So any type of statistics necessarily have a latency period to them. 

Our Enforcement Division put out a report that talks about the 

numbers in a comprehensive way. I am happy with that report. I 

am also confident that the people who are in our Enforcement Division and leading it, many of them former Federal prosecutors, two 

of them former heads of the Securities Task Force in the Southern 

District of New York, are pursuing our securities laws vigorously. 

I have no doubt. They come to work every day and they have my 

full confidence. 

Senator BROWN. I hear you say that, and I believe you when you 

say that. I remember the last SEC—and it was not you—the last 

SEC under a Republican President, how they were asleep at the 

switch. So as the Governor of the Richmond Federal Reserve used 

to tell me, ‘‘Watch us, and let us know you are watching us.’’ 

But I am further troubled by a statement by one of the SEC’s 

enforcement codirectors last fall that SEC might lose 100 of its enforcement staff by not replacing those who leave. Compared to 2016 

figures, this would reflect a 7-percent reduction in enforcement 

head count. So how are you going to stay on top of developments 

in virtual currencies and the other enforcement in all the other 

areas that we just talked about to be able to fight traditional misconduct? How are you going to do that when you are not replacing 

them, if, in fact, that is the case? 

Mr. CLAYTON. Senator Brown, personnel is my biggest challenge 

at the moment. We have a hiring freeze as a result of natural increases in costs and people retiring or taking other jobs has reduced the size of the workforce at the SEC. I could use more people 

in Enforcement. I could use more people in Trading and Markets. 

Those are the two areas where I think the American people would 

get the greatest return for additional bodies. 

Senator BROWN. So when you come in front of us—and I appreciate your candor. When you come in front of us and tell us that 

you are having trouble filling those jobs and—— 

Mr. CLAYTON. No trouble. I just cannot. 

Senator BROWN. OK, I guess trouble that way, all right, because 

of the freeze. Isn’t that message to those who want to game the 

system and those who want to defraud the system, isn’t the message that the SEC is not the cop on the beat that even the new 

Chair wants it to be? 

Mr. CLAYTON. Do I want more bodies to do more? Yes. Is the 

message that somehow we are asleep at the switch? Absolutely not. 

Senator BROWN. And with your budget that is coming out, our 

understanding is the budget—I hope the freeze is lifted. I hope the 

budget is enough. And I hope that you will speak to us and ask 

particularly people on the other side of the aisle for the dollars you 

need and the flexibility you need to put those cops on the beat. 

Mr. CLAYTON. I think I have been very straight about an incremental amount of money and where I think value can be added. 

Senator BROWN. Thank you. 

Chairman CRAPO. Senator Shelby. 

11 

Senator SHELBY. Thank you. Thank you, Mr. Chairman. 

Chairman Clayton, you and Chairman Giancarlo, you are Chairmen of two powerful regulatory bodies, but you have different jurisdictions. Anything that smacks of security comes somewhere in 

your range, does it not? Dealing with a commodity, something that 

could be deemed a commodity clearly comes in your range. The 

Federal Reserve is the biggest bank regulator we have and also 

the—and Treasury is involved in this. How are you going to put together a task force, can you do it on your own through the Administration, to deal with the cryptocurrencies—because you have got 

the Fed, you have got the Treasury, you have got the commodities, 

you have got the securities, perhaps some others that we have not 

thought about—before this gets out of control somewhere in the 

world? 

Mr. CLAYTON. Let me start, and then Chris can—— 

Senator SHELBY. Yes, sir, go ahead. 

Mr. CLAYTON. ——by recognizing the Treasury Secretary. He has 

brought us together—— 

Senator SHELBY. That is good. 

Mr. CLAYTON. ——the CFTC, the SEC, and representatives of the 

Federal Reserve to talk about this because, Senator, you are exactly right. The funny thing about these cryptocurrencies is they 

only work for their purported purpose if they are integrated with 

the financial system. And so, therefore, it necessarily touches on all 

of our regulation. 

Senator SHELBY. Chairman. 

Mr. GIANCARLO. I would just reinforce that. The Treasury Secretary has been out front on this. He has formed a Virtual Currency Working Group of ourselves, the SEC, the Fed, and FinCEN. 

We have had a number of preliminary conversations and work 

streams developed. I have had a number of bilateral conversations 

with the Treasury Secretary on virtual currencies, and we are 

going to be coordinating our various responses. 

It has begun with just some broad conversations establishing our 

different jurisdictions so that we are all clear as to what we are 

doing, but also what we are not doing, where the gaps are. 

Senator SHELBY. Do you need additional legislation in this area, 

to both of you, or do you think you can work a task force together 

to get your arms around this without that? 

Mr. CLAYTON. I cannot give you a definitive answer to that question because we should work together, but, Senator, we may be 

back with our friends from Treasury and the Fed to ask for additional legislation. 

Senator SHELBY. You know, we live in a virtual world. We go to 

the doctor, and they give you a virtual examination, you know? We 

can go here and it is virtual, and this was not my world. I started 

out with pencil and paper in school, as you can imagine, in my day. 

But at the same time, this currency, these cryptocurrencies, they 

lack intrinsic value, it seems to me. They lack liquidity. I am sure 

people have probably made a lot of money going up, and a lot of 

them made money or lost money going down. But I do not know 

where the bottom is, if the bottom was ever reached, as opposed to 

a sovereign-issued currency. Do you disagree? 

12 

Mr. GIANCARLO. No, Senator. I do not know where the natural 

equilibrium point is in this, but I will tell you there are some 

economists who posit that there is a relationship between Bitcoin 

value and the difficulty or the cost of mining, which is a process 

of electronically producing these, and that there are some charts I 

have seen that have plotted that correlation that seemed to be 

readily correlated until last summer when the price broke free of 

that correlation and that it came back into correlation late at the 

end of the year last year. 

Now, I am not an economist. I find those things fascinating, but 

I am not an expert in it. But the point the economists are making 

is that there is some sort of floor, that the level set is not zero, that 

there is some floor there tied into the cost of mining of Bitcoin. And 

I am not endorsing that point of view. I am just sharing that with 

you. 

Senator SHELBY. Chairman Clayton, do you have any comment? 

Mr. CLAYTON. Look, there are a lot of smart people who think 

there is something to the value of the cryptocurrency in the international exchange, and I am not seeing those benefits manifesting 

themselves in the marketplace yet. And from the perspective of— 

look, I look at this as protecting Main Street investors. They should 

understand that. 

Senator SHELBY. How do you put a value on cryptocurrencies? 

Does the market put a value on it, or does it go straight up, then 

straight down, or what? 

Mr. CLAYTON. Well, that is what is something worth? It is worth 

what somebody is willing to pay you for it. But in our world, the 

securities world, you know, there are rules that dictate how much 

you have to tell somebody about what it is you are selling them. 

Senator SHELBY. But part of your mandate, the Securities and 

Exchange Commission, is to protect the investor. Is that right? 

Mr. CLAYTON. That is right. 

Senator SHELBY. And the Chairman of the Commodity Futures 

Trading Commission, he has seen obviously commodities just go 

wild at times, and your mandate is to watch the commodities, 

right? 

Mr. GIANCARLO. Market integrity is generally perceived to be our 

core mandate. 

Senator SHELBY. You also mentioned personnel, you know, you 

need personnel. There is a hiring freeze on. We talked the other 

day about—this gets into the realm of appropriations and so forth. 

I am hoping that we will give you every tool you need to do your 

job and to hire the people that you need to execute that. 

Mr. CLAYTON. Thank you very much. Thank you. 

Senator BROWN [presiding]. Senator Reed. 

Senator REED. Thank you very much. Thank you, gentlemen, for 

your testimony. 

Following on the questions of Senator Brown and Senator 

Shelby, you do need more personnel, but very specifically, do you 

have the technologists, the computer experts that can begin to understand how these cryptocurrencies work, the cryptologists, and 

not just sort of on a day-to-day basis, you know, to give you the 

Thompson, but look ahead and say this is the direction it is going, 

13 

which could have very significant deleterious effects? Do you have 

anyone like that on the staff? 

Mr. CLAYTON. The answer to your question is we formed a Distributed Ledger Technology Working Group, a cybergroup. They 

have done an exceptional job getting up to speed on this in a short 

amount of time and identifying some of the very issues you talk 

about. 

You know, in an emerging area like this, could you use more 

horsepower? Always. But you make a very good point, Senator, on 

looking out across the international nature of this and trying to understand where it is going to land and do the things that people 

say add up. That is a very important—— 

Senator REED. Where are the technologists located? If you do not 

have them—and I presume you do not—is it—— 

Mr. CLAYTON. What we have, I would say it is a combination of 

economists and technologists. It is a question of, you know, here is 

what the technology is and does it make economic sense. We have 

those people in our Division of Economic and Risk Analysis, DERA, 

and we also have some of them in Enforcement, and they work together. 

Senator REED. But you need more. I will take that as a yes. 

Mr. Giancarlo, the same question. Do you have the technologists? 

Are you working together? 

Mr. GIANCARLO. Thank you, Senator Reed. We have done a couple of things in 2017, as Senator Brown said, to get ahead of the 

curve. We hired the agency’s first-ever Chief Innovation Officer, 

someone who comes with a deep background in a lot of these new 

financial technology innovations. 

We also created something called ‘‘LabCFTC’’, which is our innovation hub, and you asked where is it located. It is actually located 

in New York City because so much of this innovation is taking 

place there and we wanted to be close to these innovators to learn 

from them. 

But in terms of protecting consumers, we also formed a Virtual 

Currency Enforcement Task Force. It was actually that task force 

that recently brought three civil actions against Bitcoin fraudsters. 

And as I said in my testimony, there is more to come. 

And as to the resource questions, we do need more resources. I 

used our bypass authority last year to put forward a budget request of 13 percent over our budget. We had been flat-funded for 

3 years, and we do need additional resources. And built into those 

resources are additional resources for FinTech generally and cyber 

and cryptocurrencies specifically. 

Senator REED. Let me just elaborate a bit. We continue to refer 

to Bitcoin. That is just one cryptocurrency. They seem to be proliferating, that every day there is a new variety of cryptocurrency, 

some of them out-and-out fraudulent, some of them based on the 

Bitcoin technology or processes. But just the sheer expansion of 

these cryptocurrencies is an issue, one. 

And, two—because my time is short and I have one other slightly 

unrelated question to Chairman Clayton—are you tracking all 

these different daily emerging currencies, one? And, two—again, it 

goes back to my sort of step-back question—is someone looking 

long term at the systemic effects? You know, where are we going 

14 

to be? This is eerily reminiscent of the late 1990s in derivatives 

which were nominally small parts of the market that were esoteric, 

et cetera, and then, of course, 10 years later, exploded. So why 

don’t you start, Mr. Giancarlo? And I will finish up with the Chairman. 

Mr. GIANCARLO. Thank you very much. So you are absolutely 

right. Bitcoin is one of many. However, of the many, there is really 

a handful that have gotten significant traction. 

Senator REED. Right. 

Mr. GIANCARLO. And so that is important, though, for listeners 

to know because so many of these are fraudulent, as you said. We 

went after one—and I just mention it because I think it is interesting—called ‘‘My Big Coin’’, which became known as ‘‘My Big 

Con’’ by people that were defrauded by it. It was people that really 

were taking—it was a Ponzi scheme. They were taking consumers’ 

money and using it to buy houses and furniture and jewelry. And 

we went after them and went after them hard, and we will continue to do that. 

In terms of systemic risk, right now this is still a relatively small 

market just by ratio. But as you say, we have to watch it and 

watch it carefully. 

Senator REED. Mr. Chairman. 

Mr. CLAYTON. So as I mentioned, the SEC does not have direct 

jurisdiction over pure cryptocurrencies, but we have had to watch 

them because, of course, they are integrated with the markets that 

we do oversee. And to your question of does 10 make sense or 15 

or 20 make sense, I have a hard time getting my head around that 

because if it is an efficient medium of exchange, 15 of them fluctuating different places probably does not make a lot of sense to 

me. That is where I am at. 

On systemic effects, I agree with Chairman Giancarlo, but if people are getting ripped off, that presents reputational risks that can 

have systemic effects. 

Senator REED. We can go into a raft of questions, money laundering, evading, et cetera, but just changing gears one second, I 

will make a comment and then follow up with a written question. 

There is some consideration, I have heard, of the SEC allowing in 

public offering, initial public offering, borrowers to sue, i.e., forced 

arbitration. I think that would be a very bad idea, and I will make 

the argument and—— 

Mr. CLAYTON. I am happy to address the question. 

Chairman CRAPO [presiding]. Well, we are out of time on that 

right now, so we will have to do it in writing. 

Senator REED. We will talk. 

Chairman CRAPO. Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. 

Gentlemen, I am just curious. I go back to where I learned with 

a pen and pencil to begin with as well, and we did not have a quill 

at that time, but we did have No. 2 lead. And as I get into this 

and learn more about this thing, it is fascinating to see how quickly things are moving, and yet everything that we talk about seems 

to translate back into dollars and cents yet. That has not 

changed—until now, and suddenly we are talking about a new type 

of exchange, and it sounds almost like bartering to me. And it is 

15 

a bartering which could avoid the determination of a value in dollars and cents. 

Which brings up the question of how do you tax it if you need 

to, how do you recognize income? But, also, in this particular case, 

I notice both of you identified that you have additional—or you 

have existing resources and regulatory oversight capabilities that 

you are utilizing today. And while I question whether or not there 

are seams that have to be filled, it would appear that there are 

some basics that maybe a lot of us do not quite understand that 

still have to be answered. 

I just want to start out, because I think, Mr. Clayton, you started 

with this discussion, with regard to the issue of whether or not you 

had control over an ICO and the fact that if they were issuing in 

this particular case Bitcoin or the opportunity to market it, you 

had identified it as a stock or at least a value of something. What 

is in this particular case that thread that you utilize once again? 

And can you delve into that a little bit more about how your agency 

responds to the regulatory need in this particular case? What is the 

specific item that you look at as being an item which is subject to 

your review, a security in what? 

Mr. CLAYTON. The definition of a security is broad, and it includes—I am not going to use the technical terms. There are Supreme Court cases and things like that. But it includes situations 

where if you are offering me a security—or offering me something, 

a coin, and I give you money, and the purpose of me giving you 

that money is to profit from your efforts going forward. So if I give 

you money, you give me a coin and you say, ‘‘I am going to take 

the money and I am going to grow a business, and that is going 

to increase the value of that coin. And, by the way, Chairman Clayton, you can trade it to somebody else. So you may be able to get 

value for it tomorrow. In fact, you probably will get value for it tomorrow. Buy now so you can get more value for it in a few days.’’ 

That is a security. 

Senator ROUNDS. So commodity-wise, if we are looking at trading 

commodities, you would not have an interest in the subject of investigating or reviewing whether or not the trading of an ag. commodity was something, and yet when we talk about the CFTC, we 

are talking about a different story where commodities most certainly are an item of interest to you. Is Bitcoin or are these as currently being traded, are they a commodity or are they a security? 

Or are they both? 

Mr. GIANCARLO. So what is so challenging about Bitcoin is it has 

characteristics of multiple different things. One of the phrases that 

is often used is that Bitcoin is a medium of exchange, a store of 

value, or a means of account. Well, those three things have different connotations to them. If it is a medium of exchange, then it 

is a currency-like instrument. And yet, as we have seen, a number 

of means of exchanges have been closed to Bitcoin. There was recently a Bitcoin conference that stopped accepting Bitcoin from registrants because they could not process the payments. But yet it is 

still spoken of as perhaps a means of account. And in that case, it 

has implications from the Fed and currency. 

From our point of view, when it is used as a store of value, then 

it is very much like an asset, like a commodity. And, in fact, what 

16 

we hear a lot of is people buying and holding. If you go on to the 

Twitter universe, you will see a phrase, ‘‘HODL,’’ which means hold 

on for dear life. And the thinking is that they buy it and hold it. 

In fact, I mentioned in my opening remarks my 30-year-old niece, 

who bought Bitcoin years ago, and she is an HODL. She says, ‘‘I 

am going to own it. I do not know what is going to come of it, but 

I want to hang onto it.’’ And she is not a fraudster or a manipulator. She is just a kid and believes in it. You know, I was fascinated talking to her, and I think she represents a lot of folks that 

think there is something in this I want to hold onto it. 

And so in that regard, from our point of view, it is a commodity. 

And if there is a derivative on that, we regulate it. The problem 

is in the cash market we do not have regulatory authority. It 

means we cannot set the standards. But what we will do and we 

are doing is looking for fraud and manipulation, and we intend to 

be very aggressive, if nothing else so that people like my niece can 

have some security that there are not fraudsters and manipulators 

out there, and there are far too many of them. 

Senator ROUNDS. Thank you, Mr. Chairman. Your suggestion 

earlier that we bring them both back in at a later date after they 

have had an opportunity to look at the differences would be very 

appropriate. Thank you, gentlemen. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

Chairman Clayton, on January 26th, Bloomberg published an article entitled, ‘‘SEC Weighs a Big Gift to Companies: Blocking Investor Lawsuits’’. Now, as you know, class action lawsuits are how 

investors can hold companies accountable when they defraud people, and the article says the SEC is thinking about letting companies sell shares in initial public offerings while at the same time 

allowing those companies to prohibit investors from bringing class 

action lawsuits against them. 

Wow, I mean, forcing investors to give up class actions when 

they have been defrauded. The SEC has never allowed corporations 

to bar investors who get cheated from bringing class action lawsuits. 

So I just want to get a straight yes-or-no answer from you on 

this. Do you support this enormous change in SEC policy? 

Mr. CLAYTON. So I think you know that I cannot prejudge an 

issue that may come before the SEC, but I would be happy to talk 

to you about this, and let me get to the bottom line. I cannot dictate whether this issue comes before us or not because of the way 

it has come before the SEC in the past. But I am not anxious to 

see a change in this area. 

Senator WARREN. OK. So I am reading tea leaves here. 

Mr. CLAYTON. I am not—— 

Senator WARREN. I mean, you run this agency. The change cannot happen without your approval. I think it is fair for the—— 

Mr. CLAYTON. That is actually not right. If it came up before the 

agency, I am only one of five votes. 

17 

Senator WARREN. I am going to guess there are going to be at 

least two votes against that and that you at best will be the deciding vote. 

Mr. CLAYTON. Senator, I do not want to prejudge the issue. If 

this issue—I want to be practical. If this issue were to come up before the agency, it would take a long time for it to be decided because it would be the subject of a great deal of debate. And like 

I said, in terms of where we can do better, this is not an area that 

is on my list for where we can do better. 

Senator WARREN. OK. So I will tell you what. Chairman Clayton, 

I am going to let you get away with that, because what I am reading is real skepticism about a rule like this. The SEC’s mission is 

to protect investors, not throw them under the bus. And I cannot 

think of anything that would do more harm to investors than saying they have to pre-waive their rights to sue a company in a class 

action when that company cheats them. So—— 

Mr. CLAYTON. Like I said, it is not a change that is on—— 

Senator WARREN. I hear you. So let me ask you about something 

else, and that is the fiduciary rule. Financial advisers who put the 

high fees, the commissions, the kickbacks, the prizes they can get 

for recommending a specific product ahead of the interests of their 

clients cost hardworking Americans trying to save for their retirements about $17 billion every year. And that is why President 

Obama and the Department of Labor put the fiduciary rule in place 

to eliminate these conflicts of interest in retirement accounts like 

401(k)s and IRAs. 

Now, less than a month after you were sworn in as Chairman 

of the SEC, you issued a Request for Information asking for public 

comment on rulemaking related to the standards of conduct for investment advisers and broker-dealers. Can you state to this Committee that any rulemaking you do on this topic will not weaken 

the existing protections for retirement savers? 

Mr. CLAYTON. Making an absolute statement like that—— 

Senator WARREN. Yeah, an absolute statement that you are not 

going to weaken rules for people who are trying to save for their 

retirement. 

Mr. CLAYTON. From what baseline—let me—— 

Senator WARREN. Well, we have a rule from the Department of 

Labor. Now you could strengthen the rule, you could pass the same 

rule, or you could weaken the rule. I want to know that you are 

not going to weaken the rule. That is all I am asking you. 

Mr. CLAYTON. Here is what I am trying to do. Let me tell you 

what I am trying to do. The relationship between an investment 

adviser or a broker-dealer and their client in a very simple area— 

they have a 401(k), they have an annuity, and they have a few 

stocks—is regulated—throw out the banking regulators. It is regulated by no less than five people. And they all have different standards. My main objective is to bring clarity to that without jeopardizing investor protections. That is how I am—— 

Senator WARREN. Well, but that is the question I am asking you, 

about whether or not you are jeopardizing the protection that people are trying to save for their retirement get. I get that you could 

bring clarity. Clarity could be do whatever you want. Clarity is 

18 

what right now has cost American investors saving for their retirement $17 billion a year. 

Mr. CLAYTON. I think it is a combination of an insufficient standard in some places, which we are looking to increase—— 

Senator WARREN. Glad to hear that. 

Mr. CLAYTON. —a lack of clarity and also the standard is only 

as good as the remedy available. And one of the things that I am 

also looking at, believe me, I spend a lot of time in this space trying to get it right. One of the things we are looking at is what dollars do you actually collect when somebody has done you harm, because you could have a really strong standard, but if there are no 

dollars there, that is a problem. 

Senator WARREN. So I agree with you, Mr. Chairman, if you 

want to strengthen enforcement of this rule or strengthen the rule 

itself, count me in. But that is what the American people look to 

the SEC for. Thank you. 

Mr. CLAYTON. I do. 

Senator WARREN. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Perdue. 

Senator PERDUE. I want to go change the subject a little bit back 

to Bitcoin here or to cryptocurrencies. You know, we see in IPOs 

and tax jurisdictional arbitrage. Do you guys see that today in this 

developing cryptocurrency and also in ICOs? Chairman Clayton, do 

you want to start with that? 

Mr. CLAYTON. Well, yeah—— 

Senator PERDUE. And, by the way, who pays for frivolous class 

action lawsuits? Who pays for that? 

Mr. CLAYTON. Shareholders. 

Senator PERDUE. Yeah, and investors, I would argue customers, 

employees, all of the above, right? 

Mr. CLAYTON. Yes. 

Senator PERDUE. Would you answer the other question for me, 

please? 

Mr. CLAYTON. So regulatory arbitrage is one of many issues that 

I see in this market. To be frank, tax loss and things like that are 

there. Of course they are because it is recordkeeping, it is difficult 

to trace. 

Senator PERDUE. South Korea and China are the ones that predominantly play in this world. You said before most of the current 

investment comes from the U.S. I am not sure—I do not know if 

we all know enough yet to know that, right? South Korea and 

China are really heavily invested. In fact, South Korea has a new 

rule that says you have to use real name bank accounts in order 

to trade in this. Those are the kinds of things I am asking for. Is 

the arbitrage really going on around the world here? 

Mr. CLAYTON. There is certainly regulatory arbitrage, but you 

are making a great point because this was a largely unregulated 

space across the world. And now what you are seeing is each country taking a perspective, a view, action, et cetera, which also goes 

to how functional is this asset class and how would we regulate it 

and how does it work. There is a lot happening that is beyond the 

kind of understanding of your average investor. How would you 

know how—— 

19 

Senator PERDUE. So how can we and two agencies here—I understand there is interaction between all of our regulatory agencies, 

but there is also another axis here that you have to coordinate, and 

that is the other country regulators as well. 

Mr. CLAYTON. Correct. 

Senator PERDUE. So I am asking both of you, what are you seeing and what are you anticipating we need to do, either legislatively or rulemaking, to combat that? 

Mr. CLAYTON. Chris, do you want to—— 

Mr. GIANCARLO. Sure, let me jump in. I will just identify two 

areas of arbitrage we are seeing. One is regulatory, which I want 

to come to, but actually we are also seeing price arbitrage as well. 

There is something known as the ‘‘kimchi premium’’ for Bitcoin 

traded in South Korea because there is so much interest there that 

it drives the price up there slightly higher, so price arbitrage. 

But, you know, in the early days of many markets, every American city had a cotton exchange and the prices were different there 

before you developed a national market. So here we have different 

regional and international markets and perhaps as this market 

matures, if it matures, a single price may develop. 

In terms of regulation, unfortunately I think that some time ago, 

perhaps the middle of last year, there was this perception that 

Bitcoin was off the regulatory grid. And one of the things that 

Chairman Clayton and I have been working so hard to do is to disabuse that notion. Now, we are limited in our regulatory authority 

to set regulatory standards on these underlying platforms. But 

when it comes to enforcement, when it comes to ICOs, we are using 

our full authority to drive the message, and other countries are 

doing that as well, and we have had frequent conversations. I 

spoke recently or had communication recently with the head of the 

Japan financial service agency about some things that were going 

on there. Jay Clayton spoke very eloquently at the FSB meeting recently in Basel, Switzerland. We are beginning our communication 

with other regulators. And I think the message is getting through 

that this is not off the grid, and I think part of that is now you 

are seeing it in the Bitcoin price. As the word is getting out that 

we will go after misconduct, I think you are starting to see that reflect in the price, and I think that is an important step. 

Senator PERDUE. Well, with what little time we have left, I 

would like both of you to respond to the pump-and-dump efforts 

that are underway right now. You see this beginning to develop. I 

know you are both involved in this. Can you both address what 

your agencies are doing to combat that? 

Mr. CLAYTON. Senator Perdue, this is one of the things that I am 

worried that investors do not understand, which is when you 

have—— 

Senator PERDUE. Me, too. 

Mr. CLAYTON. When you have an unregulated exchange, the ability to manipulate prices increases significantly. And, you know, 

just a few coordinated sales can change a price. 

Senator PERDUE. Or an email, a fraudulent email. 

Mr. CLAYTON. Correct. 

Mr. GIANCARLO. I have mentioned we formed this Virtual Currency Enforcement Task Force. We have got some really good peoVerDate Nov 24 2008 09:37 May 07, 2018 Jkt 046629 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\02-06 ZDISTILLER\20618.TXT JASON
20 

ple on this, and we have brought three actions in the last few 

weeks. I said there are more to come. There are more to come. We 

are digging deep and learning a lot and seeing a lot. And I do not 

want to get ahead of that other than to say that we are working 

the beat hard right now. 

Senator PERDUE. And you have a jurisdictional right to do that, 

right? 

Mr. GIANCARLO. We have enforcement jurisdiction. Yes, we do. 

Senator PERDUE. Great. Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Donnelly. 

Senator DONNELLY. Thank you, Mr. Chairman. Thanks to both 

the witnesses. 

This would be to both of you. Now that the SEC and the CFTC 

have asserted jurisdiction and warned the public of the risks posed 

by virtual currency operators, what other ways can your agencies 

prevent retail investors from falling victim to fraud and manipulation? 

Mr. GIANCARLO. I am happy to take this question, Senator. Earlier Ranking Member Brown mentioned what do we do with the 

CFPB. We have actually formed a partnership with the CFPB to 

consumer education in the area of Bitcoin. One of the things I have 

learned recently is that America’s libraries are a place where a lot 

of people go and research Bitcoin. In fact, they use the library computers. One of the most frequently searched items from a library 

computer is Bitcoin. And so we are teaming up with CFPB to go 

out to America’s libraries, to educate librarians who often get some 

of the questions asked, to be able to direct library patrons to use 

our resources, our Bitcoin website and our other resources. 

So we are really getting very creative in the area of consumer 

education. I had mentioned we have got several podcasts on this 

subject with thousands of downloads. We are working as hard as 

we ever were. We have never done as much work on consumer education as we have done with virtual currency. 

Mr. CLAYTON. We also have an Office of Investor Education and 

Advocacy that has been engaged with a number of groups on this, 

and I think they have done a terrific job getting the word out. 

In terms of getting the word out, though, there are financial 

intermediaries and other actors that we are counting on to act responsibly in this area. 

Senator DONNELLY. OK. Well, let me ask you a follow-up, and it 

goes to the point you just made about the libraries and others. Are 

you concerned that retail investors will remain vulnerable to fraudulent and manipulative online solicitations that are sometimes 

more difficult for you guys to pick up? 

Mr. GIANCARLO. Senator, in the broad range of marketplaces, 

seniors seem to be the prey of choice for fraudsters and manipulators. Whether it is in precious metals, whether it is in foreign exchange, whether it is in a whole range of products, we see and we 

prosecute continuously fraudsters who seek to prey on either the 

less sophisticated seniors who maybe do not quite have the retirement nest egg that they believe they need and fall prey to get-richquick schemes or schemes that say we will guarantee 100 percent 

returns and all kinds of nonsense like that. And it is a big part of 

our enforcement effort at the agency. 

21 

Senator DONNELLY. Let me ask you this, and this goes to perspective and to hopes and dreams. But what warnings would you 

give? There was an article in the Washington Post yesterday, and 

it was about good, hardworking Americans, people who have 

worked really hard and want to have a pension. It was about a 

group of our friends and neighbors from Kentucky, and the title of 

the article was, ‘‘Bitcoin Is My Potential Pension’’. What would you 

say to them to help protect them from winding up in a situation 

a few years from now where it did not quite work out the way they 

were hoping? 

Mr. GIANCARLO. It is such a troubling development, Senator, unquestionably, which is why we are putting out so much materials. 

But what I would say to them is—it is the same advice I would 

give my children. If it sounds too good to be true, it is. If they are 

promising ridiculous returns, they are ridiculous. If you are going 

to give them money, you had better be prepared to lose it. 

Mr. CLAYTON. I agree with everything that Chairman Giancarlo 

said. I also would say this to them, which is there are things like 

disruptive technologies that come along, but they should not disrupt the way you look at markets or the way you look at investing. 

Pumping all of your money into a disruptive technology has a very 

high likelihood of not working out for you as an individual. When 

we see disruptive technologies come along, you know, there will be 

winners, but there will be many losers. 

Senator DONNELLY. OK. 

Mr. CLAYTON. That is the way it works. 

Senator DONNELLY. Let me ask you one other question. How can 

both of you best assist law enforcement and Federal authorities to 

ensure these virtual currencies are not used by terrorist groups or 

Nations like North Korea to evade sanctions? 

Mr. GIANCARLO. So we work very closely with law enforcement. 

We recently commenced a program with the FBI where we actually 

had FBI agents on secondment with our agency in order to look at 

this. At the end of the day, the use of these cash markets for that, 

it is going to require cooperation amongst multiple agencies, especially with FinCEN, who often because of their anti–money-laundering operation may see some of these issues before we can, and 

then bring our expertise to bear and coordinate with our law enforcement agencies. 

Mr. CLAYTON. Same here. I would supplement that with we also 

have a Dark Web Working Group that tries to monitor what is 

going on in that space in order to identify these types of issues. 

Senator DONNELLY. Thank you, Mr. Chairman. 

Senator BROWN [presiding]. Senator Kennedy. 

Senator KENNEDY. Thank you, Mr. Chairman. Welcome, gentlemen. I think you are both doing a terrific job. 

Chairman Giancarlo, when is the last time you bought a stock 

exchange-traded fund, mutual fund, or a bond? 

Mr. GIANCARLO. So I hold generally traded funds—— 

Senator KENNEDY. Yes, but when is the last time you bought 

one? 

Mr. GIANCARLO. Well, probably before I—I pretty much put my 

investing—— 

Senator KENNEDY. A year ago? 

22 

Mr. GIANCARLO. Well, probably before I started at the Commission. 

Senator KENNEDY. Two years ago? 

Mr. GIANCARLO. Yes. 

Senator KENNEDY. OK. When you bought it, what did you buy? 

Equity or bond? 

Mr. GIANCARLO. Index funds mostly. 

Senator KENNEDY. Index funds, OK. When you bought it, did you 

sit down and read the prospectus for the index fund? 

Mr. GIANCARLO. Well, you know, I am not supposed to say 

this—— 

Senator KENNEDY. Cover to cover? 

Mr. GIANCARLO. As a lawyer, I am not supposed to say that I 

probably did not read it cover to cover. 

[Laughter.] 

Mr. GIANCARLO. But I will confess that I did not read it cover to 

cover. 

Senator KENNEDY. How many investors do you think do that, do 

not read it? 

Mr. GIANCARLO. I think most. 

Senator KENNEDY. OK. So what is the point? I mean, we are 

talking about all the dangers and the risks of cryptocurrencies like 

Bitcoin. I am putting aside the shyster fraud issue. I mean, what 

is the point of all this over disclosure if nobody is reading it? 

Mr. GIANCARLO. Well, I—— 

Senator KENNEDY. And why do we want to do the same thing 

with Bitcoin? 

Mr. GIANCARLO. I will say historically it has been one of the 

foundational principles of our securities laws that adequacy of disclosure, full disclosure, is one of the building blocks. 

I will tell you, having been in business, that most business people will tell you they study the prospectus only to see what they 

can sue on if they need to sue on something if something goes 

wrong. 

Senator KENNEDY. I think you see where I am going. I am going 

to ask you both a philosophical question in a second about how far 

you think we ought to go to protect people from themselves. But 

I do not think the disclosure we have right now works. I think it 

is good for the lawyers, and it is good for the financial advisers. 

But I think we overdisclose, and I think you can—I will bet you 

each have a smart lawyer on your staff. You could go to them and 

say, ‘‘Write me a good disclosure for Bitcoin.’’ And you would get 

it back and look at it and then pick 50 names from the Washington, DC, phone book and ask them to come in and say, ‘‘Read 

this and tell me if it makes sense to you.’’ I mean, what is the 

point? 

How far do you think we ought to go here in terms of a 

cryptocurrency—I am separating this from the blockchain technology. China outlawed it. I think South Korea has, too. What are 

you suggesting, that we just go after the shysters and fully disclose? I mean, is that what you think we ought to do? Chairman 

Clayton. 

Mr. CLAYTON. Well, I think that is exactly the question we are 

here to pose and take forward, which is, you know, what is the 

23 

right way to deal with this new thing? As just a person watching 

it, I am not satisfied when I see people thinking that these trading 

platforms of cryptocurrencies have the same kind of protections 

that a stock exchange would. And I am very unhappy that people 

are conducting ICOs like public offerings of stock when they should 

know that they should be following the private placement rules unless they are registering with us. Those two things make me unhappy. To figure out how to deal with them is why we are here. 

I agree with you that we should be careful not to go too far. But 

just to be clear, for me in this ICO space, it is pretty clear that our 

securities laws work pretty well. Disclosure can be improved. It can 

really be improved. 

Senator KENNEDY. Well, let me make this suggestion, because I 

do not want to go over. The last time I asked questions, I got a little carried away. I think I went over 3 minutes, and our Ranking 

Member put me on double secret probation. 

[Laughter.] 

Senator KENNEDY. So I am not going to do that today. 

Senator BROWN. Like I have the power to do that. 

[Laughter.] 

Senator KENNEDY. He does. 

The disclosure, I mean, you can extend the disclosure we have 

now to Bitcoin, and you have not done anything. I am not suggesting we should not have disclosure, but you have got to have 

disclosure that makes sense and helps people other than the lawyers. 

Mr. CLAYTON. I agree, Senator. 

Senator BROWN. Senator Warner. 

Senator WARNER. I usually agree with my friend from Louisiana. 

I think we may be on top of something that is transformational, 

and I do not think you can separate the underlying distributed 

ledger or blockchain from some of these crypto assets. And if we 

had the same rate of increase the next 2 years that we have had 

the last couple years—we are talking now a couple hundred billion—we would be north of $20 trillion caught up in this area by 

2020. And I think you—I remember back, I was lucky enough to 

get in the cell phone business back in the early 1980s, and everybody thought it was going to be a small business, and they were 

wrong and I got rich. I think we are looking at the same kind of 

transformation about to take place, and we are going to have to 

wrap our arms around it. 

We have talked about some of the consumer protection issues, 

but we have got money-laundering issues, we have got cybersecurity issues. A third of the Bitcoin exchanges have been cyberhacked between 2009 and 2015. 

I am not exactly sure what the right regime ought to be, but I 

would argue that—while I commend the Treasury Secretary for 

putting a working group together, I would argue this is the reason 

we created FSOC in the first place, that this rises potentially to the 

level of a systemically relevant event, and I would just be curious 

whether you believe—and I commend what both of you are trying 

to do, but whether this ought to elevate to an FSOC-level analysis. 

Mr. CLAYTON. So, Senator, I had the same question you had, 

which is: There is a big rise here; if it does keep going is this a 

24 

systemic issue? Which is one of the reasons we brought it up at 

FSOC, talked about it at FSOC. Again, I commend the Treasury 

Secretary for forming the working group. 

I want to go back to separating ICOs and cryptocurrencies. ICOs 

that are securities offerings, we should regulate them like we regulate securities offerings. End of story. 

Senator WARNER. I have a couple more points I want to make. 

Mr. GIANCARLO. Thank you, Senator. Just real quickly, on the 

issue of disclosure, sometimes what we are seeing is not a problem 

of absence of disclosure. It is false disclosure. False disclosure is 

often fraud, and I think we need to step in there. But just in terms 

of discussion, as Chairman Clayton mentioned, we have begun discussions at FSOC. In addition, there have also been discussions led 

by Chairman Clayton at the Financial Stability Board and also at 

IOSCO, which is the International Organization of Securities Commissions. So these discussions are taking place at the right levels 

of debate, but there is so much more to be done. 

Senator WARNER. Again, to my friend from Louisiana, we have 

got this—we are focusing a lot on Bitcoin and crypto assets, 

cryptocurrencies, and I think there are even definitional issues 

here. But you have got a whole new platform called ‘‘Ethereum’’ 

where they are creating, you know, file sharing or extra computer 

time. I am not sure what kind of assets those fall into? Are they 

potentially regulated within your realm or if there is a trading exchange, a tokenization exchange between excess computer time? I 

am not sure where that fits at this point. 

Mr. CLAYTON. The definition of a security I believe—the people 

who wrote the 1934 Act and the 1933 Act, they were smart. They 

did it on a principled basis. They basically said if you are giving 

people money in exchange for a future development of a business 

with the hope of a return—and whether that return comes in the 

form of server time or your ability to sell server time—it is a security. 

Senator WARNER. I concur with the approach you have taken in 

terms of the ICOs, and I think there has been some very bad behavior. Yet certain ICOs the SEC has not stopped; others they have 

stopped. Are you going to go back and re-review the ones that have 

gone forward? 

Mr. CLAYTON. Let me say another thing about the 1933 and 1934 

Acts. When they were written, there was a great recognition that 

there was a tremendous amount of securities activity in this country, and that we were going to rely on gatekeepers to help us enforce those rules and they would be liable if they did not help us 

enforce those rules—accountants, lawyers, underwriters, sellers, 

and the like. I am counting on those people to do their job, and I 

have made that clear. 

Senator WARNER. Let me ask, Chairman Giancarlo, what we 

did—and one of the things I am concerned about was that I think 

we may have moved too fast on allowing, for example, futures trading on Bitcoin. And I just wonder. You know, you have allowed future trading contracts on Bitcoin, yet the SEC has not allowed 

ETFs. I am just worried that we need a much more coordinated effort, because I think the potential, writ large, amongst crypto assets and the underlying blockchain could be as transformational as 

25 

wireless was years ago, and I think we are going to need a much 

more coordinated effort. 

I know my time has expired, but if you could both quickly comment on that, I would appreciate it. 

Mr. GIANCARLO. Well, so I believe it is critically important that 

we coordinate on this. I believe that we are all both individually 

and collectively understanding our authorities, understanding this 

new technology, working around it. There was communication 

among myself, Chairman Clayton, the Treasury Secretary, and others in connection with Bitcoin futures. And, you know, Bitcoin future are quite different than the Bitcoin market. Bitcoin is an 

anonymous area. Bitcoin futures is fully transparent to the regulator. Bitcoin, retail. Bitcoin futures, mostly institutional and high 

net worth. Bitcoin futures, regulated. Bitcoin futures, regulated. 

Bitcoin, unregulated. And with Bitcoin futures we are now having 

visibility into underlying spot markets and data from those markets we would not otherwise have. 

Mr. CLAYTON. I completely agree on coordination. Like I said, I 

break it down into three areas. There is this great technology that 

I agree with you has promise. There are these pure 

cryptocurrencies, which we need to take a look at across FinCEN, 

Treasury, CFTC, the Fed. And then there are securities offerings 

that are called ICOs that should be undertaken as securities offerings consistent with our regulatory regime. 

Chairman CRAPO [presiding]. Senator Cotton. 

Senator COTTON. Thank you, and thank you, gentlemen, for your 

appearance today. 

I want to continue on the line of questioning that Senator Warner began. Putting aside Bitcoin or other kinds of cryptocurrencies 

that are based on blockchain or distributed ledger technology, what 

are your thoughts on the potential value of that underlying technology, of blockchain and distributed ledger technology, both to enterprises and consumers and perhaps to Government agencies? 

Mr. GIANCARLO. It is important to remember that if there were 

no Bitcoin, there would be no distributed ledger technology. It grew 

out of that technology initiative. And the potential applications— 

and, by the way, I am no pie-in-the-sky dreamer. I just report what 

I read. But the applications range from enormous potential in the 

financial services industry, in the banking industry, but right down 

to the way charity dollars are spent, the way perhaps refugees are 

accounted for across the globe. 

There was an article just this morning about use of distributed 

ledger technology for 2.5 billion people around the world who do 

not have access to banking services. 

One of the areas that—in our own area of agriculture futures, 66 

million tons of American soybeans were just handled through a 

blockchain transaction by the Dreyfus Company for sale to China. 

So Bitcoin is now being used—it is used in our American transportation logistics system, and, most importantly, the potential of distributed ledger technology for regulators to be able to do really 

close market surveillance, and if it had been available in 2008, if 

we had been able to see the counterparty credit exposure of one 

bank to another bank in real time with precision, that would have 

enabled much more precise policy choices that had to be made in 

26 

a rush without good data. So I think distributed ledger technology 

has got enormous potential. 

Now, how it will be realized, when it will be realized, what are 

the other challenges in it, those we cannot say. But the potential 

seems extraordinary. 

Senator COTTON. Thank you. 

Mr. Clayton. 

Mr. CLAYTON. I agree that the potential seems very significant, 

and just look around anywhere in our economy where verification 

and recordkeeping has cost that is potentially reduced, that is an 

opportunity for this technology. That is just one of them, and I 

hope people pursue it vigorously. 

Senator COTTON. Thank you. Let us turn our attention now to 

cryptocurrency and to Bitcoin, since it is the most prominent. Yesterday, the Dow Jones had its single largest decline in a point 

scale, 4.6 percent as a percent, which is high—not the highest ever. 

That obviously generated a lot of news coverage. The dollar has 

faced 2-percent inflation or less now for many years. Bitcoin, however, has seen a 32,000-percent increase in its value over the last 

5 years. It has declined by some 60 percent, I think, in just the last 

30 days. 

What are the factors driving that kind of extreme price volatility 

in Bitcoin relative to securities in publicly traded companies or the 

U.S. dollar? 

Mr. GIANCARLO. Well, just recently the volatility you see in 

Bitcoin was not as large as volatility we have seen in some other 

assets classes, such as the VIX product, which is known as the fear 

index or volatility gauge. And so we have seen extraordinary volatility in Bitcoin, but, you know, in our world, in commodity derivatives, we are used to volatility in asset classes, and that is one of 

the things the emergence of a futures product is meant to do, is to 

provide those who are exposed to that volatility means of hedging 

and mitigating the risk to that volatility. 

Senator COTTON. Mr. Clayton. 

Mr. CLAYTON. I do not really know what is driving the volatility 

in Bitcoin and cryptocurrencies. They are not correlated with sovereign currencies, so it must be something different from what 

would drive the dollar. But that is one of the issues before us, there 

does appear to be a lot of volatility compared to the medium they 

are supposed to be a substitute for. 

Senator COTTON. So what does that kind of volatility portend for 

a cryptocurrency’s future as a potential alternative to legal tender 

of Nation States or, in the EU’s case, a transnational organization? 

Mr. CLAYTON. You raise a great point. Now, maybe that volatility 

tamps down to a stable currency—but an asset that is highly volatile is not a very effective means of exchange because you do not 

know how much you are getting by the time you receive it or how 

much you are paying at the time you have to pay it. If you agree 

to a price on day one but have to source it on day ten, you expose 

yourself to significant risk. 

Senator COTTON. Thank you. My time has expired. I do want to 

associate myself with the remarks of Senator Donnelly at the end 

of his remarks about the risks that cryptocurrencies are currently 

posing as a way for rogue Nations, terrorist organizations, criminal 

27 

organizations to evade sanctions, not just in trading but in hacking 

as well, as we have seen in media reports on North Korea. So I am 

glad to hear that you are working closely with our law enforcement 

and intelligence agencies, and I hope that continues. 

Thank you. 

Chairman CRAPO. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. Thank you to 

both of you. It is good to welcome a fellow New Jerseyan in your 

role, Mr. Chairman. 

I have been actively following both Venezuela’s and Russia’s interest in developing virtual currencies for the purposes of evading 

U.S. sanctions. Last month I sent a letter to Secretary Mnuchin on 

this subject, and I asked Under Secretary Mandelker about this a 

few weeks ago when she was here before the Committee. 

Under what circumstances would the SEC and the CFTC have 

a role in engaging or regulating the proposed new petro or crypto 

ruble currencies? More broadly, does the SEC and CFTC have a 

role to play in preventing the use of digital currencies by foreign 

Governments to evade U.S. sanctions? 

Mr. GIANCARLO. Our jurisdiction would be very limited in that 

area, Senator. As I have spoken about before, we do have enforcement authority for fraud and manipulation, and so if we thought 

that that instrument was being used for fraudulent purposes, manipulation purposes, we would not hesitate to take authority. But 

you are probably touching on an area where the jurisdictional lapse 

is probably greatest for the two agencies sitting before you today. 

Senator MENENDEZ. And so let me ask you, manipulation, what 

if you are manipulating to avoid U.S. sanctions? 

Mr. GIANCARLO. You know, I would have to speak to our enforcement counsel to see how that fits in, but we would certainly look 

at it, and if—— 

Senator MENENDEZ. I would like to have you do so, and I would 

love to hear back through the Committee. 

Mr. GIANCARLO. Thank you. 

Senator MENENDEZ. Are you interacting with FinCEN to the extent that you may have limited jurisdiction? Are you adequately integrated into the financial regulatory network that watches for illicit activities? Or are there gaps that could create vulnerabilities? 

Mr. GIANCARLO. So as we mentioned before, Senator, Chairman 

Clayton and I are part of a Virtual Currency Task Force that has 

been put together by the Treasury Secretary that includes the Fed 

and FinCEN, and we have already had our first meeting, a beginning meeting to set up some work streams. We will have more to 

come. 

It just so happens that I am actually meeting with FinCEN’s virtual currency team this week on a previously scheduled meeting to 

get some introductory discussions started of cooperation between 

our agencies, and so I look forward to actually asking them this 

question as well. 

Senator MENENDEZ. OK. And I would just say to both of you, to 

the extent that you have a role to play and you lack the present 

authorities to do so, I would love to know about that if you determine that is necessary, because my sense of cryptocurrency is 

largely driven to evade U.S. sanctions and to undermine sovereign 

28 

currencies. Both of them are a challenge to the national interest of 

the United States. 

Let me ask you this: We have seen a dramatic increase in the 

number of initial coin offerings where private companies are using 

digital tokens to raise money instead of going through the capital 

markets. The Wall Street Journal reported that initial coin offerings grew from about 96 million in 2016 to over 4 billion in 2017. 

Many of these ICOs are relying on celebrity promoters to gin up 

the sales. For example, last year Floyd Mayweather, the boxer, 

used Instagram to promote the purchase of Centra tokens. 

Now, I have done extensive work on consumer protections in the 

prepaid card space where we have seen celebrities like the 

Kardashians use their status to sell products that come at a steep 

cost to consumers, and this feels eerily similar to that, just the next 

avenue of exploitation. And I worry about unsuspecting investors 

that do not have the resources to understand the true risks. 

What can the SEC do to better protect investors who may be persuaded by celebrity promoters to purchase tokens offered in initial 

coin offerings without fully understanding the risks? 

Mr. CLAYTON. Senator, I am not going to comment on a specific 

instance, but—— 

Senator MENENDEZ. I am talking about broadly. 

Mr. CLAYTON. Some time ago we put out an alert that said if you 

are promoting securities, you are taking on securities law liability. 

I believe that that has tamped down some of this endorsement activity. 

I will say it again right here: If you are promoting securities, you 

are potentially taking on securities law liability. 

Senator MENENDEZ. Well, let me ask you—I appreciate that, and 

I hope that you will think about doing more to protect consumers. 

Can you walk us through why the SEC at this point is not comfortable with approving ETFs with significant investments in 

cryptocurrencies? 

Mr. CLAYTON. Our ETF product space is largely a retail product 

space, and we have made it clear to the marketplace that there are 

a couple of issues with having an ETF that is based on a 

cryptocurrency. They go to price discovery, custody, and, you know, 

some other issues around volatility. We have let the industry know 

that those are issues that are of concern to us and that we do not 

want to approve an ETF product with a cryptocurrency underlier 

until we can get comfortable with those issues. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Moran. 

Senator MORAN. Mr. Chairman, thank you very much. I am sorry 

you both have to crane your necks to the left so hard to have a conversation with me. But I am delighted to be back on the Committee, Mr. Chairman. Thank you very much. 

Let me first start by suggesting to you that if you have suggestions, I will probably not have the chance to see you in the Financial Services Appropriations Subcommittee before we take a look at 

fiscal year 2019. Assuming that we are successful in the next few 

days on fiscal year 2018 and budget caps, we will have an opportunity to reconsider spending levels for fiscal year 2018. You have 

29 

made your request through the budgetary process and an appearance before our subcommittee, but if there are priorities in which 

as we go back to potentially increase funding and any levels of jurisdiction within FSGG, I would welcome your input as to what is 

the highest priority. 

I heard the commentary earlier in regard to one of the questions, 

I think, of Senator Reed that the hiring freeze has created challenges. I do not know that we can overcome that. But if it is personnel in a particular way or other things, it would be useful for 

me to know. 

Mr. CLAYTON. Thank you very much. And I did not want to get 

ahead of the process. Our fiscal year 2019 request reflects the sentiment I have expressed today. 

Senator MORAN. I do not know that we will see the fiscal year 

2019 request before we are taking a look at the potential increase 

in funding for fiscal year 2018, depending on when the President’s 

budget is released. But I would offer that—it does not need to be 

today—if there are any suggestions you would like to convey to me. 

You may have answered this question just now with Senator 

Menendez, Chairman Clayton, but doesn’t—you indicated why you 

were reluctant or unwilling at the moment to approve an ETF proposal. But doesn’t ETF, just as options do on its exchange, reduce 

the—mitigate the concerns, reduce the volatility and increase price 

discovery and reduce risk? So additional products—my question 

really is: Don’t additional products help alleviate some of the challenges that we face? Or is Bitcoin or cryptocurrency so unique that 

it is different than other items that are traded on exchanges? 

Mr. CLAYTON. Yes, I think that the CFTC product has that effect. 

It is largely an institutional product, and you can take both sides 

of the market and, you know, it gives people a chance. As for ETFs, 

you can take both sides of an ETF, but predominantly they are offered for a long investor, someone who wants exposure to the rise 

and fall of Bitcoin or other currencies, and that is a different dynamic than a futures product. And we have long taken an investor 

protection view of approving those types of products, which is embodied in our liquidity, custody, and pricing rules. If we get comfortable with those rules, then we can move forward. 

Senator MORAN. Very good. Let me raise a different topic than 

cryptocurrency. One of the things that I have tried to pay attention 

to and often in cooperation with the Senator from New Mexico, 

Senator Udall, is trying to modernize our IT system, particularly 

within the Federal Government. And you indicated, Chairman 

Clayton, about the $500 million loss in a Japanese cryptocurrency 

in your written testimony. We have now passed as part of the national defense authorization bill what has been labeled as ‘‘MGT 

Act’’. It is the Modernizing Government Technology Act, and what 

it does is create a fund for Federal agencies to rid themselves of 

their legacy technologies and have access to dollars to replace that 

legacy. It encourages moving to the cloud, again, with the opportunities for us to have better technologies and safer technology systems to reduce our vulnerabilities. 

I just would encourage you, you have a lot at risk in the safety 

and security of the data that you hold, and I would welcome your 

reassurances that—I am sure you will tell me that you are spendVerDate Nov 24 2008 09:37 May 07, 2018 Jkt 046629 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\02-06 ZDISTILLER\20618.TXT JASON
30 

ing many millions of dollars and working diligently and you have 

the right personnel in place. But I would guess if we ask agencies 

of the Federal Government who have been hacked themselves and 

whose data has been released, they would have told us the same 

thing prior to that occurring to them. I would be, first of all, delighted to be reassured that we will not be reading in tomorrow’s 

paper or next month’s papers that there has been a hack at CFTC 

or SEC. 

Then, second, I just would offer you the opportunity to take a 

look at that legislation and see how it might be of benefit to your 

agencies and to suggest any ideas that you would have for what 

Congress can do to further strengthen cybersecurity within your 

worlds. 

Mr. CLAYTON. Thank you. 

Senator MORAN. You are welcome. 

Mr. CLAYTON. Thank you very much. 

Senator MORAN. Mr. Chairman, thank you. 

Chairman CRAPO. Thank you. 

Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you. Gentlemen, thank you. I 

apologize. I have had another Committee hearing going on at the 

same time, but I appreciate your written comments and the conversation today. It is so important. And as somebody who was Attorney General of the State of Nevada and worked on consumer 

protection issues, obviously weeding out any type of fraud is important in this space as well. 

Let me start with a couple of questions that I have. I understand 

that companies that originated outside the cryptocurrency space 

like Kodak and Burger King have recently jumped into the 

cryptocurrency space. However, some critics have warned that companies are using blockchain as an opportunistic venture to pump 

up stock prices without having a clear business plan. One company, 

Long Island Iced Tea, I understand changed its name to Long 

Blockchain and watched its stock soar. 

So are you concerned that companies may be utilizing blockchain 

as a scheme to pump up their stock prices? I am going to just open 

it up to both of you. 

Mr. CLAYTON. The short answer is yes. The longer answer is I 

have put out a warning in this space, and I have put out a warning 

to securities lawyers as well, which is nobody should think it is OK 

to change your name to something that involves blockchain when 

you have no real underlying blockchain business plan and try to 

sell securities based on the hype around blockchain. 

Senator CORTEZ MASTO. And when you say you put out a warning, what does that mean specifically? 

Mr. CLAYTON. I made a speech regarding this, which is published 

on the SEC website. But this is an area of concern to us. Anytime 

there is something new that people seek to raise the value of their 

securities without the underlying goods being there is problematic. 

Senator CORTEZ MASTO. Right. 

Mr. GIANCARLO. Thank you, Senator. So as you know, the jurisdiction of the CFTC and the SEC is slightly different in this regard, and so Chairman Clayton is rightfully concerned with initial 

coin offerings that are misrepresenting the affiliation, whether it be 

31 

with Kodak or otherwise. We focus on fraud and manipulation 

broadly in instruments where there is wild claims for them, and I 

mentioned earlier a case we recently brought on a Long Island firm 

called ‘‘My Big Coin’’, which turned out to be My Big Con. There 

was nothing there. They were taking people’s money and not investing in anything other than their own jewelry and houses and 

fancy cars and this kind of thing. 

We have been very aggressive in using our enforcement authority. We have recently brought three cases just last month alone. I 

have said there will be more, and we are looking into this and monitoring markets very carefully. We believe that our big task is 

bringing enforcement cases and letting people see that, as well as 

consumer education, which I have also—— 

Senator CORTEZ MASTO. Yeah, because it has a deterrent effect. 

You hope it does, right? 

Mr. CLAYTON. Yes. 

Senator CORTEZ MASTO. OK. Thank you. 

It has also been reported that more than 3 million Bitcoins have 

been stolen. That is about 14 percent of the Bitcoins or one in 

seven Bitcoins stolen. And on January 26th, Coincheck, a Japanese 

currency exchange, was hacked. In minutes, $430 million was lost 

to hackers. This follows another theft of more than $500 million 

from another exchange, Mt. Gox. If people put money into a stock 

or bond and it was stolen, they would have help. For example, the 

Federal Government is still trying to help investors recover the 

money stolen by Bernie Madoff. When virtual currencies are stolen 

by hackers, what can buyers do to get their money back, if anything? 

Mr. CLAYTON. This is a very good point, and it is one that we 

have emphasized in our investor alerts, that when you engage in 

investing online with an offshore entity, the chances that we can 

do anything practical to get your money back are very, very low. 

Mr. GIANCARLO. In our futures market, for example, we have 

what we call ‘‘system safeguards,’’ requirements that futures exchanges have cyberprotections in place and they adopt best practices. For these underlying spot markets, which we do not regulate, 

we do not have the authority to require them to have 

cybersafeguards in place. 

Senator CORTEZ MASTO. Right. 

Mr. GIANCARLO. And, you know, a lot of these companies are 

young, they are startups. They are focused on putting what resources they have into developing their technology. And in the case 

of some of the cases you mentioned, what I understand was the 

cyberprotections just were not there. 

Now, I know that the JFSA has been aggressive on this. We have 

had some conversations with them. We have asked questions. What 

are they doing about it? But, unfortunately, the theft has already 

happened. 

Senator CORTEZ MASTO. Right. 

Mr. GIANCARLO. And so this is a problem, that these underlying 

stages, while we do have enforcement authority, we do not have the 

same regulatory authority that we have in the markets that we 

oversee. That is our day job, as one of your colleagues mentioned 

earlier, and so, therefore, this is a gap. 

32 

Mr. CLAYTON. Or the same kind of protection rules like custody. 

Senator CORTEZ MASTO. Right. 

Mr. CLAYTON. It was gone. 

Senator CORTEZ MASTO. Yeah, so it is the old axiom, ‘‘Buyer beware.’’ So around this space, a lot of education is important, I 

would imagine, from all the Federal agencies to buyers so they 

know until something else can be done, which I think we are still 

trying to figure that out 

I notice my time is up. Thank you very much. Thank you. 

Chairman CRAPO. Thank you, Senator. 

I had not planned on having a second round, but I have agreed 

to allow Senator Shelby and Senator Warren to each have one brief 

question. Senator Shelby. 

Senator SHELBY. I want to get in the area of what is on a lot of 

people’s minds today, and I know you do not control the stock market. You know, what goes up comes down, as we all know, and we 

do not know when and so forth. Is this perhaps more than an ordinary correction, or do you have a judgment on that at all? Chairman Clayton. 

Mr. CLAYTON. So your question is exactly the question I asked 

my staff and some of my colleagues across the Federal Government. 

Senator SHELBY. OK. 

Mr. CLAYTON. Because we should be asking those questions. By 

this morning, there was nothing to indicate that any of our systems 

did not function as they were expected to function yesterday. This 

was the largest volume since November 2016. There was a significant price change. We have two types of limits. We have single 

stock limits, and then we have market limits, the circuit breakers. 

Neither one of those were hit in any great detail. The single stock 

was nine; the circuit breakers did not get hit. 

So as I sit here today, there is nothing that came out of this that 

concerns me from a functioning standpoint. But days like yesterday, our job is to look at them. 

Senator SHELBY. From a regulatory standpoint, are you saying 

that you do not see anything amiss? 

Mr. CLAYTON. Yes. 

Senator SHELBY. From a regulatory standpoint. 

Mr. CLAYTON. Yes. 

Senator SHELBY. You cannot control what goes up and what goes 

down. But what spooked the markets? Is it profit taking perhaps? 

Is it a whiff of maybe inflation out there? Because people that 

watch the markets and participate in the markets see that the Fed 

is beginning to raise interest rates, dealing with price stability as 

they see it. And the Fed has information perhaps we do not have. 

The economy is hot, unemployment is low, and so forth. Is it a combination of all, or can we really say? 

Mr. CLAYTON. Well, I cannot really say because I—you know, 

there are a lot of opinions on those things. Our job is to look at 

the functioning—— 

Senator SHELBY. Absolutely. 

Mr. CLAYTON. —and look at the systemic risks. 

Senator SHELBY. That is right. 

33 

Mr. CLAYTON. And I am asking myself, is there anything that 

happened yesterday that gives me a different view of systemic risk 

than I had the day before? And so far, no. But that is a question 

I ask myself almost every day. 

Senator SHELBY. Of course, we all know that when the market 

is going up, people are elated. That is natural. When it is going 

down, some people profit, but not a lot of people are elated. Is that 

fair? 

Mr. CLAYTON. That is fair. 

Senator SHELBY. Do you have any comment, Mr. Chairman? 

Mr. GIANCARLO. Well, I am just smiling because of just a recollection of a saying that a mentor of mine who actually was my introduction in to the financial markets used to say. When I would 

ask him—and he was an old hand in the markets—what drove the 

market up yesterday, or down, he would say, ‘‘Oh, it was up? More 

people bought than sold. Oh, it was down? More people sold than 

bought.’’ And we laugh, but what he said to me, he said, you know, 

‘‘When you listen to the pundits and they say, ‘Well, the market 

was up yesterday because of this,’ that may have been why or it 

may not have been why.’’ But the reporters or the pundit needed 

a reason, so they pick something out and that becomes the reason 

for the day. 

I do not mean to be facetious, but markets are very, very complex. Very, very complex. 

Senator SHELBY. Very much. 

Mr. GIANCARLO. And sometimes it is oversimplifying, and you 

hear it on the news, you hear it by people that are stock pickers, 

and they say, ‘‘Well, it was because of this.’’ Well, I do not know 

how anybody really knows. 

Now, if there are fundamental moves, fundamental changes, that 

is where we have to do—and I share Chairman Clayton’s view. Our 

job is to look at the structural underpinnings and see whether 

there is anything that is not functioning. 

Senator SHELBY. See if the fundamentals are sound. 

Mr. GIANCARLO. See if the fundamentals are sound. So you will 

not be surprised to know that we had a late night last night and 

an early morning this morning, checking in with our exchanges to 

make sure that things are in order, making sure that the margin 

levels held, to make sure there was no significant margin breaches. 

And I can say that the system held. The system worked as it was 

designed to do. The margin levels worked as they were designed to 

work. And so the right systems and the right policies are in place. 

But the markets are always evolving, always organic, and that is 

why we need to stay very close to them. 

Senator SHELBY. The market always corrects. The question is: Is 

this an ordinary—maybe not an ordinary correction, but is it a correction, the market will correct itself, and we go from there? Is that 

fair? 

Mr. GIANCARLO. Yes. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

So I want to go back to virtual currency, and I want to ask about 

initial coin offerings, ICOs. Some ICOs raise money for legitimate 

34 

companies, but others we know are just Ponzi schemes. And many 

of the investors in ICOs are just everyday Americans lured by aggressive marketing promising very high returns. In fact, it is now 

so bad that Facebook recently banned all ads for virtual currencyrelated products and ICOs because there were so many ‘‘deceptive 

and misleading’’ advertising that targeted regular consumers. So I 

just want to ask a little question around how we make ICOs safer. 

Chairman Clayton, the SEC evidently recognized the risk, so it 

announced last summer that it would consider certain coins to be 

securities under the Securities Act, meaning that they have to be 

registered with the Commission and comply with disclosure requirements. In 2017, companies raised more than $4 billion in 

ICOs. How many of those companies registered their ICO with the 

SEC? 

Mr. CLAYTON. Not one. 

Senator WARREN. Not one. And as of today, how many companies 

have registered for upcoming ICOs? 

Mr. CLAYTON. Not one. 

Senator WARREN. Not one, so we are still at zero. Can you just 

say a word about why that is so? 

Mr. CLAYTON. Yes. I do not think the gatekeepers that we rely 

on to assist us in making sure our securities laws are followed have 

done their job. We have made it clear what the law is. As I have 

said many times, there are thousands and thousands of private 

placements that go on every year in the U.S. We want them to go 

on. We want people to raise capital. But we want them to do it 

right. 

Senator WARREN. Right. 

Mr. CLAYTON. What ICOs do is they take the disclosure-like benefits of a private placement and then add to it the public general 

solicitation and retail investor promise of a secondary market without registering with us. And folks somehow got comfortable that 

this was new and it was OK and it was not a security, it was just 

some other way to raise money. Well, I disagree with them. 

Senator WARREN. So it is not new, it is—or it is new, but it is 

not OK and it is not another way to raise money. 

Mr. CLAYTON. Correct. 

Senator WARREN. I am understanding you to say it is a violation 

of the law. 

Mr. CLAYTON. Yes. 

Senator WARREN. Registration really matters. When companies 

do not register their tokens as securities, they can hide information, and the SEC does not have the information it needs to monitor this market. 

Mr. CLAYTON. I am perfectly happy for these people to do private 

placements, but do them right. Do not try and do it as a private 

placement but get all the benefits of a public—— 

Senator WARREN. And then lever over into a public—— 

Mr. CLAYTON. Yeah, and do all the other shenanigans that 

are—— 

Senator WARREN. Well, good. So should I take today as you are 

sounding a warning bell for people, maybe they better pay a little 

closer attention to the law or the SEC is going to pay closer attention to them? 

35 

Mr. CLAYTON. Yes, and it is not the first time. But I really appreciate the opportunity to do it today. 

Senator WARREN. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator. And thank you to our witnesses. We appreciate not only your testimony today but the work 

that you are doing in this critical area. 

I would ask you to get back to me on recommendations as you 

refine your evaluation of our current financial legislative system 

and whether we need to provide further clarification from Congress. 

With that, this hearing is adjourned. 

[Whereupon, at 11:54 a.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 

36 

1The views expressed in this testimony are those of the Chairman of the Securities and Exchange Commission and do not necessarily represent the views of the President, the full Commission, or any Commissioner. 

PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO 

This morning, we will receive testimony from SEC Chairman Jay Clayton and 

CFTC Chairman Chris Giancarlo on the growing world of virtual currencies and the 

oversight conducted by their two agencies. 

Virtual currencies are meant to act as a type of money that can be traded on online exchanges for conventional currencies, such as dollars, or used to purchase 

goods or services, predominantly online. 

Additionally, developers, businesses and individuals are selling virtual coins or tokens through initial coin offerings, also known as ICOs, to raise capital. 

Over the last year, many Americans have become increasingly interested in virtual currencies, especially given the meteoric rise in valuation and recent fall of 

Bitcoin. 

Just for perspective, on January 2 of last year, Bitcoin broke the $1,000 barrier, then peaked in December of 2017 at almost $20,000 and as of this morning is trading at roughly $6,900. Today, the market capitalization of Bitcoin is roughly $115 billion. 

This is an incredible rise given that in 2013, when this Committee had subcommittee hearings on the topic, the total value of Bitcoin in circulation was approximately $5 billion. 

As virtual currencies have become more widespread, financial regulators and 

heads of financial institutions have noticed and voiced their opinions. 

Regulators and heads of industry have tried to educate investors so that they 

make informed decisions, and ensure that the markets they oversee and participate 

in are appropriately working. 

For its part, the SEC has put forth many statements and guideposts to help the 

markets and investors. Namely, the SEC has: issued investor bulletins on initial 

coin offerings; issued an investigative report on what characteristics make an ICO 

a security offering; issued several statements by Chairman Clayton on the issue; 

brought enforcement actions against fraudsters; and issued joint statements with 

the CFTC about enforcement of virtual currency related products. 

The CFTC has also been helping inform the markets by: launching a dedicated 

website on virtual currencies to educate investors; bringing enforcement actions 

against individuals involved in cryptocurrency related scams; issuing several statements by Chairman Giancarlo and other Commissioners on the issue; and scheduling hearings on the topics. 

Much of the recent news about virtual currencies has been negative; between the 

enforcement actions brought by your agencies, the hack of the international 

Coincheck exchange, and the concerns raised by various regulators and market participants, there is no shortage of examples that increase investor concerns. 

It is also important to note that the technology, innovation, and ideas underlying 

these markets present significant positive potential. 

These aspects underpinning virtual currencies have the ability to transform for 

investors the composition of, and ability to access, the financial landscape, thus 

changing and modernizing capital formation and transfer of risk. 

Technology is forward looking, and we look to our regulators to continue carrying 

out their mandates, including investor protection, as the markets evolve. 

I look forward to learning more about virtual currency oversight from the two witnesses, including what their agencies are doing to ensure appropriate disclosures 

and safeguards for investors. 

PREPARED STATEMENT OF JAY CLAYTON 

CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION

FEBRUARY 6, 2018 

Chairman Crapo, Ranking Member Brown, and distinguished senators of the 

Committee, thank you for the opportunity to testify before you today. 1 I am pleased 

that the Committee is holding this hearing to bring greater focus to the important 

issues that cryptocurrencies, initial coin offerings (ICOs) and related products and 

activities present for American investors and our markets. 

I am also pleased to join my counterpart, Commodity Futures Trading Commission (CFTC) Chairman Christopher Giancarlo, for our second time testifying together before Congress. Since I joined the Commission in May, Chairman Giancarlo 

37 

2See Jay Clayton and J. Christopher Giancarlo, ‘‘Regulators Are Looking at Cryptocurrency’’, 

Wall St. J. (Jan. 24, 2018), available at https://www.wsj.com/articles/regulators-are-looking-atcryptocurrency-1516836363?mod=searchresults&page=1&pos=2. 3 Under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, a security includes, among other items, ‘‘an investment contract.’’ See 15 U.S.C. §§77b-77c. An investment contract is an investment of money in a common enterprise with a reasonable expectation 

of profits to be derived from the entrepreneurial or managerial efforts of others. See SEC v. 

Edwards, 540 U.S. 389, 393 (2004); SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946); see also 

United Housing Found., Inc. v. Forman, 421 U.S. 837, 852-53 (1975). 4 In December, I issued a statement that provided my general views on the cryptocurrency 

and ICO markets. The statement was directed principally at two groups: (1) Main Street investors and (2) market professionals—including, for example, broker-dealers, investment advisers, 

exchanges, lawyers, and accountants—whose actions impact Main Street investors. See ‘‘Statement on Cryptocurrencies and Initial Coin Offerings’’ (Dec. 11, 2017), available at https:// 

www.sec.gov/news/public-statement/statement-clayton-2017-12-11. 

and I have built a strong relationship. Cryptocurrencies, ICOs and related subjects 

are the latest in a host of market issues on which we and our staffs have been closely collaborating to strengthen our capital markets for investors and market participants. 2

The mission of the SEC is to protect investors, maintain fair, orderly, and efficient 

markets and facilitate capital formation. We do so through our enforcement of the 

Federal securities laws and our oversight of the securities markets and their participants including (1) approximately $75 trillion in securities trading annually on U.S. 

equity markets; (2) the disclosures of approximately 4,100 exchange-listed public 

companies with an approximate aggregate market capitalization of $31 trillion; and 

(3) the activities of over 26,000 registered entities and self-regulatory organizations, 

including investment advisers, broker-dealers, transfer agents, securities exchanges, 

clearing agencies, mutual funds, exchange-traded funds (ETFs), the Financial Industry Regulatory Authority (FINRA), and the Municipal Securities Rulemaking Board 

(MSRB), among others. 

For those who seek to raise capital to fund an enterprise, as many in the ICO 

space have sought to do, a primary entry into the SEC’s jurisdiction is the offer and 

sale of securities, as set forth in the Securities Act of 1933. 3 As I will explain in 

greater detail below, determining what falls within the ambit of a securities offer 

and sale is a facts-and-circumstances analysis, utilizing a principles-based framework that has served American companies and American investors well through periods of innovation and change for over 80 years. 

The cryptocurrency and ICO markets, while new, have grown rapidly, gained 

greater prominence in the public conscience and attracted significant capital from 

retail investors. We have seen historical instances where such a rush into certain 

investments has benefited our economy and those investors who backed the right 

ventures. But when our laws are not followed, the risks to all investors are high 

and numerous—including risks caused by or related to poor, incorrect or nonexistent 

disclosure, volatility, manipulation, fraud, and theft. 

To be clear, I am very optimistic that developments in financial technology will 

help facilitate capital formation, providing promising investment opportunities for 

institutional and Main Street investors alike. From a financial regulatory perspective, these developments may enable us to better monitor transactions, holdings and 

obligations (including credit exposures) and other activities and characteristics of 

our markets, thereby facilitating our regulatory mission, including, importantly, investor protection. 

At the same time, regardless of the promise of this technology, those who invest 

their hard-earned money in opportunities that fall within the scope of the Federal 

securities laws deserve the full protections afforded under those laws. This everpresent need comes into focus when enthusiasm for obtaining a profitable piece of 

a new technology ‘‘before it’s too late’’ is strong and broad. Fraudsters and other bad 

actors prey on this enthusiasm. 

The SEC and the CFTC, as Federal market regulators, are charged with establishing a regulatory environment for investors and market participants that fosters 

innovation, market integrity and ultimately confidence. To that end, a number of 

steps the SEC has taken relating to cryptocurrencies, ICOs and related assets are 

discussed below. 

Message for Main Street Investors 

Before discussing regulation in more detail, I would like to reiterate my message 

to Main Street investors from a statement I issued in December. 4 Cryptocurrencies, 

ICOs and related products and technologies have captured the popular imagination—and billions of hard-earned dollars—of American investors from all walks of 

life. In dealing with these issues, my key consideration—as it is for all issues that 

38 

5 In one instance, the SEC brought an enforcement action against a purported Bitcoin mining 

company that claimed to have a product ‘‘so easy to use that it is ‘Grandma approved.’ ’’ In this 

case, in less than 6 months, the company allegedly raised more than $19 million from more than 

10,000 investors. The SEC charged that company with operating a Ponzi scheme. See Press Release 2015-271, ‘‘SEC Charges Bitcoin Mining Companies’’ (Dec. 1, 2015), available at https:// 

www.sec.gov/news/pressrelease/2015-271.html; ‘‘SEC Obtains Final Judgment Against Founder 

of Bitcoin Mining Companies Used To Defraud Investors’’ (Oct. 4, 2017), available at https:// 

www.sec.gov/litigation/litreleases/2017/lr23960.htm. 6See ‘‘EY Research: Initial Coin Offerings (ICOs)’’ (Dec. 2017), available at http:// 

www.ey.com/Publication/vwLUAssets/ey-research-initial-coin-offerings-icos/%24File/ey-research-initial-coin-offerings-icos.pdf. 7See Reuters, ‘‘Japan Raps Coincheck, Orders Broader Checks After $530 Million 

Cryptocurrency Theft’’, Jan. 28, 2018, available at https://www.reuters.com/article/us-japancryptocurrency/japan-raps-coincheck-orders-broader-checks-after-530-million-cryptocurrencytheft-idUSKBN1FI06S. 8 ‘‘Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others’’ (Nov. 1, 2017), available at https://www.sec.gov/news/publicstatement/statement-potentially-unlawful-promotion-icos; ‘‘Investor Alert: Public Companies 

Making ICO-Related Claims’’ (Aug. 28, 2017), available at https://www.sec.gov/oiea/investoralerts-and-bulletins/ialicorelatedclaims; ‘‘Investor Bulletin: Initial Coin Offerings’’ (July 25, 

2017), available at https://www.sec.gov/oiea/investor-alerts-and-bulletins/iblcoinofferings; ‘‘Investor Alert: Bitcoin and Other Virtual Currency-Related Investments’’ (May 7, 2014), available 

at https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alertbitcoin-other-virtual-currency; ‘‘Investor Alert: Ponzi Schemes Using Virtual Currencies’’ (July 

23, 2013), available at https://www.sec.gov/investor/alerts/ialvirtualcurrencies.pdf. 9See ‘‘Sample Questions for Investors Considering a Cryptocurrency or ICO Investment Opportunity’’ (Dec. 2017), available at https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11#lftnref8. 

come before the Commission—is to serve the long term interests of our Main Street 

investors. My efforts—and the tireless efforts of the SEC staff—have been driven 

by various factors, but most significantly by the concern that too many Main Street 

investors do not understand all the material facts and risks involved. Unfortunately, 

it is clear that some have taken advantage of this lack of understanding and have 

sought to prey on investors’ excitement about the quick rise in cryptocurrency and 

ICO prices. 5

There should be no misunderstanding about the law. When investors are offered 

and sold securities—which to date ICOs have largely been—they are entitled to the 

benefits of State and Federal securities laws and sellers and other market participants must follow these laws. 

Yes, we do ask our investors to use common sense, and we recognize that many 

investment decisions will prove to be incorrect in hindsight. However, we do not ask 

investors to use their common sense in a vacuum, but rather, with the benefit of 

information and other requirements where judgments can reasonably be made. 

This is a core principle of our Federal securities laws and is embodied in the 

SEC’s registration requirements. Investors should understand that to date no ICOs 

have been registered with the SEC, and the SEC also has not approved for listing 

and trading any exchange-traded products (such as ETFs) holding cryptocurrencies 

or other assets related to cryptocurrencies. If any person today says otherwise, investors should be especially wary. 

Investors who are considering investing in these products should also recognize 

that these markets span national borders and that significant trading may occur on 

systems and platforms outside the U.S. Investors’ funds may quickly travel overseas 

without their knowledge. As a result, risks can be amplified, including the risk that 

U.S. market regulators, such as the SEC and State securities regulators, may not 

be able to effectively pursue bad actors or recover funds. 

Further, there are significant security risks that can arise by transacting in these 

markets, including the loss of investment and personal information due to hacks of 

online trading platforms and individual digital asset ‘‘wallets.’’ A recent study estimated that more than 10 percent of proceeds generated by ICOs—or almost $400 

million—has been lost to such attacks. 6 And less than 2 weeks ago, a Japanese cryptocurrency market lost over $500 million in an apparent hack of its systems. 7

In order to arm investors with additional information, the SEC staff has issued 

investor alerts, bulletins and statements on ICOs and cryptocurrency-related investments, including with respect to the marketing of certain offerings and investments 

by celebrities and others. 8 If investors choose to invest in these products, they 

should ask questions and demand clear answers. I would strongly urge investors— 

especially retail investors—to review the sample questions and investor alerts 

issued by the SEC’s Office of Investor Education and Advocacy. 9

These warnings are not an effort to undermine the fostering of innovation through 

our capital markets—America was built on the ingenuity, vision, and spirit of entreVerDate Nov 24 2008 09:37 May 07, 2018 Jkt 046629 PO 00000 Frm 00042 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\02-06 ZDISTILLER\20618.TXT JASON
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10 It is possible to conduct an offer and sales of securities, including an ICO, without triggering the SEC’s registration requirements. For example, just as with a Regulation D exempt 

offering to raise capital for the manufacturing of a physical product, an ICO that is a security 

can be structured so that it qualifies for an applicable exemption from the registration requirements. 

preneurs who tackled old and new problems in new, innovative ways. Rather, they 

are meant to educate Main Street investors that many promoters of ICOs and 

cryptocurrencies are not complying with our securities laws and, as a result, the 

risks are significant. 

With my remaining testimony, I would like to provide the Committee an overview 

of the Commission’s ongoing work on cryptocurrencies and ICOs. 

Cryptocurrencies and Related Products and Trading 

Speaking broadly, cryptocurrencies purport to be items of inherent value (similar, 

for instance, to cash or gold) that are designed to enable purchases, sales, and other 

financial transactions. Many are promoted as providing the same functions as longestablished currencies such as the U.S. dollar but without the backing of a Government or other body. While cryptocurrencies currently being marketed vary in different respects, proponents of cryptocurrencies often tout their novelty and other potential beneficial features, including the ability to make transfers without an intermediary and without geographic limitation and lower transaction costs compared to 

other forms of payment. Critics of cryptocurrencies note that the purported benefits 

highlighted by proponents are unproven and other touted benefits, such as the personal anonymity of the purchasers and sellers and the absence of Government regulation or oversight, could also facilitate illicit trading and financial transactions, as 

well as fraud. 

The recent proliferation and subsequent popularity of cryptocurrency markets creates a question for market regulators as to whether our historic approach to the regulation of sovereign currency transactions is appropriate for these new markets. 

These markets may look like our regulated securities markets, with quoted prices 

and other information. Many trading platforms are even referred to as ‘‘exchanges.’’ 

I am concerned that this appearance is deceiving. In reality, investors transacting 

on these trading platforms do not receive many of the market protections that they 

would when transacting through broker-dealers on registered exchanges or alternative trading systems (ATSs), such as best execution, prohibitions on front running, short sale restrictions, and custody and capital requirements. I am concerned 

that Main Street investors do not appreciate these differences and the resulting substantially heightened risk profile. 

It appears that many of the U.S.-based cryptocurrency trading platforms have 

elected to be regulated as money-transmission services. Traditionally, from an oversight perspective, these predominantly State-regulated payment services have not 

been subject to direct oversight by the SEC or the CFTC. Traditionally, from a function perspective, these money transfer services have not quoted prices or offered 

other services akin to securities, commodities and currency exchanges. In short, the 

currently applicable regulatory framework for cryptocurrency trading was not designed with trading of the type we are witnessing in mind. As Chairman Giancarlo 

and I stated recently, we are open to exploring with Congress, as well as with our 

Federal and State colleagues, whether increased Federal regulation of 

cryptocurrency trading platforms is necessary or appropriate. We also are supportive of regulatory and policy efforts to bring clarity and fairness to this space. 

The SEC regulates securities transactions and certain individuals and firms who 

participate in our securities markets. The SEC does not have direct oversight of 

transactions in currencies or commodities, including currency trading platforms. 

While there are cryptocurrencies that, at least as currently designed, promoted, 

and used, do not appear to be securities, simply calling something a ‘‘currency’’ or 

a currency-based product does not mean that it is not a security. To this point I 

would note that many products labeled as cryptocurrencies or related assets are increasingly being promoted as investment opportunities that rely on the efforts of 

others, with their utility as an efficient medium for commercial exchange being a 

distinct secondary characteristic. As discussed in more detail below, if a 

cryptocurrency, or a product with its value tied to one or more cryptocurrencies, is 

a security, its promoters cannot make offers or sales unless they comply with the 

registration and other requirements under our Federal securities laws. 10

In this regard, the SEC is monitoring the cryptocurrency-related activities of the 

market participants it regulates, including brokers, dealers, investment advisers, 

and trading platforms. Brokers, dealers and other market participants that allow for 

payments in cryptocurrencies, allow customers to purchase cryptocurrencies (includVerDate Nov 24 2008 09:37 May 07, 2018 Jkt 046629 PO 00000 Frm 00043 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\02-06 ZDISTILLER\20618.TXT JASON
40 

11 I am particularly concerned about market participants who extend to customers credit in 

U.S. dollars—a relatively stable asset—to enable the purchase of cryptocurrencies, which, in recent experience, have proven to be a more volatile asset. 12See ‘‘Staff Letter: Engaging on Fund Innovation and Cryptocurrency-Related Holdings’’ 

(Jan. 18, 2018), available at https://www.sec.gov/divisions/investment/noaction/2018/ 

cryptocurrency-011818.htm. 13Section 21(a) of the Exchange Act authorizes the Commission to investigate violations of 

the Federal securities laws and, in its discretion, to ‘‘publish information concerning any such 

violations.’’ The Report does not constitute an adjudication of any fact or issue addressed therein, nor does it make any findings of violations by any individual or entity. 

ing 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. 11 As I have stated previously, these market participants should treat 

payments and other transactions made in cryptocurrency as if cash were being 

handed from one party to the other. 

Finally, financial products that are linked to underlying digital assets, including 

cryptocurrencies, may be structured as securities products subject to the Federal securities laws even if the underlying cryptocurrencies are not themselves securities. 

Market participants have requested Commission approval for new products and 

services of this type that are focused on retail investors, including cryptocurrencylinked ETFs. While we appreciate the importance of continuing innovation in our 

retail fund space, there are a number of issues that need to be examined and resolved before we permit ETFs and other retail investor-oriented funds to invest in 

cryptocurrencies in a manner consistent with their obligations under the Federal securities laws. These include issues around liquidity, valuation, and custody of the 

funds’ holdings, as well as creation, redemption, and arbitrage in the ETF space. 

Last month, after working with several sponsors who ultimately decided to withdraw their registration statements, the Director of our Division of Investment Management issued a letter to provide an overview of certain substantive issues and related questions associated with registration requirements and to encourage others 

who may be considering a fund registered pursuant to the Investment Company Act 

of 1940 to engage in a robust discussion with the staff concerning the above-mentioned issues. 12 Until such time as those questions have been sufficiently addressed, 

I am concerned about whether it is appropriate for fund sponsors that invest substantially in cryptocurrencies and related products to register. We will continue engaging in a dialogue with all interested parties to seek a path forward consistent 

with the SEC’s tripartite mission. 

ICOs and Related Trading 

Coinciding with the substantial growth in cryptocurrencies, companies and individuals increasingly have been using so-called ICOs to raise capital for businesses 

and projects. Typically, these offerings involve the opportunity for individual investors to exchange currency, such as U.S. dollars or cryptocurrencies, in return for a 

digital asset labeled as a coin or token. The size of the ICO market has grown exponentially in the last year, and it is estimated that almost $4 billion was raised 

through ICOs in 2017. Note that this number may understate the size of the ICO 

market (and the potential for loss) as many ICOs ‘‘trade up’’ after they are issued. 

These offerings can take different forms, and the rights and interests a coin is 

purported to provide the holder can vary widely. A key question all ICO market participants—promoters, sellers, lawyers, officers, and directors and accountants, as 

well as investors—should ask: ‘‘Is the coin or token a security?’’ As securities law 

practitioners know well, the answer depends on the facts. But by and large, the 

structures of ICOs that I have seen involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our Federal securities laws. As noted above, the foundation of our 

Federal securities laws is to provide investors with the procedural protections and 

information they need to make informed judgments about what they are investing 

in and the relevant risks involved. In addition, our Federal securities laws provide 

a wide array of remedies, including criminal and civil actions brought by the DOJ 

and the SEC, as well as private rights of action. 

The Commission previously urged market professionals, including securities lawyers, accountants, and consultants, to read closely an investigative report it released. On July 25, 2017, the Commission issued a Report of Investigation pursuant 

to Section 21(a) of the Securities Exchange Act of 1934 13 regarding an ICO of DAO 

41 

14 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: 

The DAO (July 25, 2017), available at https://www.sec.gov/litigation/investreport/34- 

81207.pdf. 15See SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 351 (1943) (‘‘[T]he reach of the [Securities] Act does not stop with the obvious and commonplace. Novel, uncommon, or irregular devices, whatever they appear to be, are also reached if it be proved as matter of fact that they 

were widely offered or dealt in under terms or courses of dealing which established their character in commerce as ‘investment contracts,’ or as any interest or instrument commonly known 

as a ‘security’.’’); see also Reves v. Ernst & Young, 494 U.S. 56, 61 (1990) (‘‘Congress’ purpose 

in enacting the securities laws was to regulate investments, in whatever form they are made 

and by whatever name they are called.’’). 16See ‘‘Opening Remarks at the Securities Regulation Institute’’ (Jan. 22, 2018), available at 

https://www.sec.gov/news/speech/speech-clayton-012218. 

Tokens. 14 In the Report, the Commission considered the particular facts and circumstances presented by the offer and sale of DAO Tokens and concluded that DAO 

Tokens were securities based on longstanding legal principles, and therefore that offers and sales of the DAO Tokens were subject to the Federal securities laws. The 

Report also explained that issuers of distributed ledger or blockchain technologybased securities must register offers and sales of such securities unless a valid exemption from registration applies, and that platforms that provide for trading in 

such securities must register with the SEC as national securities exchanges or operate pursuant to an exemption from such registration. 

The Commission’s message to issuers and market professionals in this space was 

clear: those who would use distributed ledger technology to raise capital or engage 

in securities transactions must take appropriate steps to ensure compliance with the 

Federal securities laws. The Report and subsequent statements also explain that 

the use of such technology does not mean that an offering is necessarily problematic 

under those laws. The registration process itself, or exemptions from registration, 

are available for offerings employing these novel methods. 

The statement I issued in December that was directed to Main Street investors 

and market professionals provided additional insight into how practitioners should 

view ICOs in the context of our Federal securities laws. Certain market professionals have attempted to highlight the utility or voucher-like characteristics of 

their proposed ICOs in an effort to claim that their proposed tokens or coins are 

not securities. Many of these assertions that the Federal securities laws do not 

apply to a particular ICO appear to elevate form over substance. The rise of these 

form-based arguments is a disturbing trend that deprives investors of mandatory 

protections that clearly are required as a result of the structure of the transaction. 

Merely calling a token a ‘‘utility’’ token or structuring it to provide some utility does 

not prevent the token from being a security. 15 Tokens and offerings that incorporate 

features and marketing efforts that emphasize the potential for profits based on the 

entrepreneurial or managerial efforts of others continue to contain the hallmarks of 

a security under U.S. law. It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens, i.e., the 

ability to sell them on an exchange at a profit. In short, prospective purchasers are 

being sold on the potential for tokens to increase in value—with the ability to lock 

in those increases by reselling the tokens on a secondary market—or to otherwise 

profit from the tokens based on the efforts of others. These are key hallmarks of 

a security and a securities offering. 

On this and other points where the application of expertise and judgment is expected, I believe that gatekeepers and others, including securities lawyers, accountants and consultants, need to focus on their responsibilities. I have urged these professionals to be guided by the principal motivation for our registration, offering process and disclosure requirements: investor protection and, in particular, the protection of our Main Street investors. 16

I also have cautioned market participants against promoting or touting the offer 

and sale of coins without first determining whether the securities laws apply to 

those actions. Engaging in the business of selling securities generally requires a license, and experience shows that excessive touting in thinly traded and volatile 

markets can be an indicator of ‘‘scalping,’’ ‘‘pump and dump,’’ and other manipulations and frauds. Similarly, my colleagues and I have cautioned those who operate 

systems and platforms that effect or facilitate transactions in these products that 

they may be operating unregistered exchanges or broker-dealers that are in violation of the Securities Exchange Act of 1934. 

I do want to recognize that recently social media platforms have restricted the 

ability of users to promote ICOs and cryptocurrencies on their platforms. I appreciate the responsible step. 

42 

17See Press Release 2017-176, ‘‘SEC Announces Enforcement Initiatives To Combat CyberBased Threats and Protect Retail Investors’’ (Sept. 25, 2017), available at https://www.sec.gov/ 

news/press-release/2017-176. 18Press Release 2017-185, ‘‘SEC Exposes Two Initial Coin Offerings Purportedly Backed by 

Real Estate and Diamonds’’ (Sept. 29, 2017), available at https://www.sec.gov/news/press-release/2017-185-0. 19Press Release 2017-219, ‘‘SEC Emergency Action Halts ICO Scam’’ (Dec. 4, 2017), available 

at https://www.sec.gov/news/press-release/2017-219. 

20Press Release 2017-227, ‘‘Company Halts ICO After SEC Raises Registration Concerns’’ 

(Dec. 11, 2017), available at https://www.sec.gov/news/press-release/2017-227. 21Press Release 2018-8, ‘‘SEC Halts Alleged Initial Coin Offering Scam’’ (Jan. 30, 2018), 

available at https://www.sec.gov/news/press-release/2018-8. 

Enforcement 

A number of concerns have been raised regarding the cryptocurrency and ICO 

markets, including that, as they are currently operating, there is substantially less 

investor protection than in our traditional securities markets, with correspondingly 

greater opportunities for fraud and manipulation. The ability of bad actors to commit age-old frauds with new technologies coupled with the significant amount of 

capital—particularly from retail investors—that has poured into cryptocurrencies 

and ICOs in recent months and the offshore footprint of many of these activities 

have only heightened these concerns. 

In September 2017, the Division of Enforcement established a new Cyber Unit focused on misconduct involving distributed ledger technology and ICOs, the spread 

of false information through electronic and social media, brokerage account takeovers, hacking to obtain nonpublic information and threats to trading platforms. 17

The Cyber Unit works closely with our cross-divisional Distributed Ledger Technology Working Group, which was created in November 2013. We believe this approach has enabled us to leverage our enforcement resources effectively and coordinate well within the Commission, as well as with other Federal and State regulators. 

To date, we have brought a number of enforcement actions concerning ICOs for 

alleged violations of the Federal securities laws. In September 2017, we brought 

charges against an individual for defrauding investors in a pair of ICOs purportedly 

backed by investments in real estate and diamonds. 18 According to the SEC’s complaint, investors provided approximately $300,000 in funding and were told they 

could expect sizeable returns despite neither company having real operations. In December 2017, we obtained an emergency asset freeze to halt an alleged ICO fraud 

that purportedly raised up to $15 million from thousands of individual investors beginning in August 2017. 19 According to the complaint, the scam was operated by 

a recidivist securities law violator and promised investors a more than 1,300 percent 

profit in under 29 days. As another example, after being contacted by the SEC last 

December, a company halted its ICO to raise capital for a blockchain-based food review service, and then settled proceedings in which we determined that the ICO was 

an unregistered offering and sale of securities in violation of the Federal securities 

laws. 20 Before tokens were delivered to investors, the company refunded investor 

proceeds after the SEC intervened. 

And most recently, we halted an allegedly fraudulent ICO that targeted retail investors promoting what it portrayed as the world’s first decentralized bank. 21 We 

were able to freeze some of the allegedly ill-gotten cryptocurrency assets and obtained a receiver to try to marshal these assets back to harmed investors. 

I also have been increasingly concerned with recent instances of public companies, 

with no meaningful track record in pursuing distributed ledger or blockchain technology, changing their business models and names to reflect a focus on distributed 

ledger technology without adequate disclosure to investors about their business 

model changes and the risks involved. A number of these instances raise serious investor protection concerns about the adequacy of disclosure especially where an offer 

and sale of securities is involved. The SEC is looking closely at the disclosures of 

public companies that shift their business models to capitalize on the perceived 

promise of distributed ledger technology and whether the disclosures comply with 

the Federal securities laws, particularly in the context of a securities offering. 

With the support of my fellow Commissioners, I have asked the SEC’s Division 

of Enforcement to continue to police these markets vigorously and recommend enforcement actions against those who conduct ICOs or engage in other actions relating to cryptocurrencies in violation of the Federal securities laws. In doing so, the 

SEC and CFTC are collaborating on our approaches to policing these markets for 

43 

22See Joint Statement by SEC and CFTC Enforcement Directors Regarding Virtual Currency 

Enforcement Actions (Jan. 19, 2018), available at https://www.sec.gov/news/public-statement/ 

joint-statement-sec-and-cftc-enforcement-directors. 

fraud and abuse. 22 We also will continue to work closely with our Federal and State 

counterparts, including the Department of Treasury, Department of Justice, and 

State attorneys general and securities regulators. 

Conclusion 

Through the years, technological innovations have improved our markets, including through increased competition, lower barriers to entry and decreased costs for 

market participants. Distributed ledger and other emerging technologies have the 

potential to further influence and improve the capital markets and the financial 

services industry. Businesses, especially smaller businesses without efficient access 

to traditional capital markets, can be aided by financial technology in raising capital 

to establish and finance their operations, thereby allowing them to be more competitive both domestically and globally. And these technological innovations can provide 

investors with new opportunities to offer support and capital to novel concepts and 

ideas. 

History, both in the United States and abroad, has proven time and again that 

these opportunities flourish best when pursued in harmony with our Federal securities laws. These laws reflect our tripartite mission to protect investors, maintain 

fair, orderly and efficient markets and facilitate capital formation. Being faithful to 

each part of our mission not in isolation, but collectively, has served us well. Said 

simply, we should embrace the pursuit of technological advancement, as well as new 

and innovative techniques for capital raising, but not at the expense of the principles undermining our well-founded and proven approach to protecting investors 

and markets. 

Thank you for the opportunity to testify before you today and for your support 

of the Commission and its workforce. I stand ready to work with Congress on these 

issues and look forward to answering your questions. 

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1See generally, CFTC Talks, Episode 24, Dec. 29, 2017, Interview with Coincenter.org Director of Research, Peter Van Valkenburgh, at http://www.cftc.gov/Media/Podcast/index.htm. 2See Marc Andreessen, ‘‘Why Bitcoin Matters’’, New York Times DealBook (Jan. 21, 2014), 

https://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/; Jerry Brito and Andrea 

O’Sullivan, ‘‘Bitcoin: A Primer for Policymakers’’, George Mason University Mercatus Center 

(May 3, 2016), https://www.mercatus.org/publication/bitcoin-primer-policymakers; Christian 

Catalini and Joshua S. Gans, ‘‘Some Simple Economics of the Blockchain’’, Rotman School of 

Management Working Paper No. 2874598, MIT Sloan Research Paper No. 5191-16 (last updated 

Sept. 21, 2017), https://papers.ssrn.com/sol3/papers.cfm?abstractlid=2874598; Arjun Kharpal, 

‘‘People Are ‘Underestimating’ the ‘Great Potential’ of Bitcoin, Billionaire Peter Thiel Says’’, 

CNBC (Oct. 26, 2017), https://www.cnbc.com/2017/10/26/bitcoin-underestimated-peter-thielsays.html; Hugh Son, ‘‘Bitcoin ‘More Than Just a Fad,’ Morgan Stanley CEO Says’’, Bloomberg 

(Sept. 27, 2017), https://www.bloomberg.com/news/articles/2017-09-27/bitcoin-more-than-justa-fad-morgan-stanley-ceo-gorman-says; Chris Brummer and Daniel Gorfine, ‘‘FinTech: Building 

a 21st-Century Regulator’s Toolkit’’, Milken Institute (Oct. 21, 2014), available at http:// 

www.milkeninstitute.org/publications/view/665. 3 Virtual currencies are not unique in their utility in illicit activity. National currencies, like 

the U.S. Dollar, and commodities, like gold and diamonds, have long been used to support criminal enterprises. 4 Countries that have banned Bitcoin include Bangladesh, Bolivia, Ecuador, Kyrgyzstan, Morocco, Nepal, and Vietnam. China has banned Bitcoin for banking institutions. 

PREPARED STATEMENT OF J. CHRISTOPHER GIANCARLO 

CHAIRMAN, U.S. COMMODITY FUTURES TRADING COMMISSION

FEBRUARY 6, 2018 

Introduction: Virtual Currency 

Thank you, Chairman Crapo, for the invitation to testify before the Committee. 

Thank you, Ranking Member Brown, and all the Members of the Committee for this 

opportunity to discuss virtual currencies. 

At the outset, I would like to note that this hearing is timely, even fortuitous. 

Emerging financial technologies broadly are taking us into a new chapter of economic history. They are impacting trading, markets and the entire financial landscape with far ranging implications for capital formation and risk transfer. They include machine learning and artificial intelligence, algorithm-based trading, data 

analytics, ‘‘smart’’ contracts valuing themselves and calculating payments in realtime, and distributed ledger technologies, which over time may come to challenge 

traditional market infrastructure. They are transforming the world around us, and 

it is no surprise that these technologies are having an equally transformative impact on U.S. capital and derivatives markets. 

The more specific topic for today’s hearing, however, is virtual currency. Broadly 

speaking, virtual currencies are a digital representation of value that may function 

as a medium of exchange, a unit of account, and/or a store of value. Virtual currencies generally run on a decentralized peer-to-peer network of computers, which 

rely on certain network participants to validate and log transactions on a permanent, public distributed ledger, commonly known as the blockchain. 

Supporters of virtual currencies see a technological solution to the age-old ‘‘double 

spend’’ problem—that has always driven the need for a trusted, central authority 

to ensure that an entity is capable of, and does, engage in a valid transaction. Traditionally, there has been a need for a trusted intermediary—for example a bank or 

other financial institution—to serve as a gatekeeper for transactions and many economic activities. Virtual currencies seek to replace the need for a central authority 

or intermediary with a decentralized, rules-based and open consensus mechanism. 1

An array of thoughtful business, technology, academic, and policy leaders have extrapolated some of the possible impacts that derive from such an innovation, including how market participants conduct transactions, transfer ownership, and power 

peer-to-peer applications and economic systems. 2

Others, however, argue that this is all hype or technological alchemy and that the 

current interest in virtual currencies is overblown and resembles wishful thinking, 

a fever, even a mania. They have declared the 2017 heightened valuation of Bitcoin 

to be a bubble similar to the famous ‘‘Tulip Bubble’’ of the 17th century. They say 

that virtual currencies perform no socially useful function and, worse, can be used 

to evade laws or support illicit activity. 3 Indeed, history has demonstrated to us 

time-and-again that bad actors will try to invoke the concept of innovation in order 

to perpetrate age-old fraudulent schemes on the public. Accordingly, some assert 

that virtual currencies should be banned, as some Nations have done. 4

There is clearly no shortage of opinions on virtual currencies such as Bitcoin. In 

fact, virtual currencies may be all things to all people: for some, potential riches, 

the next big thing, a technological revolution, and an exorable value proposition; for 

102 

5 Jay Clayton and J. Christopher Giancarlo, ‘‘Regulators Are Looking at Cryptocurrency: At 

the SEC and CFTC We Take Our Responsibility Seriously’’, Wall Street Journal, Jan. 24, 2018, 

https://www.wsj.com/articles/regulators-are-looking-at-cryptocurrency-1516836363. 6See CFTC, ‘‘Mission and Responsibilities’’, http://www.cftc.gov/About/ 

MissionResponsibilities/index.htm. 

others, a fraud, a new form of temptation and allure, and a way to separate the 

unsuspecting from their money. 

Perspective is critically important. As of the morning of February 5, the total 

value of all outstanding Bitcoin was about $130 billion based on a Bitcoin price of 

$7,700. The Bitcoin ‘‘market capitalization’’ is less than the stock market capitalization of a single ‘‘large cap’’ business, such as McDonalds (around $130 billion). The 

total value of all outstanding virtual currencies was about $365 billion. Because virtual currencies like Bitcoin are sometimes considered to be comparable to gold as 

an investment vehicle, it is important to recognize that the total value of all the 

gold in the world is estimated by the World Gold Council to be about $8 trillion 

which continues to dwarf the virtual currency market size. Clearly, the column 

inches of press attention to virtual currency far surpass its size and magnitude in 

today’s global economy. 

Yet, despite being a relatively small asset class, virtual currency presents novel 

challenges for regulators. SEC Chairman Clayton and I recently wrote: 

The CFTC and SEC, along with other Federal and State regulators and criminal 

authorities, will continue to work together to bring transparency and integrity to 

these markets and, importantly, to deter and prosecute fraud and abuse. These markets are new, evolving, and international. As such they require us to be nimble and 

forward-looking; coordinated with our State, Federal, and international colleagues; 

and engaged with important stakeholders, including Congress. 5

It is this perspective that has guided our work at the CFTC on virtual currencies. 

Introduction: The Mission of the CFTC 

The mission of the CFTC is to foster open, transparent, competitive, and financially sound derivatives markets. 6 By working to avoid systemic risk, the Commission aims to protect market users and their funds, consumers, and the public from 

fraud, manipulation, and abusive practices related to derivatives and other products 

that are subject to the Commodity Exchange Act (CEA). 

The CFTC was established as an independent agency in 1974, assuming responsibilities that had previously belonged to the Department of Agriculture since the 

1920s. The Commission historically has been charged by the CEA with regulatory 

authority over the commodity futures markets. These markets have existed since 

the 1860s, beginning with agricultural commodities such as wheat, corn, and cotton. 

Over time, these organized commodity futures markets, known as designated contract markets (DCMs) regulated by the CFTC, have grown to include those for energy and metals commodities, collectively including crude oil, heating oil, gasoline, 

copper, gold, and silver. The agency now also oversees these commodity futures markets for financial products such as interest rates, stock indexes, and foreign currency. The definition of ‘‘commodity’’ in the CEA is broad. It can mean a physical 

commodity, such as an agricultural product (e.g., wheat, cotton) or natural resource 

(e.g., gold, oil). It can mean a currency or interest rate. The CEA definition of ‘‘commodity’’ also includes ‘‘all services, rights, and interests . . . in which contracts for 

future delivery are presently or in the future dealt in.’’ 

In the aftermath of the 2008 financial crisis, President Obama and Congress enhanced the CFTC’s regulatory authority. With passage of the Dodd–Frank Wall 

Street Reform and Consumer Protection Act (Dodd–Frank Act), the agency now also 

oversees most of the U.S. swaps market in addition to exchange traded futures markets. 

Futures, swaps and other derivatives markets are essential means for commercial 

and financial risk mitigation and transfer. These markets allow the risks of variable 

production costs, such as the price of raw materials, energy, foreign currency, and 

interest rates, to be transferred from those who cannot afford them to those who 

can. They are the reason why American consumers enjoy stable prices in the grocery 

store, whatever the conditions out on the farm. 

But derivatives markets are not just useful for agricultural producers. They impact the price and availability of heating in American homes, the energy used in 

factories, the interest rates borrowers pay on home mortgages, and the returns 

workers earn on their retirement savings. More than 90 percent of Fortune 500 companies use derivatives to manage commercial or market risk in their worldwide 

business operations. In short, derivatives serve the needs of society to help moderate 

103 

7Testimony of CFTC Chairman Timothy Massad before the U.S. Senate Committee on Agriculture, Nutrition, and Forestry (Dec. 10, 2014), http://www.cftc.gov/PressRoom/ 

SpeechesTestimony/opamassad-6. 8 In re Coinflip, Inc., Dkt. No. 15-29 (CFTC Sept. 17, 2015), http://www.cftc.gov/idc/groups/ 

public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf. 9 In re TeraExchange LLC, Dkt. No. 15-33 (CFTC Sept. 24, 2015), http://www.cftc.gov/idc/ 

groups/public/@lrenforcementactions/documents/legalpleading/enfteraexchangeorder92415.pdf. 10 In re BXFNA Inc. d/b/a Bitfinex, Dkt. No. 16-19 (CFTC June 2, 2016), http://www.cftc.gov/ 

idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.pdf. 11 CFTC, Retail Commodity Transactions Involving Virtual Currency, 82 FR 60335 (Dec. 20, 

2017), www.gpo.gov/fdsys/pkg/FR-2017-12-20/pdf/2017-27421.pdf. 12 CFTC, A CFTC Primer on Virtual Currencies (Oct. 17, 2017), http://www.cftc.gov/idc/ 

groups/public/documents/file/labcftclprimercurrencies100417.pdf. 

price, supply and other commercial risks to free up capital for economic growth, job 

creation, and prosperity. 

To ensure the integrity of U.S. derivatives markets, the CFTC regulates derivatives market participants and activities. The agency oversees a variety of individuals and organizations. These include swap execution facilities, derivatives clearing 

organizations, designated contract markets, swap data repositories, swap dealers, 

futures commission merchants, commodity pool operators, and other entities. The 

CFTC also prosecutes derivative market fraud and manipulation, including misconduct in underlying spot markets for commodities. 

I. CFTC Authority and Oversight Over Virtual Currencies 

In 2015, the CFTC determined that virtual currencies, such as Bitcoin, met the 

definition of ‘‘commodity’’ under the CEA. Nevertheless, the CFTC does NOT have 

regulatory jurisdiction under the CEA over markets or platforms conducting cash 

or ‘‘spot’’ transactions in virtual currencies or other commodities or over participants 

on such platforms. More specifically, the CFTC does not have authority to conduct 

regulatory oversight over spot virtual currency platforms or other cash commodities, 

including imposing registration requirements, surveillance and monitoring, transaction reporting, compliance with personnel conduct standards, customer education, 

capital adequacy, trading system safeguards, cybersecurity examinations, or other 

requirements. In fact, current law does not provide any U.S. Federal regulator with 

such regulatory oversight authority over spot virtual currency platforms operating 

in the United States or abroad. However, the CFTC DOES have enforcement jurisdiction to investigate through subpoena and other investigative powers and, as appropriate, conduct civil enforcement action against fraud and manipulation in virtual currency derivatives markets and in underlying virtual currency spot markets. 

In contrast to the spot markets, the CFTC does have both regulatory and enforcement jurisdiction under the CEA over derivatives on virtual currencies traded in the 

United States. This means that for derivatives on virtual currencies traded in U.S. 

markets, the CFTC conducts comprehensive regulatory oversight, including imposing registration requirements and compliance with a full range of requirements for 

trade practice and market surveillance, reporting and monitoring and standards for 

conduct, capital requirements, and platform and system safeguards. 

II. Assertion of CFTC Authority 

The CFTC has been straightforward in asserting its area of statutory jurisdiction 

concerning virtual currencies derivatives. As early as 2014, former CFTC Chairman 

Timothy Massad discussed virtual currencies and potential CFTC oversight under 

the Commodity Exchange Act (CEA). 7 And as noted above, in 2015, the CFTC found 

virtual currencies to be a commodity. 8 In that year, the agency took enforcement 

action to prohibit wash trading and prearranged trades on a virtual currency derivatives platform. 9 In 2016, the CFTC took action against a Bitcoin futures exchange 

operating in the U.S. that failed to register with the agency. 10 Last year, the CFTC 

issued proposed guidance on what is a derivative market and what is a spot market 

in the virtual currency context. 11 The agency also issued warnings about valuations 

and volatility in spot virtual currency markets 12 and launched an unprecedented 

consumer education effort (detailed in Section IV herein). 

a. Enforcement 

The CFTC Division of Enforcement is a premier Federal civil enforcement agency 

dedicated to deterring and preventing price manipulation and other disruptions of 

market integrity, ensuring the financial integrity of all transactions subject to the 

CEA, and protecting market participants from fraudulent or other abusive sales 

practices and misuse of customer assets. Appendix A hereto summarizes recent 

CFTC enforcement activities. 

104 

13On September 21, 2017, the CFTC filed a complaint in Federal court in the Southern District of New York against Nicholas Gelfman and Gelfman Blueprint, Inc., see http:// 

www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/ 

enfgelfmancomplaint09212017.pdf. 14 Each CME contract represents 5 bitcoin. 15The price changes day to day. 16Prior to the changes made in the Commodity Futures Modernization Act of 2000 (CFMA) 

and the Commission’s subsequent addition of Part 40, exchanges submitted products to the 

CFTC for approval. From 1922 until the CFMA was signed into law, less than 800 products 

were approved. Since then, exchanges have certified over 12,000 products. For financial instrument products specifically, the numbers are 494 products approved and 1,938 self-certified. See 

http://www.cftc.gov/IndustryOversight/ContractsProducts/index.htm. 

The CFTC has been particularly assertive of its enforcement jurisdiction over virtual currencies. It has formed an internal virtual currency enforcement task force 

to garner and deploy relevant expertise in this evolving asset class. The task force 

shares information and works cooperatively with counterparts at the SEC with similar virtual currency expertise. 

In September 2017, the CFTC took enforcement action against a virtual currency 

Ponzi scheme. 13 Over the past few weeks, the CFTC filed a series of civil enforcement actions against perpetrators of fraud, market manipulation and disruptive 

trading involving virtual currency. These include: 

i. My Big Coin Pay Inc., which charged the defendants with commodity fraud and 

misappropriation related to the ongoing solicitation of customers for a virtual 

currency known as My Big Coin; 

ii. The Entrepreneurs Headquarters Limited, which charged the defendants with 

a fraudulent scheme to solicit Bitcoin from members of the public, misrepresenting that customers’ funds would be pooled and invested in products including binary options, and instead misappropriated the funds and failed to register as a Commodity Pool Operator; and 

iii. Coin Drop Markets, which charged the defendants with fraud and misappropriation in connection with purchases and trading of Bitcoin and Litecoin. 

These recent enforcement actions confirm that the CFTC, working closely with the 

SEC and other fellow financial enforcement agencies, will aggressively prosecute 

bad actors that engage in fraud and manipulation regarding virtual currencies. 

b. Bitcoin Futures 

It is important to put the new Bitcoin futures market in perspective. It is quite 

small with open interest at the CME of 6,695 bitcoin 14 and at Cboe Futures Exchange (Cboe) of 6,695 bitcoin (as of Feb. 2, 2018). At a price of approximately 

$7,700 per Bitcoin, 15 this represents a notional amount of about $94 million. In 

comparison, the notional amount of the open interest in CME’s WTI crude oil futures was more than one thousand times greater, about $170 billion (2,600,000 contracts) as of Feb 2, 2018, and the notional amount represented by the open interest 

of Comex gold futures was about $74 billion (549,000 contracts). 

Prior to the launch of Bitcoin futures, the CFTC closely observed the evolution 

of virtual currencies over the past several years. One exchange, CME Group, 

launched a Bitcoin Reference Rate in November 2016. And, another exchange, 

CBOE Futures Exchange (Cboe), first approached the CFTC in July 2017. The 

CFTC anticipated receiving proposals for the launch of Bitcoin futures products in 

late 2017. 

Under CEA and Commission regulations and related guidance, futures exchanges 

may self-certify new products on 24-hour notice prior to trading. In the past decade 

and a half, over 12,000 new futures products have been self-certified. 16 It is clear 

that Congress and prior Commissions deliberately designed the product self-certification framework to give futures exchanges, in their role as self-regulatory organizations, the ability to quickly bring new products to the marketplace. The CFTC’s current product self-certification framework has long been considered to function well 

and be consistent with public policy that encourages market-driven innovation that 

has made America’s listed futures markets the envy of the world. 

Practically, both CME and Cboe had numerous discussions and exchanged numerous draft product terms and conditions with CFTC staff over a course of months 

prior to their certifying and launching Bitcoin futures in December 2017. This type 

of lengthy engagement is not unusual during the self-certification process for products that may raise certain issues. The CFTC staff undertook its review of CME’s 

and Cboe’s Bitcoin futures products with considered attention. Given the emerging 

nature and heightened attention of these products, staff conducted a ‘‘heightened review’’ of CME’s and Cboe’s responsibilities under the CEA and Commission regulaVerDate Nov 24 2008 09:37 May 07, 2018 Jkt 046629 PO 00000 Frm 00108 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\02-06 ZDISTILLER\20618.TXT JASON
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17See CEA Section 5(d)(3), 7 U.S.C. 7(d)(3); Section 5(d)4), 7 U.S.C. 7(d)(4); 17 CFR 38.253 

and 38.254(a), and Appendices B and C to Part 38 of the CFTC’s regulations. 18 CEA Section 5b(c)(2)(D)(iv), 7 U.S.C. 7a-1(c)(2)(D)(iv) (‘‘The margin from each member and 

participant of a derivatives clearing organization shall be sufficient to cover potential exposures 

in normal market conditions.’’). 19 In the case of CME and Cboe Bitcoin futures, the initial and maintenance margins were 

ultimately set at 47 percent and 44 percent by the respective DCOs. By way of comparison that 

is more than 10 times the margin required for CME corn futures products. 20 Unlike provisions in the CEA and Commission regulations that provide for public comment 

on rule self-certifications, there is no provision in statute or regulation for public input into 

CFTC staff review of product self-certifications. It is hard to believe that Congress was not deliberate in making that distinction. 

tions to ensure that their Bitcoin futures products and their cash-settlement processes were not readily susceptible to manipulation, 17 and the risk management of 

the associated Derivatives Clearing Organizations (DCOs) to ensure that the products were sufficiently margined. 18

Staff obtained the voluntary cooperation of CME and Cboe with a set of enhanced 

monitoring and risk management steps. 

1. Designated contract markets (DCMs) setting exchange large trader reporting 

thresholds at five bitcoins or less; 

2. DCMs entering direct or indirect information sharing agreements with spot 

market platforms to allow access to trade and trader data making up the underlying index that the futures contracts settle to; 

3. DCMs agreeing to engage in monitoring of underlying index data from cash 

markets and identifying anomalies and disproportionate moves; 

4. DCMs agreeing to conduct inquiries, as appropriate, including at the trade settlement and trader level when anomalies or disproportionate moves are identified; 

5. DCMs agreeing to regular communication with CFTC surveillance staff on 

trade activities, including providing trade settlement and trader data upon request; 

6. DCMs agreeing to coordinate product launches to enable the CFTC’s market 

surveillance branch to monitor developments; and 

7. DCOs setting substantially high initial 19 and maintenance margin for cash-settled instruments. 

The first six of these elements were used to ensure that the new product offerings 

complied with the DCM’s obligations under the CEA core principles and CFTC regulations and related guidance. The seventh element, setting high initial and maintenance margins, was designed to ensure adequate collateral coverage in reaction to 

the underlying volatility of Bitcoin. 

In crafting its process of ‘‘heightened review’’ for compliance, CFTC staff 

prioritized visibility, data, and monitoring of markets for Bitcoin derivatives and underlying settlement reference rates. CFTC staff felt that in gaining such visibility, 

the CFTC could best look out for Bitcoin market participants and consumers, as 

well as the public interest in Federal surveillance and enforcement. This visibility 

greatly enhances the agency’s ability to prosecute fraud and manipulation in both 

the new Bitcoin futures markets and in its related underlying cash markets. 

As for the interests of clearing members, the CFTC recognized that large global 

banks and brokerages that are DCO clearing members are able to look after their 

own commercial interests by choosing not to trade Bitcoin futures, as some have 

done, requiring substantially higher initial margins from their customers, as many 

have done, and through their active participation in DCO risk committees. 

After the launch of Bitcoin futures, some criticism was directed at the self-certification process from a few market participants. Some questioned why the Commission did not hold public hearings prior to launch. However, it is the function of the 

futures exchanges and futures clearinghouses—and not CFTC staff 20—to solicit and 

address stakeholder concerns in new product self-certifications. The CFTC staff’s 

focus was on how the futures contracts and cash settlement indices are designed to 

bar manipulation and the appropriate level of contract margining to meet CEA and 

Commission regulations. 

Interested parties, especially clearing members, should indeed have an opportunity to raise appropriate concerns for consideration by regulated platforms proposing virtual currency derivatives and DCOs considering clearing new virtual currency products. That is why CFTC staff has added an additional element to the Review and Compliance Checklist for virtual currency product self-certifications. That 

106 

21The CFTC has jurisdiction over retail foreign currency markets and retail commodity transactions that use leverage, margin, or financing with some exceptions. Congress responded to 

concerns in the regulation of leveraged retail FX by providing the CFTC oversight responsibilities for Retail Foreign Exchange Dealers (RFEDs). The CFTC Re-authorization Act of 2008 

amended the CEA to create a new registration category for RFEDs that include disclosure requirements and leverage limitations to customers. 

is, requesting DCMs and SEFs to disclose to CFTC staff what steps they have taken 

in their capacity as self-regulatory organizations to gather and accommodate appropriate input from concerned parties, including trading firms and FCMs. Further, 

CFTC staff will take a close look at DCO governance around the clearing of new 

virtual currency products and formulate recommendations for possible further action. 

The CFTC’s response to the self-certification of Bitcoin futures has been a balanced one. It has resulted in the world’s first federally regulated Bitcoin futures 

market. Had it even been possible, blocking self-certification would not have stopped 

the rise of Bitcoin or other virtual currencies. Instead, it would have ensured that 

virtual currency spot markets continue to operate without effective and data-enabled Federal regulatory surveillance for fraud and manipulation. It would have 

prevented the development of a regulated derivatives market that allowed participants to take ‘‘short’’ positions that challenged the 2017 rise of Bitcoin prices. 

III. Adequacy of CFTC Authority 

The CFTC has sufficient authority under the CEA to protect investors in virtual 

currency derivatives over which the CFTC has regulatory jurisdiction under the 

CEA. As noted above, the CFTC does NOT have regulatory jurisdiction over markets or platforms conducting cash or ‘‘spot’’ transactions in virtual currencies or over 

participants on those platforms. For such virtual currency spot markets, CFTC only 

has enforcement jurisdiction to investigate and, as appropriate, conduct civil enforcement action against fraud and manipulation. 

Any extension of the CFTC’s regulatory authority to virtual currency spot markets 

would require statutory amendment of the CEA. 21 The CFTC is an experienced regulator of derivatives markets that mostly serve professional and eligible contract 

participants. Such extension of regulatory authority would be a dramatic expansion 

of the CFTC’s regulatory mission, which currently does not give the CFTC regulatory authority (distinct from enforcement authority) over cash commodity markets. 

IV. Educating Investors and Market Participants 

The CFTC believes that the responsible regulatory response to virtual currencies 

must start with consumer education. Amidst the wild assertions, bold headlines, 

and shocking hyperbole about virtual currencies, there is a need for much greater 

understanding and clarity. 

Over the past 6 months, the CFTC has produced an unprecedented amount of consumer information concerning virtual currencies (listed in Appendix B hereto). 

These consumer materials include an information ‘‘primer’’ on virtual currencies 

(Appendix C hereto), consumer and market advisories on investing in Bitcoin and 

other virtual currencies (Appendix D hereto), a dedicated CFTC ‘‘Bitcoin’’ webpage, 

several podcasts (available on the Commission’s website and from various streaming 

services) concerning virtual currencies and underlying technology, weekly publication of Bitcoin futures ‘‘Commitment of Traders’’ data and an analysis of Bitcoin 

spot market data. 

In addition, the CFTC’s Office of Consumer Education and Outreach (OCEO) is 

actively engaging with responsible outside partners to better educate consumers on 

Bitcoin and other virtual currencies. The OCEO is currently partnering with: 

• The Consumer Finance Protection Bureau (CFPB) to train U.S. public library 

staff to identify and report consumer in virtual currencies; 

• the American Association of Retired Persons (AARP) to distribute a virtual currency ‘‘Watchdog Alert’’ to 120,000 AARP members; 

• North American Securities Administrators Association (NASAA) Investor Educators, who are responsible for conducting outreach to the public on avoiding 

investment fraud, including in virtual currencies; 

• the National Attorneys General Training and Research Institute (NAGTRI), 

which is the research and training arm of the National Association of Attorneys 

General (NAAG), to inform State AGs about the availability of CFTC’s virtual 

currency resources; and 

107 

22 J. Christopher Giancarlo, Keynote Address of Commissioner J. Christopher Giancarlo before 

the Markit Group, 2016 Annual Customer Conference, New York, May 10, 2016, http:// 

www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-15. 23 Id. 24See, e.g., Larry Greenemeier, ‘‘Can’t Touch This: New Encryption Scheme Targets Transaction Tampering’’, Scientific American, May 22, 2015, http://www.scientificamerican.com/article/can-t-touch-this-new-encryption-scheme-targets-transaction-tampering/. 25See Massimo Morini and Robert Sams, ‘‘Smart Derivatives Can Cure XVA Headaches’’, 

Risk Magazine, Aug. 27, 2015, http://www.risk.net/risk-magazine/opinion/2422606/-smart-derivatives-can-cure-xva-headaches; see also Jeffrey Maxim, ‘‘UBS Bank Is Experimenting with 

‘Smart-Bonds’ Using the Bitcoin Blockchain’’, Bitcoin Magazine, June 12, 2015, https:// 

bitcoinmagazine.com/articles/ubs-bank-experimenting-smart-bonds-using-bitcoin-blockchain1434140571; see also Pete Harris, ‘‘UBS Exploring Smart Bonds on Block Chain’’, Block Chain 

Inside Out, June 15, 2015, http://harris-on.typepad.com/blocklchainlio/2015/06/ubs-exploring-smart-bonds-on-block-chain.html; See, generally, Galen Stops, ‘‘Blockchain: Getting Beyond 

the Buzz’’, Profit & Loss, Aug.–Sept. 2015, at 20, http://www.profit-loss.com/articles/analysis/ 

technology-analysis/blockchain-getting-beyond-the-buzz. 26See, e.g., ‘‘Oversight of Dodd–Frank Act Implementation’’, U.S. House Financial Services 

Committee, http://financialservices.house.gov/Dodd–Frank/ (last visited Mar. 2, 2016). 

• The Federal Reserve Bank of Chicago to help consumers manage their finances 

better, OCEO will again coordinate with NFA, FINRA, and SEC to hold a 

webinar on fraud prevention in virtual currencies. 

V. Interagency Coordination 

As noted, the CFTC’s enforcement jurisdiction over virtual currencies is not exclusive. As a result, the U.S. approach to oversight of virtual currencies has evolved 

into a multifaceted, multi-regulatory approach that includes: 

• The Securities and Exchange Commission (SEC) taking increasingly strong action against unregistered securities offerings, whether they are called a virtual 

currency or initial coin offering in name. 

• State Banking regulators overseeing certain U.S. and foreign virtual currency 

spot exchanges largely through State money transfer laws. 

• The Internal Revenue Service (IRS) treating virtual currencies as property subject to capital gains tax. 

• The Treasury’s Financial Crimes Enforcement Network (FinCEN) monitoring 

Bitcoin and other virtual currency transfers for anti–money-laundering purposes. 

The CFTC actively communicates its approach to virtual currencies with other 

Federal regulators, including the Federal Bureau of Investigation (FBI) and the Justice Department and through the Financial Stability Oversight Council (FSOC), 

chaired by the Treasury Department. The CFTC has been in close communication 

with the SEC with respect to policy and jurisdictional considerations, especially in 

connection with recent virtual currency enforcement cases. In addition, we have 

been in communication with overseas regulatory counterparts through bilateral discussions and in meetings of the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO). 

VI. Potential Benefits 

I have spoken publicly about the potential benefits of the technology underlying 

Bitcoin, namely Blockchain or distributed ledger technology (DLT). 22 Distributed 

ledgers—in various open system or private network applications—have the potential 

to enhance economic efficiency, mitigate centralized systemic risk, defend against 

fraudulent activity and improve data quality and governance. 23

DLT is likely to have a broad and lasting impact on global financial markets in 

payments, banking, securities settlement, title recording, cybersecurity, and trade 

reporting and analysis. 24 When tied to virtual currencies, this technology aims to 

serve as a new store of value, facilitate secure payments, enable asset transfers, and 

power new applications. 

Additionally, DLT will likely develop hand-in-hand with new ‘‘smart’’ contracts 

that can value themselves in real-time, report themselves to data repositories, automatically calculate and perform margin payments and even terminate themselves 

in the event of counterparty default. 25

DLT may enable financial market participants to manage the significant operational, transactional, and capital complexities brought about by the many mandates, regulations, and capital requirements promulgated by regulators here and 

abroad in the wake of the financial crisis. 26 In fact, one study estimates that DLT 

could eventually allow financial institutions to save as much as $20 billion in infraVerDate Nov 24 2008 09:37 May 07, 2018 Jkt 046629 PO 00000 Frm 00111 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\02-06 ZDISTILLER\20618.TXT JASON
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27Santander InnoVentures, Oliver Wyman, and Anthemis Group, ‘‘The FinTech Paper 2.0: 

Rebooting Financial Services’’ 15 (2015), http://santanderinnoventures.com/wp-content/ 

uploads/2015/06/The-Fintech-2-0-Paper.pdf. 28Telis Demos, ‘‘Bitcoin’s Blockchain Technology Proves Itself in Wall Street Test’’, Apr. 7, 

2016, Wall Street Journal, http://www.wsj.com/articles/bitcoins-blockchain-technology-provesitself-in-wall-street-test-1460021421. 29 Based on conversations with R3 CEV, http://r3cev.com/. 30 Emiko Terazono, ‘‘Commodities Trader Louis Dreyfus Turns to Blockchainhttps’’, Financial 

Times, Jan. 22, 2018, www.ft.com/content/22b2ac1e-fd1a-11e7-a492-2c9be7f3120a. 31Frisco d’Anconia, ‘‘IOTA Blockchain To Help Trace Families of Refugees During and After 

Conflicts’’, Cointelegraph.com, Aug. 8, 2017, https://cointelegraph.com/news/iota-blockchain-tohelp-trace-families-of-refugees-during-and-after-conflicts. 32See supra n. 22. 33The Telecommunications Act of 1996 (See Telecommunications Act of 1996 (Pub. L. No. 

104-104, 110 Stat. 56 (1996))) and the ensuing Clinton administration ‘‘Framework for Global 

Electronic Commerce’’ (See Clinton administration, Framework for Global Electronic Commerce, 

http://clinton4.nara.gov/WH/New/Commerce/) established a simple and sensible framework: 

(a) the private sector should play the leading role in innovation, development, and financing; 

and (b) Governments and regulators should ‘‘do no harm’’ by avoiding undue restrictions, supporting a predictable, consistent, and simple legal environment and respecting the ‘‘bottom-up’’ 

nature of the technology and its deployment in a global marketplace. 

structure and operational costs each year. 27 Another study reportedly estimates 

that blockchain could cut trading settlement costs by a third, or $16 billion a year, 

and cut capital requirements by $120 billion. 28 Moving from systems-of-record at 

the level of a firm to an authoritative system-of-record at the level of a market is 

an enormous opportunity to improve existing market infrastructure. 29

Outside of the financial services industry, many use cases for DLT are being posited from international trade to charitable endeavors and social services. International agricultural commodities merchant, Louis Dreyfus, and a group of financing banks have just completed the first agricultural deal using distributed ledger 

technology for the sale of 60,000 tons of U.S. soybeans to China. 30 Other DLT use 

cases include: legal records management, inventory control and logistics, charitable 

donation tracking and confirmation; voting security and human refugee identification and relocation. 31

Yet, while DLT promises enormous benefits to commercial firms and charities, it 

also promises assistance to financial market regulators in meeting their mission to 

oversee healthy markets and mitigate financial risk. What a difference it would 

have made on the eve of the financial crisis in 2008 if regulators had access to the 

real-time trading ledgers of large Wall Street banks, rather than trying to assemble 

piecemeal data to recreate complex, individual trading portfolios. I have previously 

speculated 32 that, if regulators in 2008 could have viewed a real-time distributed 

ledger (or a series of aggregated ledgers across asset classes) and, perhaps, been 

able to utilize modern cognitive computing capabilities, they may have been able to 

recognize anomalies in marketwide trading activity and diverging counterparty exposures indicating heightened risk of bank failure. Such transparency may not, by 

itself, have saved Lehman Brothers from bankruptcy, but it certainly would have 

allowed for far prompter, better-informed, and more calibrated regulatory intervention instead of the disorganized response that unfortunately ensued. 

VII. Policy Considerations 

Two decades ago, as the Internet was entering a phase of rapid growth and expansion, a Republican Congress and the Clinton administration established a set of 

enlightened foundational principles: the Internet was to progress through human social interaction; voluntary contractual relations and free markets; and Governments 

and regulators were to act in a thoughtful manner not to harm the Internet’s continuing evolution. 33

This simple approach is well-recognized as the enlightened regulatory underpinning of the Internet that brought about such profound changes to human society. 

During the almost 20 years of ‘‘do no harm’’ regulation, a massive amount of investment was made in the Internet’s infrastructure. It yielded a rapid expansion in access that supported swift deployment and mass adoption of Internet-based technologies. Internet-based innovations have revolutionized nearly every aspect of 

American life, from telecommunications to commerce, transportation and research 

and development. This robust Internet economy has created jobs, increased productivity and fostered innovation and consumer choice. 

‘‘Do no harm’’ was unquestionably the right approach to development of the Internet. Similarly, I believe that ‘‘do no harm’’ is the right overarching approach for distributed ledger technology. 

109 

34See supra n. 5. 

Virtual currencies, however, likely require more attentive regulatory oversight in 

key areas, especially to the extent that retail investors are attracted to this space. 

SEC Chairman Clayton and I recently stated in a joint op-ed, that: 

Our task, as market regulators, is to set and enforce rules that foster innovation while promoting market integrity and confidence. In recent months, 

we have seen a wide range of market participants, including retail investors, seeking to invest in DLT initiatives, including through 

cryptocurrencies and so-called ICOs . . . initial coin offerings. Experience 

tells us that while some market participants may make fortunes, the risks 

to all investors are high. Caution is merited. 

A key issue before market regulators is whether our historic approach to 

the regulation of currency transactions is appropriate for the 

cryptocurrency markets. Check-cashing and money-transmission services 

that operate in the U.S. are primarily State-regulated. 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. 34

As the Senate Banking Committee, the Senate Agriculture Committee and other 

Congressional policymakers consider the current state of regulatory oversight of 

cash or ‘‘spot’’ transactions in virtual currencies and trading platforms, consideration should be given to shortcomings of the current approach of State-by-State 

money transmitter licensure that leaves gaps in protection for virtual currency traders and investors. Any proposed Federal regulation of virtual currency platforms 

should be carefully tailored to the risks posed by relevant trading activity and enhancing efforts to prosecute fraud and manipulation. Appropriate Federal oversight 

may include: data reporting, capital requirements, cybersecurity standards, measures to prevent fraud and price manipulation and anti–money laundering and 

‘‘know your customer’’ protections. Overall, a rationalized Federal framework may 

be more effective and efficient in ensuring the integrity of the underlying market. 

Conclusion 

We are entering a new digital era in world financial markets. As we saw with 

the development of the Internet, we cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response. 

The evolution of these assets, their volatility, and the interest they attract from a 

rising global millennial population demand serious examination. 

With the proper balance of sound policy, regulatory oversight, and private sector 

innovation, new technologies will allow American markets to evolve in responsible 

ways and continue to grow our economy and increase prosperity. This hearing is an 

important part of finding that balance. 

Thank you for inviting me to participate. 

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RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM JAY CLAYTON 

Q.1. When I asked you how much of the $4 billion raised by initial 

coin offerings (ICOs) last year was raised in the United States, you 

said that it was unclear and hard to estimate ‘‘because this has 

been conducted largely on an unregulated basis,’’ but there is 

enough to make it worth paying attention. Later, when asked why 

no ICOs were registered with the SEC, you stated that you do not 

think gatekeepers ‘‘have done their job,’’ even though you have 

made the law clear. You also explained that you want private 

placements to happen, but you ‘‘want them to do it right,’’ and 

ICOs have taken ‘‘the disclosure-like benefits of a private placement’’ but used general solicitation and the promise of secondary 

trading among retail investors without registering with the SEC. 

Based on these responses, you seem to share my concern that 

ICOs are evading the registration requirements of the securities 

laws and failing to satisfy private-placement requirements. Accordingly, I have several follow-up questions and requests about the 

SEC’s efforts to police ICOs: 

Please describe the strategy, policies, and procedures that the 

SEC is using to track and monitor ICOs and secondary trading of 

‘‘tokens’’ issued in ICOs. 

A.1. I do share your concern that a number of initial coin offering 

(ICO) participants are evading the registration requirements of the 

Securities Act of 1933 by failing to either register the token offering or to qualify for an exemption from the registration requirements. With the support of my fellow Commissioners, I have asked 

the SEC’s Enforcement staff to continue to police these markets 

vigorously and recommend enforcement actions against those who 

conduct or facilitate ICOs or engage in other actions relating to digital assets in violation of the Federal securities laws. 

Last year, the SEC announced two initiatives to build on the Enforcement Division’s ongoing efforts to address cyber-based threats 

and protect retail investors. One such effort was to create a Cyber 

Unit to focus on targeting cyber-related misconduct, including in 

the insider trading and ICO spaces. The other was to establish a 

Retail Strategy Task Force to implement initiatives that directly 

affect retail investors. The Cyber Unit and Retail Strategy Task 

Force are helping to build upon and leverage the expertise already 

developed by the cross-divisional Distributed Ledger Technology 

Working Group, formed in 2013, to address violations of the Federal securities laws. 

I want to emphasize that our efforts are not limited to the offerings of coins or tokens. The number of broker-dealers and investment advisers engaged in this space has grown, and we are reviewing their activities as well. The SEC’s National Examination Program announced in its public priorities that it will continue to 

monitor the sales of ICOs and cryptocurrencies, and where the 

products are securities, will conduct examinations of investment 

advisers and broker-dealers to assess regulatory compliance. Areas 

of focus include, among other things, whether financial professionals maintain adequate controls and safeguards to protect these 

assets from theft or misappropriation, and whether financial professionals are providing investors with disclosure about the risks 

139 

1 If those tokens are securities and the platforms on which they trade register as national securities exchanges or operate as alternative trading systems (ATSs), those exchanges and ATSs 

are required to report information about their operations and trading to the SEC. For example, 

ATSs file quarterly reports on Form ATS–R to disclose to the SEC their trade volume, the securities traded, and trading participants, which augments the SEC’s oversight to monitor the activities of these markets. 

associated with these investments, including the risk of investment 

losses, liquidity risks, price volatility, and potential fraud. 

Through these various functions, the SEC staff surveils publicly 

available data sources; receives and reviews tips, complaints and 

referrals, which can be submitted to the SEC via https:// 

www.sec.gov/whistleblower/submit-a-tip; and liaises with domestic 

and international regulatory and law enforcement partners and 

with members of the public to gather information. The staff also established a dedicated email address at FinTech@sec.gov to centralize communications from the public on FinTech issues to engage with issuers and other market participants about these issues. 

I have made cross-border awareness of and attention to these 

issues a priority, including in connection with our participation in 

the Financial Stability Board (FSB) and International Organization 

of Securities Commissions (IOSCO). 

With respect to secondary trading of tokens, because token trading platforms by and large are not registered as national securities 

exchanges or operating pursuant to the Regulation ATS exemption, 

and certain of them appear to operate overseas, the SEC’s direct 

knowledge of the nature and full extent of trading by those platforms has been limited. The SEC’s Divisions of Enforcement and 

Trading and Markets recently issued a joint statement on potentially unlawful online platforms for trading digital assets. The 

statement emphasizes that investors should use a platform or entity registered with the SEC to get the protections offered by the 

Federal securities laws and SEC oversight. 1 Notwithstanding the 

fact that these platforms largely have not registered with us or operated pursuant to an exemption, the SEC staff has continued to 

monitor publicly available sources; review tips, complaints and referrals, and work with regulatory partners, members of the public, 

and members of the industry to obtain information on secondary 

trading as described above. The Commission has brought enforcement actions against online platforms for operating as unregistered 

national securities exchanges and will continue to do so where appropriate. 

Q.2. Please provide statistics on ICOs tracked by the SEC and/or 

any third-party data obtained and used by the SEC to follow ICOs. 

Please provide: the total number of offerings and monetary value, 

and the exemptions used and/or purported to be used for those 

ICOs, by number of offerings and monetary value. 

A.2. Although a number of public data sources purport to track 

ICOs, we do not have definitive data on their number or value. In 

this regard, it is noteworthy that many of the platforms that facilitate trading in digital assets are not regulated and do not provide 

information that is subject to regulatory review. In addition, much 

of the information found in public data sources is unaudited. 

In addition, while the SEC possesses offering data with respect 

to registered offerings, data with respect to ICOs purporting to 

140 

qualify for an exemption from registration is more spotty (e.g., with 

respect to offerings conducted under Regulation D, which requires 

the provision of only limited data to the Commission and does not 

require the issuer to designate whether the offering is an ICO), or 

non-existent (e.g., with respect to offerings relying on statutory exemptions rather than Commission rules). 

In connection with the efforts described above, the SEC staff reviews third-party data sources to examine market data for ICOs. 

Publicly reported numbers from third-party data sources indicate 

on a worldwide basis more than $6.2 billion has been raised in 

2018; $3.9 billion in 2017; and $95 million in 2016. 

Q.3. I am concerned that the anonymity afforded by blockchain 

technology may allow issuers to evade the geographic and accredited-investor restrictions that they claim to impose on ICOs. How 

is the SEC ensuring that ICOs do not evade these requirements? 

In answering this question, please address: o How is the SEC ensuring that issuers in ICOs that are restricted to non-U.S. investors do not sell securities to U.S. investors through blockchain or 

other technology? 

How is the SEC ensuring that issuers in ICOs that are restricted 

to accredited investors do not sell securities to nonaccredited investors through blockchain or other technology? 

How is the SEC ensuring that securities issued in unregistered 

ICOs are not sold to U.S. investors in secondary trading in violation of the securities laws through blockchain or other technology? 

A.3. The Federal securities laws provide that all offers and sales 

of securities to persons within the United States must be registered 

or qualify for an exemption. These laws apply to protect United 

States investors regardless where the issuer is located. Just as 

with any other offer and sale of securities, the SEC will bring enforcement actions where appropriate for violations of the registration provisions of the Federal securities laws. 

The Federal securities laws provide certain exemptions from registration for both primary offerings of securities and resales of securities, notably concerning accredited investors. Failure to comply 

with the conditions for such exemptions can result in violations of 

the registration provisions of the Federal securities laws. To the extent offering participants are able to qualify for an exemption from 

registration, our efforts will examine whether the procedures they 

are following are designed to ensure compliance with an appropriate exemption, and we are aware of issues raised by anonymity 

and other aspects of ICOs that make compliance with private 

placement exemptions more difficult on a relative basis. The SEC 

will continue to review information related to individual ICOs, ask 

for additional information from issuers and trading platforms, and 

bring enforcement actions where appropriate for violations of the 

registration provisions of the Federal securities laws. 

The SEC already has brought enforcement actions alleging violations of the registration and anti-fraud provisions of the Federal securities laws. See SEC v. REcoin Group Foundation, LLC et al. 

(E.D.N.Y.) (Sep. 29, 2017); SEC v. PlexCorps et al., 17-cv-7007 

(E.D.N.Y.) (Dec. 1, 2017); SEC v. AriseBank et al., 3:28-cv-0186 

(N.D. Tex.) (Jan. 25, 2017); see also In re Munchee, Inc., Admin. 

141 

File No. 3-18304 (Dec. 11, 2017) (settled administrative action alleging registration violations). Additionally, the SEC has brought 

enforcement actions against virtual currency-denominated platforms operating as unregistered securities exchanges. See SEC v. 

Jon E. Montroll and Bitfunder, 18-cv-1582 (S.D.N.Y.) (Feb. 21, 

2018); In re BTC Trading, Corp. and Ethan Burnside, Admin. File 

No. 3-16307 (Dec. 8, 2014). 

This is the same approach—clarifying the application of longstanding law, then prosecuting violations—that the SEC has taken 

for any offers and sales of securities for many years. The SEC will 

continue to police these markets vigorously—including through the 

use of our investigatory tools, such as issuing document requests 

and administrative subpoenas, conducting witness interviews, and 

taking sworn testimony—and staff will recommend enforcement actions against those who conduct ICOs or engage in other actions relating to digital assets in violation of the Federal securities laws. 

Q.4. What is the SEC doing to ensure that gatekeepers are doing 

their jobs? 

Without commenting on any specific ongoing investigations, has 

the SEC considered taking enforcement actions against any accountants, securities lawyers, consultants, or other gatekeepers in 

connection with ICOs? 

A.4. Our securities laws are based in substantial part on, and in 

many ways require, market professionals holding themselves to 

high standards. In December, I issued a public statement on 

cryptocurrencies and ICOs directed in part to market professionals. 

I have since made other public statements that these professionals, 

especially gatekeepers, need to act responsibly and hold themselves 

to high standards. I have made it clear that gatekeepers need to 

focus on their responsibilities, keeping in mind the principal motivation for our registration, offering process and disclosure requirements—to protect retail investors. I’m counting on them to do their 

jobs. 

We have encouraged market professionals to contact our staff for 

assistance and have set up a dedicated email address, 

FinTech@sec.gov, for this very purpose. Within the SEC, a group 

of staff across the agency has been tasked with focusing on these 

issues and are exploring the best ways to message our expectations 

to professionals. 

SEC staff is examining approaches to ICOs that may be contrary 

to our securities laws and the professional obligations of the securities bar. In this regard, staff is focusing on professional advisers 

and other gatekeepers, and, as with other areas of the securities 

laws, the SEC will consider bringing enforcement actions where appropriate. 

Q.5. Do you believe a virtual currency exchange or platform utilized in an ICO could have liability under the securities laws for 

an illegal unregistered ICO? 

A.5. The SEC’s Report of Investigation Pursuant to Section 21(a) 

of the Securities Act of 1934: The DAO (The DAO Report), issued 

on July 25, 2017, reminded entities that engage in exchange activity, including with respect to the trading of tokens that meet the 

definition of ‘‘security,’’ regarding their obligation to register as a 

142 

national securities exchange or operate pursuant to an exemption 

from such registration. More recently, the Divisions of Enforcement 

and Trading and Markets issued a statement with information for 

investors and market participants about the applicability of the 

Federal securities laws to online trading platforms that operate as 

an ‘‘exchange’’ for securities trading. 

As The DAO Report and the statement make clear, a platform 

can be found to have violated Section 5 of the Exchange Act by effecting trades in a token that is a security without registering as 

a national securities exchange or operating pursuant to an exemption from such registration. In addition, as The DAO Report addresses, those who participate in an unregistered offer and sale of 

securities not subject to a valid exemption can be liable for violating the registration provisions of the Federal securities laws. Accordingly, such a platform could also be found to have violated Section 5 of the Exchange Act to the extent it participated in the offer 

or sale of the token in the ICO itself, including (for example) by soliciting offers to buy the securities for value. The SEC will bring 

enforcement action against unregistered securities token exchanges 

as the facts and circumstances warrant. 

Q.6. In response to my questions about how the SEC is handling 

a reported reduction in its enforcement staff headcount by 100, you 

stated that ‘‘personnel’’ is your ‘‘biggest challenge at the moment,’’ 

with ‘‘a hiring freeze’’ and attrition having reduced SEC staff 

headcount. You then said you ‘‘could use more people’’ in the Divisions of Enforcement and Trading and Markets, adding that 

‘‘[t]hose are the two areas where I think the American people 

would get the greatest return for additional bodies.’’ 

Please explain the hiring freeze, i.e., how and when it was authorized, when it was implemented, staffing levels at the time of 

implementation, and when or under what conditions you expect it 

to be lifted. 

A.6. In late Fiscal Year (FY) 2016, the SEC implemented a general 

freeze on external hiring, with limited exceptions. As a result, the 

filling of 365 total positions was suspended. Limited backfills of vacancies have been allowed for specific needs. Recently, I submitted 

the SEC’s budget request for FY 2019 seeking $1.658 billion in support of 4,628 positions. The funds will allow us to restore 100 positions, approximately one-quarter of the total reduction resulting 

from the hiring freeze, to address critical priority areas and enhance the agency’s expertise in key areas. These key areas include 

cybersecurity and risk management, protecting Main Street investors, facilitating capital formation, and effective oversight of our 

capital markets. I expect that a significant number of these positions would be in or related to our Trading and Markets and Enforcement Divisions. 

Q.7. As noted in Question 2, you stated the SEC is under a ‘‘hiring 

freeze’’. The day following the hearing, The Wall Street Journal reported that former Representative Scott Garrett plans to take a position as your advisor at the SEC. Is this report accurate? Assuming it is: 

What is, or will be, Mr. Garrett’s role at the SEC? Please explain 

if this is a new role. Specifically, please state (i) his title; (ii) the 

143 

division where he works or will work; (iii) his responsibilities; (iv) 

who he reports to (and, if applicable, who that individual reports 

to), and (v) who, or how many staff, he supervises or will supervise, 

if any. 

Has Mr. Garrett started work at the SEC yet? If not, when will 

Mr. Garrett start work at the SEC? 

Why does the hiring freeze not appear to apply to Mr. Garrett? 

Did you consider any other individuals for Mr. Garrett’s role? If 

so, what were these other individuals’ backgrounds and qualifications? 

A.7. Mr. Garrett began working at the SEC on March 5, 2018, as 

a senior advisor to the General Counsel in the Office of the General 

Counsel. He is not acting as my advisor. Mr. Garrett has an important, specialized, and narrowly tailored role. He will be working 

primarily on projects involving other Federal financial regulators 

that oversee our capital markets (e.g., the CFTC, Federal Reserve, 

and the Treasury Department). Information sharing, and in particular, sharing information regarding market operations, is important to the SEC. Mr. Garrett will focus on matters where we need 

to seek greater information sharing and regulatory cooperation. As 

a former member of Congress with many years of experience interacting with and overseeing Federal financial regulatory agencies, 

Mr. Garrett is well positioned to help ensure that appropriate protocols are in place to foster information sharing and regulatory coordination that improve our ability to oversee the capital markets 

and its participants. 

Our current plan for FY2018 allows for limited external hiring, 

including the position Mr. Garrett occupies. This hiring action is 

consistent with our prioritization of hiring professionals to assist 

the agency in fulfilling its mission generally and the specific needs 

discussed above. The agency hired Mr. Garrett as an attorney, an 

‘‘excepted-service’’ position, which means that the position was excepted from competitive hiring procedures. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM JAY CLAYTON 

Q.1. We’ve heard a lot about the potential for fraud with ICOs. 

What are the potential benefits of ICOs? For example, do ICOs 

have the potential to expand access to capital for small businesses? 

A.1. If done in conformance with our securities laws, ICOs may 

allow small businesses to raise capital in an efficient and cost-effective manner. At the same time, these ICOs could provide investors 

with additional investment opportunities. Importantly, though, 

when offering these investment opportunities to investors in the 

form of an ICO, issuers must be sure to comply with our securities 

laws, including with respect to providing adequate disclosures to 

investors about the risks of the investment and how the money 

raised will be used. We should embrace the pursuit of technological 

advancement, as well as new and innovative techniques for capital 

raising, but not at the expense of the principles undermining our 

well-founded and proven approach to protecting investors and markets. 

144 

2See testimony appendix 

Q.2. According to your testimony, ICOs raised nearly $4 billion in 

2017. While the SEC has filed enforcement actions that argue that 

certain ICOs should have been registered with the SEC, your testimony states that no ICOs have yet to be registered with the SEC. 

Why have no ICOs been registered with the SEC? 

Is one possible explanation for the lack of ICO registrations that 

the registration requirements are too stringent and not adapted to 

the unique nature of an ICO? 

A.2. I am not aware of unique features of ICOs that would prevent 

and further complicate compliance, as opposed to other types of securities offerings, with the Federal securities laws. The SEC has 

assisted numerous issuers in registering novel and unusual products over the years, utilizing a principles-based framework that has 

served American companies and American investors well through 

periods of innovation and change. 

While I will not speculate as to why no issuer to date has chosen 

to conduct an ICO as a registered offering, we have received inquiries about registering ICOs with the SEC and will continue to work 

with parties that seek to do so. The staff has held itself out as 

ready and willing to engage with would-be issuers and other market participants who would like to conduct offerings in compliance 

with the Federal securities laws but may need compliance assistance or exemptive, no-action, or other forms of regulatory relief in 

order to comply with our rules and regulations that may have been 

written with a more traditional offering in mind. Unfortunately, too 

few have sought to take us up on that offer. 

Q.3. What guidance has the SEC provided to companies as to 

whether their ICO should be registered with the SEC? 

Does the SEC intend to provide more guidance as to when ICOs 

should be registered with the SEC? For example, beyond enforcement actions, the SEC could issue no action letters, put out a concept release or proposed rule, or otherwise provide further written 

guidance as to what constitutes a security. 

How—if at all—has the SEC tried to work with companies that 

want to register their ICOs with the SEC? 

A.3. The SEC and its staff have issued a number of statements, investor alerts and bulletins, and press releases. 2 The Commission 

also issued The DAO 21Report and has brought a number of enforcement actions consistent with the requirements of the Federal 

securities laws. We have made clear that, for decades, we have applied a flexible, principles-based analysis to determine whether an 

instrument is a security. This analysis has served our markets and 

our investors well for many years as investment opportunities and 

market structures have changed. In short, where purchasers make 

an investment of money with an expectation of profits derived from 

the entrepreneurial and managerial efforts of others, there is an investment contract and therefore a security. The focus is not on 

form, but on the economic realities of the transaction and relationship. 

Again, we have been clear on this issue. We have applied our securities law framework to a number of different ICOs and shown 

145 

each time that the ICO was a security. I worry that many have 

sought to make this analysis more complicated than it really is, in 

the hopes of coming to a conclusion that the securities laws should 

not apply and, as a result, they are free to seek investments from 

the general public without regard to disclosure and procedural 

rules that have served our markets so well. 

That said, to the extent additional guidance in this area would 

be appropriate or helpful, we will continue to be open to providing 

it. We also stand ready to engage with issuers seeking to register 

ICOs or to discuss potential ICO structures. We have established 

a FinTech@sec.gov email address dedicated to FinTech-specific inquiries. I have encouraged market participants, including issuers 

and their advisers, to engage with the SEC staff to aid in their 

analysis under the Federal securities laws. Through the 

FinTech@sec.gov email address, and in-person meetings, the SEC 

staff regularly communicates with dozens of individuals and practitioners regarding the Federal securities laws and regulations thereunder, and to date, the staff has had numerous potential issuers 

seeking guidance on how to register or qualify an ICO. 

Q.4. Does the SEC intend to evaluate whether all of the registration requirements for a securities offering should also apply to registering an ICO? 

A.4. The SEC staff has substantial experience in assisting issuers 

in registering novel and unusual products, making appropriate accommodations to adapt to particular circumstances of each offering. 

While I am not aware of unique features of ICOs that would prevent and further complicate compliance with the Federal securities 

laws, SEC staff stand ready to engage with interested issuers and 

market participants on issues related to securities offerings involving ICOs and other cryptocurrency-related products. 

Q.5. Are you concerned about the potential for bitcoin and other 

cryptocurrencies to facilitate money laundering by criminals such 

as human traffickers, gangs like MS-13, or terrorists like 

Hezbollah? 

What—if any—role does your agency have in addressing this 

problem, including through cooperation with other agencies? 

A.5. Several characteristics of cryptocurrencies can facilitate efforts 

to evade our money-laundering laws and regulations and, as a result, facilitate criminal and other illicit activity. For example: 

• Anonymity/Tracing money. Many of the cryptocurrencies are 

specifically designed to be pseudonymous or truly anonymous. 

Attribution of a specific private key to an individual or entity 

could be difficult or impossible, especially where tools such as 

digital tumblers and misers are used to make tracing and attribution difficult. Traditional financial institutions (such as 

banks) often are not involved with cryptocurrency transactions, 

again making it more difficult to follow the flow of money. 

• International scope. Cryptocurrency transactions and users 

span the globe. Although the SEC has methods for obtaining 

information from abroad (including through cross-border agreements), there may be restrictions on how the SEC can use the 

information, and it may take more time to get the information 

146 

than in the case of domestic activity. In many cases, the SEC 

may be unable to obtain relevant information located overseas. 

• No central authority. As there is no central authority that collects cryptocurrency user information, the SEC generally must 

rely on other sources, such as cryptocurrency exchanges or 

users, for this type of information. 

• Seizing or freezing cryptocurrency. Law enforcement officials 

may have difficulty seizing or freezing illicit proceeds held in 

cryptocurrencies. Cryptocurrency wallets may be encrypted 

and, unlike money held in a bank or brokerage account, 

cryptocurrencies may not be held by a third-party custodian. 

• New technologies. Cryptocurrencies involve new and developing 

technologies, ever evolving. 

The SEC staff collaborates regularly with other agencies (Federal, State, and international) on matters of mutual interest and 

has frequent communications with other financial regulators. In 

particular, the SEC’s Division of Enforcement has long-standing 

and on-going cooperation efforts with a number of Federal law enforcement and regulatory partners, such as the DOJ, FBI, IRS, and 

CFTC, to name a few, in addition to State and international regulators. In matters of mutual interest, SEC Enforcement staff will 

collaborate as appropriate with these partners through, among 

other ways, information sharing arrangements, access grants, and 

memoranda of understanding. In addition, SEC staff participates in 

forums organized within the law enforcement and regulatory communities. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM JAY CLAYTON 

Q.1. On January 26th, Bloomberg reported that the SEC is considering breaking with its prior position, and permitting issuers to 

slip forced arbitration clauses into initial public offerings, which 

would bar investors from suing issuers for wrongdoing, such as 

fraud. During your testimony, you said that you ‘‘cannot prejudge 

an issue that may come before the SEC,’’ but added that you are 

‘‘not anxious to see a change in this area.’’ 

Isn’t it the case that the SEC has previously opposed barring investors in initial public offerings from pursuing legal remedies 

against issuers for offenses like fraud? If so, what—if anything— 

has changed? 

Does your comment during your testimony that you are ‘‘not anxious to see a change’’ in this area reflect your belief that investors 

should not be barred from suing issuers for fraud and other securities violations? 

A.1. This matter is complex. It involves our securities laws, matters of other Federal and State law, an array of market participants and activities, as well as matters of U.S. jurisdiction. It also 

involves many public policy considerations. Further, this issue has 

come before the Commission in a variety of ways and contexts and 

may do so in the future. Views of market participants on this issue, 

particularly in the case of an initial public offering (IPO) of a U.S. 

company, are deeply held and, in many cases, divergent. In reVerDate Nov 24 2008 09:37 May 07, 2018 Jkt 046629 PO 00000 Frm 00150 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\02-06 ZDISTILLER\20618.TXT JASON
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1See, e.g., Remarks before the SEC Investor Advisory Committee (March 8, 2018), available 

at https://www.sec.gov/news/public-statement/statement-clayton-2018-3-8. 

sponse to the recent heightened interest from Congress and others 

relating to the inclusion of mandatory arbitration provisions in the 

charters or bylaws of U.S. companies contemplating an IPO, I have 

(1) made several statements 1 and (2) more recently, asked the Division of Corporation Finance (the Division) to review how this 

issue has arisen in the past, and may arise in the future, in connection with filings made by companies with the Division. 

A summary provided by the Division of its prior approach to this 

issue, as well as how the Division would expect to proceed if the 

issue were presented in the context of an IPO of a U.S. company, 

is below. The summary reflects the Division’s view that should a 

U.S. company pursue a registered IPO with a mandatory arbitration clause in its governing documents, the decision about whether 

to declare the filing effective should be made by the Commission, 

not the Division by delegated authority. I agree with the Division’s 

view on process and, in particular, that this would be a decision for 

the Commission. Although I have made several prior statements on 

this issue, for reasons of clarity and completeness, I summarize my 

perspective on the issue below. 

As a threshold matter, and recognizing the complexity and importance of this issue, I reiterate my personal view that any analysis of this issue or decision making by the Commission in the context of a registered IPO by a U.S. public company should be conducted in a measured and deliberative manner. 

The Federal securities laws provide a basis for private rights of 

action by investors in the event of material misstatements as part 

of securities offerings. There is a long history of claims of this type 

being brought against U.S. publicly traded companies in our Federal and State courts, including as class actions. The Division’s 

summary notes that, in the case of foreign private issuers that 

have conducted registered offerings in the United States and U.S. 

companies that are not listed, direct and indirect limitations on 

such actions have been prevalent for many years. In addition, and 

beginning several years prior to my arrival at the Commission, certain U.S. companies conducting exempt Regulation A offerings 

have included mandatory arbitration clauses in their governing 

documents or subscription agreements. The Division’s summary 

discusses these and other matters in more detail. 

It is my view that if we are presented with this issue in the context of a registered IPO of a U.S. company, I would expect that any 

decision would involve Commission action (and not be made 

through delegated authority) and that the Commission would give 

the issue full consideration in a measured and deliberative manner. 

Such a review would take into account various considerations, including developments in applicable law and any other relevant considerations. Since this hearing, I have reiterated these views and 

sought to appropriately frame this issue and my preference for 

such a process in my public statements. 

These statements have not only addressed my perspective on the 

appropriate procedure for analyzing this matter but also its relative priority. With respect to priority, generally speaking, my view 

148 

is that the Commission should allocate its limited rulemaking and 

other related resources to a portfolio of matters that (1) present 

currently pressing and significant issues for investors and our markets, (2) are central to our mission, (3) are ripe for consideration, 

and/or (4) are addressable through a reasonable share of Commission and staff time. To me, such matters currently include, among 

others and in no particular order, (1) standards of conduct for investment professionals, (2) Congressionally-mandated rulemaking, 

(3) the regulation of investment products, including ETFs, (4) the 

impact of distributed ledger technology (including cryptocurrencies 

and ICOs), (5) FinTech developments, (6) the elimination of burdensome regulations that do not enhance investor protection or 

market integrity with an eye toward facilitating capital formation, 

(7) an examination of equity and fixed income market structure, 

and (8) of course, inevitable issues that we have not yet identified 

but will emerge as pressing. 

These statements have made it clear that I have not formed a 

definitive view on whether or not mandatory arbitration for shareholder disputes is appropriate in the context of an IPO for a U.S. 

company. I believe any decision would be facts and circumstances 

dependent and could inevitably divert a disproportionate share of 

the Commission’s resources from the priorities I noted above. In 

short, this issue is not a priority for me. Although the issue is not 

a priority for me, it does not mean that it is not worthwhile to analyze, and I have encouraged those with strong views to support 

their position with robust, legal and data driven analysis. If this 

matter does come before the Commission, such analysis will assist 

the Commission in its deliberative process. 

Summary Provided by the Division of Corporation of 

Finance 

The Division of Corporation Finance (the Division) oversees periodic filings by reporting companies and filings of issuers seeking to 

raise money in the capital markets through, for example, initial 

public offerings. The Federal securities laws generally focus on requiring companies to provide full and fair disclosure of material information to investors and the Division’s oversight of filings is intended to facilitate compliance with those laws. 

State laws generally provide the parameters for companies to establish their corporate governance through their organizational 

documents, such as their charter or bylaws. The Commission does 

not have rules permitting or prohibiting companies from using arbitration provisions. 

The Commission’s processes with respect to arbitration provisions have been and may in the future be implicated through the 

Division’s role in overseeing and processing filings by companies. 

The most often identified channel for this issue to arise is if a U.S. 

company sought to include a mandatory arbitration provision in its 

governing documents when it filed an initial registration statement 

to offer and sell securities publicly. Following is an overview of circumstances in which mandatory arbitration provisions have been 

and could be present in the governance documents of companies 

that make filings with the Commission. 

149 

2 In its entirety, Section 8(a) states that ‘‘The effective date of a registration statement shall 

be the twentieth day after the filing thereof or such earlier date as the Commission may determine, having due regard to the adequacy of the information respecting the issuer theretofore 

available to the public, to the facility with which the nature of the securities to be registered, 

their relationship to the capital structure of the issuer and the rights of holders thereof can be 

understood, and to the public interest and the protection of investors [emphasis added].’’ 3Section 14 states that ‘‘Any condition, stipulation, or provision binding any person acquiring 

any security to waive compliance with any provision of this title or of the rules and regulations 

of the Commission shall be void.’’ 

Registered Offerings by U.S. Companies 

A company may not sell securities in the United States unless 

(1) it has an effective registration statement on file with the SEC 

or (2) an exemption from registration is available. Section 8(a) of 

the Securities Act of 1933 (Securities Act) provides that a registration statement will become effective 20 days after it is filed and authorizes the Commission to accelerate the effective date of a registration statement after taking into account the adequacy of the 

disclosure and certain other considerations. 2 This authority to accelerate the effective date has been delegated to the Division by the 

Commission. By statute, registration statements become effective 

with the passage of time. As a matter of practice, a company will 

nearly always include in any pre-effective registration statement a 

legend, referred to as a ‘‘delaying amendment,’’ in order to prevent 

the registration statement from becoming effective automatically 

following the passage of time and to better control the timing of its 

offering. During this time, the Division staff may review the filing. 

In the course of a filing review, Division staff will evaluate the 

company’s disclosure and may issue comments to elicit better compliance with disclosure requirements, and the company will amend 

its registration statement to address the comments as appropriate. 

Following this review and comment process, the company submits 

a request to accelerate the effective date of the registration statement. 

When this issue last arose in the context of an initial public offering (IPO) of a U.S. company in 2012, the Division took the position, based on a consideration of relevant Federal laws and case 

law, that it would not use its delegated authority to accelerate the 

effective date of a U.S. company’s registration statement when the 

company’s governing documents contained a mandatory arbitration 

provision covering disputes arising under Federal securities laws. 

In that context, the Division was unable to conclude that such provisions are consistent with ‘‘the public interest and protection of investors’’ as required by Securities Act Section 8(a) in light of, 

among other things, the anti-waiver provision in Section 14 of that 

Act. 3 More specifically, at that time, the Division advised a company that it did not anticipate exercising its delegated authority to 

accelerate the effective date of the registration statement if such a 

provision was included in the company’s governing documents and 

that the Commission would need to make any decision on a request 

for acceleration. In that situation, the company decided not to include the mandatory arbitration provisions in its governing documents in connection with its IPO. 

If this issue were to come before the Division in a U.S. company’s 

registration statement for an IPO today, as discussed in more detail below, the Division would not use its delegated authority to acVerDate Nov 24 2008 09:37 May 07, 2018 Jkt 046629 PO 00000 Frm 00153 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\02-06 ZDISTILLER\20618.TXT JASON
150 

celerate the effective date of the registration statement. Instead, 

the Division would refer a request for acceleration to the full Commission. 

The historical treatment of this issue in other circumstances, 

such as in the qualification of Regulation A offerings and in the 

processing of registration statements filed by foreign private 

issuers, is described below. 

Other Circumstances 

For many years, U.S. and non-U.S. companies have made other 

types of filings with the Commission that have included mandatory 

arbitration provisions for shareholder disputes in their governing 

or offering documents. These circumstances and the relevant considerations are described further below. In these circumstances, the 

relevant statutes and rules generally require appropriate disclosure 

regarding material risks to the issuer or of the offering, which 

would include risks relating to mandatory arbitration provisions 

and any impact on holders of the offered securities. 

Regulation A: Some companies utilizing the exemption from registration available under Regulation A have included mandatory 

arbitration clauses in their governing documents or subscription 

agreements. Under Regulation A, a company may not sell its securities until the Division has qualified its offering statement. In 

these exempt offerings, neither the Federal securities laws nor the 

Commission’s rules require the Division to make the same public 

interest determination as is required when accelerating the effective date of a registration statement in the context of an IPO. 

In 2015, after reviewing the relevant law and regulations, the 

Commission staff concluded that there would not be grounds to 

withhold qualification of a Regulation A offering on the basis that 

the issuer had included a mandatory arbitration provision in its 

governing documents. Since then, in light of the Commission staff’s 

2015 determination, certain offerings that have included a mandatory arbitration clause have been qualified under Regulation A, 

provided that the material risks of such a dispute resolution approach had been disclosed and the issuer otherwise qualified for 

the exemption. 

Foreign Private Issuers: For many years, a number of foreign 

companies with securities listed or traded in the United States 

have included mandatory arbitration and other analogous provisions in their filings. Registration statements of foreign private 

issuers offering and selling securities in the United States also generally include disclosures regarding limitations investors may face 

as a result of the issuer’s foreign status and home country laws and 

regulations. These disclosures have typically included a risk factor 

informing investors that due to jurisdictional issues it may be difficult for them to obtain or enforce judgments or bring original actions, including actions styled as class actions, against the company. In these instances and in situations where mandatory arbitration has been required, either due to local law requirements or 

otherwise, the Division staff has focused on the disclosure of the 

material risks related to these limitations and has declared these 

filings effective. 

151 

4See Claudia H. Allen, ‘‘Bylaws Mandating Arbitration of Stockholder Disputes’’, 39 Del. J. 

of Corp. Law 751, 779–782 (2015) (discusses circumstances where arbitration clauses included 

in public issuers’ filings) (Allen). 5See, e.g., American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013) (holding 

that, under the Federal Arbitration Act (FAA), courts must ‘‘rigorously enforce’’ arbitration 

agreements according to their terms unless the FAA’s mandate has been ‘‘overridden by a contrary congressional command’’). 6See, e.g., Allen at 778 (fn 141). 

Exchange Act Reporting Companies: There are several other ways 

a company could be in the Securities Exchange Act of 1934 (Exchange Act) reporting regime and have a mandatory arbitration 

provision in its governing documents. For example, a registration 

statement for a class of securities pursuant to Exchange Act Section 12(g) becomes effective automatically 60 days after filing. As 

another example, a public reporting company could amend its bylaws or seek shareholder approval of a charter amendment or to include an arbitration provision (assuming that the applicable State 

law allows for the enforceability of such a provision). 4 In any of 

these situations, the Commission’s rules would require appropriate 

disclosures to investors. 

Considerations 

Mandatory arbitration clauses involve complexities beyond the 

Commission and its rules. For example, they raise issues under the 

State corporate laws under which the issuers are organized. In addition, Federal case law regarding mandatory arbitration continues 

to evolve. Since 2012, when this issue was last presented to the Division in the context of an IPO of a U.S. company, the Supreme 

Court has affirmed the strong Federal interest in promoting the arbitration of claims under Federal laws. 5 Over the last several 

years, commentators have observed that there is uncertainty as to 

whether the Commission would have a basis to deny an acceleration request in these circumstances. 6 If a U.S. company were to file 

for an IPO with governing documents that included a mandatory 

arbitration provision, the Commission would need to evaluate the 

specific facts and circumstances in the context of not just the Federal securities laws but also State corporate and other Federal law. 

This is a complex legal and policy issue that requires careful consideration. As such, and as discussed above, if the issue were presented to the Division in the context of an IPO for a U.S. company, 

the Division would decline to exercise its delegated authority to accelerate the effective date of a registration statement and instead 

refer the matter to the Commission for its consideration. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ 

FROM JAY CLAYTON 

Q.1. During your testimony you mentioned that initial coin offerings (ICO) seem to be security offerings, which would bring under 

the jurisdiction of your agency to regulate. One major concern that 

members of the committee, financial experts, and investors all 

share is that ICOs may actually be Ponzi schemes. 

How can investors discern between legitimate ICOs with legitimate value and those that are fraudulent schemes? 

152 

A.1. Your question goes to the heart of the Federal securities 

laws—ensuring that investors, especially retail investors, have adequate information to make informed investment decisions. I believe 

that it is difficult for investors to make determinations whether an 

investment opportunity is at risk of being a Ponzi scheme or another scheme in the absence of disclosures of material information 

by ICO issuers. While many ICOs issue a ‘‘White Paper’’ in conjunction with the offering, many of these White Papers are, in essence, outlines of an idea, and none that I have seen provide the 

scope and depth of information one would find in a statutory prospectus. Many provide nothing comparable in the way of disclosure. 

In the absence of this critical information, I do not know how an 

average investor would be able to discern with a reasonable degree 

of confidence whether the ICO is ‘‘legitimate’’ or whether there is 

significant risk that it is a fraudulent scheme. As part of my December statement on cryptocurrencies and ICOs, I cautioned investors to ask clear questions and demand answers from ICO issuers 

and promoters. 

In addition to publicized enforcement actions, the SEC and its 

staff have issued a number of statements, investor alerts, and bulletins targeted to retail investors. Investors can access much of this 

information by visiting the www.investor.gov website ‘‘Spotlight on 

Initial Coin Offerings and Digital Assets.’’ 

Q.2. Do you need new statutory authority to regulate ICOs (and 

other areas of cryptocurrencies) or do you believe already-existing 

authorities sufficiently address this new area? 

If new statutory authority is required, what should the authority 

aim to achieve? 

A.2. The registration and disclosure requirements of the Federal 

securities laws provide flexibility in describing the terms of the securities, as well as the particular businesses that may be issuing 

these securities. Over the past 84 years, the SEC and its staff have 

worked with companies issuing novel types of securities and have 

used a principles-based approach to assure appropriate disclosure 

is made to investors, and this approach has worked well. In addition, the Federal securities laws have anti-fraud and other remedial provisions that are principles-based, broad, and flexible and 

that are aimed at protecting investors from fraud, including fraud 

arising from securities offerings, actions of intermediaries, and 

market manipulation. These provisions provide the SEC with important tools that can be applied to securities activities involving 

novel technologies—regardless of how those technologies are used. 

I believe offerings of digital assets that are securities should be 

treated and evaluated no differently. Nevertheless, the staff will 

continue monitoring developments in this area and consider the 

need for additional authorities. 

As Chairman Giancarlo and I testified, we are open to exploring 

with Congress, as well as with our Federal and State colleagues, 

whether increased Federal regulation of cryptocurrency trading 

platforms—or spot markets—is necessary or appropriate. We also 

are supportive of regulatory and policy efforts to bring clarity and 

fairness to this space and are conferring with our colleagues at the 

U.S. Department of the Treasury and the Federal Reserve Board 

153 

with respect to any potential legislative suggestions. To the extent 

that new issues arise in our markets that the SEC is unable to address, we will alert Congress to gaps in authority and request additional authority where necessary. 

Q.3. In SEC v. W.J. Howey Co., the Supreme Court created the 

‘‘Howey Test’’ which has since been the test for determining whether a financial transaction is a security or not. However, 

cryptocurrencies are not squarely compatible with the test that was 

designed to address more traditional instruments and contracts. 

Does Howey apply to cryptocurrencies? 

More specifically, is the ‘‘efforts of others’’ requirement met? 

Who should arbitrate whether a particular cryptocurrency should 

be considered an investment contact, commodity, or some other financial instrument? 

Do you believe that responsibility should belong to a specific Federal agency or should it be made in an interagency forum, such as 

the Financial Stability Oversight Council? 

A.3. Determining whether a transaction involves a security does 

not turn on labelling—such as the characterization of something as 

a ‘‘cryptocurrency.’’ Whether a token or a digital asset called a 

cryptocurrency is a security is determined by applying long-established law to the facts and circumstances of the particular instrument being sold. As you noted, under Supreme Court case law in 

SEC v W.J. Howey and its progeny, where purchasers make an investment of money with an expectation of profits derived from the 

entrepreneurial and managerial efforts of others, there is a security. Determining whether the Howey test results in an investment 

being a security requires an assessment of the facts and circumstances of each case, including the economic realities underlying a transaction. Such analysis looks to the substance of the 

transaction, not merely its form or other naming conventions. 

As is the case with any ‘‘investment contract’’ analysis, securities 

counsel assisting its client may exercise judgment in making an 

initial determination. The SEC staff may confer with counsel to express different views and explain its basis. If these differences remain unresolved and the company offers the instrument, the SEC 

may authorize an enforcement action on the basis that the instrument is a security. If litigated, a court would make the ultimate determination. 

As is the case with any instrument being offered or sold, the SEC 

is the agency appropriately charged with determining whether a 

particular instrument is an ‘‘investment contract,’’ and, thus, a security. This principles-based framework has served American companies and investors well throughout periods of innovation and 

change for 84 years. Such determinations have been made without 

recourse to an interagency forum. The SEC staff does confer, and 

will continue to confer, with other agencies as appropriate to discuss particular products that may raise issues under different regulatory regimes. 

With respect to the ‘‘managerial efforts of others’’ prong of the 

Howey test, the DAO Report noted that the central issue turned on 

‘‘whether the efforts made by those other than the investor are the 

undeniably significant ones, those essential managerial efforts 

154 

1SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir. 1973). 

which affect the failure or success of the enterprise.’’ 1 In the case 

of The DAO, its investors ‘‘relied on the managerial and entrepreneurial efforts of Slock.it and its co-founders, and The DAO’s Curators, to manage The DAO and put forth project proposals that 

could generate profits for The DAO’s investors.’’ The DAO Report 

further noted that The DAO’s investors’ expectations of future profits were primed by market efforts of The DAO and its co-founders. 

Whether any other particular token or cryptocurrency met this test 

would be a facts-and-circumstances analysis, utilizing the principles-based framework. 

With respect to a ‘‘true’’ cryptocurrency, it may well be that the 

Howey test leads to the conclusion that the cryptocurrency is not 

a security and the cryptocurrency is a commodity. Again, however, 

such a determination would need to be made on an individual basis 

based on the facts and circumstances, without regard to what the 

product is named. 

Q.4. The concept of banks is familiar to the average American. 

Banks comply with extensive regulations to ensure safety and protect consumer confidence and are insured by the Federal Deposit 

Insurance Corporation (FDIC). Cryptocurrency investments are 

quite different. But many retail investors do not seem to appreciate 

how different cryptocurrencies are from real currencies. For example, there is no FDIC-like protection for investments in 

cryptocurrency. 

Should cryptocurrency wallets and exchanges be subject to similar rules aimed at protecting consumer funds under their control? 

A.4. I agree with the premise in your question that banks are subject to regulations designed to ensure their safety and soundness 

and bank cash deposits are insured by the FDIC. In the securities 

industry, customers receive protection for cash and securities held 

at broker-dealers under the SEC’s customer protection rule, which 

requires broker-dealers to hold customer fully paid and excess margin securities in possession or control and free of lien and to segregate the net amount of cash owed to customers. These provisions, 

along with the SEC’s net capital rule applicable to broker-dealers, 

are designed to facilitate the prompt return of securities and cash 

to customers if the broker-dealer fails financially. 

Moreover, if the failed broker-dealer cannot promptly return 

these assets, there is a special bankruptcy regime to protect customers. Specifically, the Securities Investor Protection Act (SIPA) 

gives the customers a priority claim over other creditors to customer securities and cash held by the failed broker-dealer. In addition, if the amount of customer securities and cash held by the 

failed firm is insufficient to make each customer whole, SIPA provides up to $500,000 per customer (of which $250,000 can be used 

for cash claims) to make up any shortfalls. 

In a recent statement from the Divisions of Enforcement and 

Trading and Markets, SEC staff noted that there may be online 

trading platforms—such as digital wallet services—that, while not 

exchanges, directly or indirectly offer trading or other services to 

investors in ICOs and cryptocurrencies. To the extent these services involve securities, this would trigger certain requirements 

155 

under the Federal securities laws, including registration as a 

broker-dealer, transfer agent, or clearing agency, among others, 

and the customer protections that go along with that registration. 

With respect to cryptocurrencies that are not securities, the question of whether wallets and exchanges should be subject to a regime that provides for consumer insurance and supervisory oversight is part of the broader questions of whether a separate regulatory regime is necessary or appropriate for those 

cryptocurrencies. We are discussing this question with our fellow 

regulators and expect to consult with the Committee on any recommendations. 

With these matters as context, I generally agree with your assessment that investors in cryptocurrencies and ICOs are not receiving the protections that are comparable to bank deposits and 

brokerage accounts. 

Q.5. Do you think consumers fully understand the level of inherent 

risk associated with investing in cryptocurrencies? 

A.5. I have significant concerns that Main Street investors have 

not been given clear disclosures that would provide a basis for understanding the material facts and risks involved when it comes to 

ICOs and cryptocurrencies. Worse, I have seen examples where it 

appears promoters are intentionally confusing ICOs with SEC-registered IPOs. Unfortunately, I believe it is clear that some have 

taken advantage of this lack of understanding. In response, I have 

urged investors, particularly retail investors, to ask questions and 

demand clear answers from issuers and promoters of 

cryptocurrencies and ICOs. The SEC staff also has taken a number 

of steps to alert investors to this very point and arm investors with 

information on these assets. For example, the SEC staff has issued 

a number of investor alerts, statements, and warnings. So, too, 

have SROs, State securities regulators, and other Federal, State, 

local, and international regulators. The www.investor.gov website 

‘‘Spotlight on Initial Coin Offerings and Digital Assets,’’ lists a series of statements, investor alerts and bulletins, announcements of 

enforcement actions, and further provides contact information. It is 

important for investors to be informed about critical questions related to these products and for them to understand the risks involved. 

Q.6. Currently, States play a major role in regulating 

cryptocurrencies. The result has been a wide range of approaches 

with a patchwork of regulatory schemes that can prove difficult to 

navigate. o Should a formal interagency committee be created to 

aid financial regulatory agencies create coordinated regulation and 

oversight of new financial products, services, and platforms associated with cryptocurrencies? 

What role should States play in regulating cryptocurrencies? 

A.6. Federal and State regulators play an important role in protecting Main Street investors against fraudulent and illegal activities. Coordination among Federal and State regulators concerning 

the introduction of new types of financial products occurs through 

a number of long-established channels. The SEC staff has worked 

with a number of agencies over the years to discuss products that 

may raise issues under different regulatory regimes, and currently 

156 

we are participating in the FSOC subcommittee formed at the direction of the Secretary of the Treasury to coordinate the regulatory approach to issues regarding cryptocurrencies, ICOs, and 

other digital assets. 

To the extent a digital asset operates as a ‘‘true’’ currency, trading in such instruments does not fall under the SEC’s jurisdiction. 

Currency trading—such as trading in euros, dollars, or yen—implicates regulation by FinCEN and State laws regarding money transfers, among others. Traditional money-transmission services that 

operate in the United States are primarily State-regulated and 

many of the internet-based cryptocurrency trading platforms have 

registered as payment services that are not subject to direct oversight by the SEC or the CFTC. To the extent these financial instruments take on other characteristics or are used in particular markets, they may be subject to regulation by the SEC and/or CFTC. 

The SEC has been collaborating with the CFTC on our approaches 

to policing these markets for fraud and abuse and will continue to 

work closely with our Federal and State counterparts, including the 

Department of Treasury, Department of Justice, and State attorneys general and securities regulators to ensure appropriate oversight consistent with our respective statutory missions. 

Should additional legislative, regulatory, or other policy efforts 

be necessary to address these issues, I stand ready to work with 

Congress and our regulatory counterparts. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM J. CHRISTOPHER GIANCARLO 

Q.1. On January 18, 2018, the Director of the SEC’s Division of Investment Management wrote a letter to industry raising concerns 

about potential ‘‘fraud and manipulation’’ that could impact prices 

in both cryptocurrency markets and the derivatives markets linked 

to them. As a result of these and other concerns, the Director 

wrote: ‘‘Until the questions identified above can be addressed satisfactorily, we do not believe that it is appropriate for fund sponsors 

to initiate registration of funds that intend to invest substantially 

in cryptocurrency and related products.’’ 

This letter follows the SEC’s previous denial of an application to 

list Bitcoin exchange-traded funds in March 2017 and reports that 

the SEC told other exchanges to withdraw their applications. One 

former SEC lawyer characterized the SEC’s first application denial 

as ‘‘essentially saying that until significant Bitcoin markets are 

regulated, the listing exchange really can’t address concerns about 

the potential for manipulative trading,’’ leading some observers to 

believe that the SEC would change its position after the launch of 

the CME and Cboe Bitcoin futures exchanges. However, between 

the Investment Management letter and the SEC’s requests for certain exchange applicants to withdraw their applications, it appears 

that there are still serious concerns at the SEC about the potential 

for fraud and manipulation in cryptocurrency and related futures 

markets, even after the launch of the CME and Cboe exchanges. 

I have several questions related to these developments: 

Do you believe that the SEC’s concerns about the risks of fraud 

and manipulation in the cryptocurrencies and related futures marVerDate Nov 24 2008 09:37 May 07, 2018 Jkt 046629 PO 00000 Frm 00160 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\02-06 ZDISTILLER\20618.TXT JASON
157 

kets are accurate? Do you believe that the SEC is being too conservative waiting until its concerns are resolved before approving 

new products? 

A.1. There are different statutory provisions and regulatory standards for how products under the SEC’s or CFTC’s jurisdiction are 

listed to trade. With respect to the SEC, commodity-trust exchange 

traded products, (ETP) (e.g., the Winklevoss Bitcoin ETP submitted 

in 2017) are exchange rule changes. The SEC must determine 

whether the proposed rule change is consistent with the statutory 

provisions, and the rules and regulations that apply to national securities exchanges. The SEC must approve the filing if it finds that 

the proposed rule change is consistent with these legal requirements and it must disapprove the filing if it does not make such 

a finding. The proposed rule change is published in the Federal 

Register and subject to notice and comment. Under the Commodity 

Exchange Act (CEA) and Commission regulations, futures exchanges can self-certify new futures contracts on 24-hour notice 

prior to trading. There are limited grounds for the CFTC to ‘‘stay’’ 

self-certification such as filing a false statement in the certification. 

It is clear that Congress and prior Commissions deliberately designed the CFTC’s product self-certification framework to give futures exchanges the ability to quickly bring new products to the 

marketplace. 

Q.2. If you believe that the SEC is being too conservative, or its 

markets and products are sufficiently different from the CFTC’s, 

please explain how the risks in your markets are different from the 

risks that led the SEC to identity fraud and manipulation concerns 

in the cryptocurrencies and related derivatives markets. 

A.2. The functional role of futures and securities are also fundamentally different. Futures are risk management instruments, 

typically very short term in nature (hence weekly and quarterly expirations) and designed to help firms manage risk exposures, while 

ETPs are investment products, held by retail investors for long periods—for example, an ETP can be held as part of a retail investor’s retirement investment in an IRA account. The regulatory approach to these two sets of instruments reflects these economic and 

functional differences. 

Q.3. Additionally, are there specific risks or events that would 

cause you to reconsider the markets underlying the Bitcoin futures 

and other derivatives? 

A.3. The CFTC’s approach to Bitcoin futures was a balanced approach that took into account promoting responsible innovation and 

development that is consistent with its statutory mission. 

The information access and risk management protocols established for the Bitcoin futures contracts reflects an appropriate and 

thoughtful balance of flexibility provided in the statute to the exchanges to self-certify new futures contracts, and for CFTC to monitor that these contracts continue to be in compliance with the 

CEA’s core principles. 

Q.4. Your written testimony mentioned that CME’s and Cboe’s 

Bitcoin futures exchanges have information-sharing agreements 

with the Bitcoin exchanges they rely on. 

158 

Could you please submit a model or sample information-sharing 

agreement for the record? This would help the Committee and others in Congress understand the unique risks in these markets, how 

oversight is being conducted, and whether additional legislation related to virtual currencies is necessary. 

A.4. One purpose of the Commodity Exchange Act is to serve the 

public interest by providing a means for managing and assuming 

price risks, discovering prices, or disseminating pricing information. The CEA sets forth a series of Core Principles applicable to 

a board of trade designated by the Commission as a contract market. Those core principles, also adopted by the Commission in Part 

38 of its Regulations, contain requirements that (core principle 3) 

the board of trade list contracts that are not readily susceptible to 

manipulation and that (core principle 4) the board of trade ‘‘shall 

have the capacity and responsibility to prevent manipulation, price 

distortion, and disruptions of the delivery or cash settlement process through market surveillance, . . . including (A) methods for 

conducting real-time monitoring of trading.’’ 

Designated contract markets that list futures contracts that are 

cash settled must also have, in accordance with Commission Regulation 38.253, ‘‘rules or agreements that allow the designated contract market access to information on the activities of its traders 

in the reference market.’’ The Commission has also published guidance and acceptable practices for contract markets to comply with 

these referenced core principles on an ongoing basis. In particular, 

the Commission’s guidance for cash settled contracts provides that 

‘‘at a minimum, an acceptable program of monitoring cash-settled 

contracts must include access, either directly or through an information-sharing agreement, to traders’ positions and transactions in 

the reference market for traders of a significant size in the designated contract market near the settlement of the contract.’’ See 

Part 38, Appendix B, Core Principle 4, Section (b)(3) (Cash-settled 

contracts). 

The Cboe Futures Exchange (CFE) has entered into an information sharing agreement with the Gemini auction platform concerning the Cboe’s listed Bitcoin contracts. The information sharing 

agreement is described starting in the last paragraph of page 5 of 

the CFE certification filing, continuing on to page 6, which is 

linked here: http://www.cftc.gov/filings/ptc/ptc120117 

cfedcm001.pdf. 

Specifically, the certification states that ‘‘the Amendment modifies [CFE] Rule 216 to make clear that CFE may enter into information sharing agreements with trading venues like the Gemini 

Exchange. In particular, CFE is amending Rule 216 to clarify that 

CFE may have information sharing agreements with trading 

venues other than domestic or foreign self-regulatory organizations, 

associations, boards of trade, and swap execution facilities. CFE is 

also amending Rule 216 to make clear that CFE may be a direct 

party to any information sharing agreements under Rule 216 or be 

a party as a third party beneficiary to information sharing agreements entered into by CFE affiliates. In this regard, Cboe Options 

has entered into an information sharing agreement with Gemini 

that provides CFE with the ability to access Gemini Exchange 

trade data for regulatory purposes, including in connection with the 

159 

surveillance and regulation of trading in XBT futures on CFE’s 

market. Pursuant to this information sharing agreement, CFE Regulation (CFER) will receive on a regular basis from Gemini, order 

and trade detail information from the Gemini Exchange market for 

Bitcoin in U.S. dollars, which CFER will utilize to conduct cross 

market surveillance of the Gemini Exchange Bitcoin auction and 

the CFE XBT futures settlements. This information sharing agreement also permits CFE to share that data with the Commission. 

One way in which this information sharing will occur is that CFE 

plans to share Gemini Exchange market data with the Commission.’’ 

The Chicago Mercantile Exchange (CME) also self-certified its 

Bitcoin futures contract which can be reviewed here: http:// 

www.cftc.gov/filings/ptc/ptc120117cmedcm001.pdf. The Bitcoin 

contract utilizes an index, referred to as the Bitcoin Reference Rate 

or BRR, for settlement. According to the CME’s certification filing, 

the BRR is calculated by Crypto Facilities, a financial services firm, 

and the BRR is also governed by an oversight committee. In order 

for a trading venue to be considered a constituent exchange by the 

BRR, CME’s certification further states at pages 4–5, that certain 

criteria must be met including that ‘‘the venue cooperates with inquiries and investigations of regulators and the Calculation Agent 

upon request.’’ 

In addition, the Commission is closely coordinating with other 

regulators who have access to cash platform data, in particular the 

Financial Crimes Enforcement Network (FinCEN) within the Department of Treasury. 

Q.5. On January 19, 2018, you said in a speech that you had directed CFTC staff to develop a ‘‘heightened review’’ process for virtual currencies derivatives, including a checklist for new products, 

and that you had asked the CTFC’s General Counsel to discuss the 

statutory support for codifying these principles through rulemaking. 

Could you please provide an update on the process and status of 

these discussions? 

A.5. The elements of the ‘‘heightened review’’ process are publicly 

available on the CFTC’s website in its January 4, 2018, 

‘‘Backgrounder on Oversight of and Approach to Virtual Currency 

Futures Markets.’’ 

Q.6. Is the CFTC staff developing a proposed rule for notice and 

comment? 

A.6. CFTC staff is currently preparing staff-level guidance on the 

heightened review process that will be publicly available on the 

CFTC’s website. 

Q.7. Will the full Commission vote on the rule? 

A.7. If a rule was proposed, it would go through the notice-andcomment process under the Administrative Procedure Act (APA) 

and require a Commission vote to implement. 

160 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM J. CHRISTOPHER GIANCARLO 

Q.1. The CFTC’s backgrounder on its oversight and approach to 

virtual currency futures markets states that virtual currency ‘‘selfcertification under heightened review means that the CFTC not 

only has clear legal authority, but now also will have the means 

to police certain underlying spot markets for fraud and manipulation.’’ 

How will the CFTC exercise this authority in light of your testimony that ‘‘the CFTC does NOT have regulatory jurisdiction under 

the CEA over markets or platforms conducting cash or ‘spot’ transactions in virtual currencies or other commodities or over participants on such platforms.’’ 

A.1. In 2015, the CFTC determined that virtual currencies, such as 

Bitcoin, met the definition of ‘‘commodity’’ under the CEA. Nevertheless, to be clear, the CFTC does not have regulatory jurisdiction 

over markets or platforms conducting cash or ‘‘spot’’ transactions in 

virtual currencies or other commodities or over participants on 

such platforms. More specifically, the CFTC does not have authority to conduct regulatory oversight over spot virtual currency platforms or other cash commodities, including imposing registration 

requirements, surveillance and monitoring, transaction reporting, 

compliance with personnel conduct standards, customer education, 

capital adequacy, trading system safeguards, cybersecurity examinations, or other requirements. In fact, current law does not provide any U.S. Federal regulator with such regulatory oversight authority over spot virtual currency platforms operating in the United 

States or abroad. However, the CFTC does have enforcement jurisdiction to investigate through subpoena and other investigative 

powers and, as appropriate, conduct civil enforcement action 

against fraud and manipulation in virtual currency derivatives 

markets, and in underlying virtual currency spot markets just like 

other commodities. 

In contrast to its lack of regulatory authority over virtual currency spot markets, the CFTC does have both regulatory and enforcement jurisdiction under the CEA over derivatives on virtual 

currencies traded in the United States. This means that for derivatives on virtual currencies traded in U.S. markets, the CFTC conducts comprehensive regulatory oversight, including imposing registration requirements and compliance with a full range of requirements for trade practice and market surveillance, reporting and 

monitoring and standards for conduct, capital requirements, and 

platform and system safeguards. 

Q.2. Are you concerned about the potential for Bitcoin and other 

cryptocurrencies to facilitate money laundering by criminals such 

as human traffickers, gangs like MS–13, or terrorists like 

Hezbollah? 

A.2. I am very concerned about the potential for the use of 

cryptocurrency for illicit activity. The CFTC does not have the regulatory authority to prevent or stop the use of it for those purposes, 

which has to be done by law enforcement agencies, with whom we 

actively cooperate on cryptocurrency and other matters. We are 

161 

committed to referring any illicit activity to our law enforcement 

partner agencies. 

Q.3. What—if any—role does your agency have in addressing this 

problem, including through cooperation with other agencies? 

A.3. I met recently with the new head of FinCEN, and the financial 

crimes unit, and they assured me that their anti–money-laundering 

procedures are in place for all domestic virtual currency trading 

platforms, which we do not regulate at the CFTC, but about which 

we are concerned. We are broadly concerned about the use of virtual currencies for illicit activities, and yet no Federal regulator 

has direct authority over these markets. I think policymakers in 

Congress, as well as the regulatory agencies, should focus first and 

foremost on developing a plan for where we go next. 

And, I think the industry itself has something to do in this area 

as well. A number of virtual currency platforms in the U.K. are 

banding together to develop a self-regulatory organization to clean 

up the industry of these problems. I think advocates for virtual currencies need to know that they have a responsibility for cleaning 

up this industry if they really want it to be something that bears 

respect and becomes part of not only our future but their future as 

well. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ 

FROM J. CHRISTOPHER GIANCARLO 

Q.1. Currently, States play a major role in regulating 

cryptocurrencies. The result has been a wide range of approaches 

with a patchwork of regulatory schemes that can prove difficult to 

navigate. 

Should a formal interagency committee be created to aid financial regulatory agencies create coordinated regulation and oversight 

of new financial products, services, and platforms associated with 

cryptocurrencies? 

A.1. The creation of a formal interagency committee to aid financial 

regulatory agencies to coordinate and oversee new financial products, services, and platforms associated with cryptocurrencies is an 

interesting idea that would have potential benefits. Currently, the 

CFTC actively communicates its approach to virtual currencies 

with other Federal regulators, including the Federal Bureau of Investigation (FBI) and the Justice Department and through the Financial Stability Oversight Council (FSOC), chaired by the Treasury Department. 

Q.2. What role should States play in regulating cryptocurrencies? 

A.2. With respect to the role of States, I believe that the States 

have an important role to play, at least, if not beyond, the point 

that a Federal regulator is designated to have regulatory jurisdiction over virtual currency platforms. 

Q.3. The CFTC has authorized Bitcoin options on the Chicago Mercantile Exchange and Cboe Options Exchange. 

What procedures and regulations are in place to ensure the volatility of Bitcoin does not spread such that it risks the stability of 

the more traditional financial sectors trading the future? 

162 

A.3. The seventh element of the ‘‘heightened review’’ process for 

virtual currency product certifications provides that derivatives 

clearing organizations (DCOs) set substantially high initial margin 

and maintenance margin for cash-settled Bitcoin futures. This element was designed to ensure adequate collateral coverage in reaction to the underlying volatility of Bitcoin. 

Futures exchanges also have risk controls and tools to manage 

periods of volatility as well as unexpected spikes in volatility. 

CFTC regulations require futures exchanges to conduct real-time 

market monitoring of trading activity and market conditions, and 

to establish and maintain risk control mechanisms to prevent and 

reduce the potential risk of price distortions and market disruptions, including restrictions that pause or halt trading. See 17 CFR 

38.157, 38.251, and 38.255. CFE and CME also have position limits 

on their Bitcoin futures, which limits the number of Bitcoin futures 

contracts a market participant may own.