    [Senate Hearing 115-176]
    [From the U.S. Government Publishing Office]

                                                            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

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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

                                      ______

                             U.S. GOVERNMENT PUBLISHING OFFICE

    28-854 PDF                     WASHINGTON : 2018
    -----------------------------------------------------------------------
      For sale by the Superintendent of Documents, U.S. Government Publishing
      Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
             DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
                              Washington, DC 20402-0001

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                          MIKE CRAPO, Idaho, Chairman

    RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
    BOB CORKER, Tennessee                JACK REED, Rhode Island
    PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
    DEAN HELLER, Nevada                  JON TESTER, Montana
    TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
    BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
    TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
    MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
    DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
    THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
    JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
    JERRY MORAN, Kansas                  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)

       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 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.
        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.
        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.
        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 sovereign- backed 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.

         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.
        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 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 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?
        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.
        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?
        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, 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 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 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 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.
        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 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----
        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
    people 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-rich-quick 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.
        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?
        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 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 cyber-hacked 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 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 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 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 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 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 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 spending 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 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.
        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.
        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 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 currency-related 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?
        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:]
                   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.
    ---------------------------------------------------------------------------
         \1\ The 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.
    ---------------------------------------------------------------------------
        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 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\
    ---------------------------------------------------------------------------
         \2\ See 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-at-cryptocurrency-
    1516836363?mod=searchresults&page=1&pos=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.
    ---------------------------------------------------------------------------
         \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).
    ---------------------------------------------------------------------------
        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 ever-present 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 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\
    ---------------------------------------------------------------------------
         \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.
         \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.
    ---------------------------------------------------------------------------
        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\
    ---------------------------------------------------------------------------
         \6\ See ``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.
         \7\ See Reuters, ``Japan Raps Coincheck, Orders Broader Checks
    After $530 Million Cryptocurrency Theft'', Jan. 28, 2018, available at
    https://www.reuters.com/article/us-japan-cryptocurrency/japan-raps-
    coincheck-orders-broader-checks-after-530-million-cryptocurrency-theft-
    idUSKBN1FI06S.
    ---------------------------------------------------------------------------
        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\
    ---------------------------------------------------------------------------
         \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/public-statement/
    statement-potentially-unlawful-promotion-icos; ``Investor Alert: Public
    Companies Making ICO-Related Claims'' (Aug. 28, 2017), available at
    https://www.sec.gov/oiea/investor-alerts-and-bulletins/
    ia_icorelatedclaims; ``Investor Bulletin: Initial Coin Offerings''
    (July 25, 2017), available at https://www.sec.gov/oiea/investor-alerts-
    and-bulletins/ib_coinofferings; ``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-alert-bitcoin-other-virtual-currency; ``Investor
    Alert: Ponzi Schemes Using Virtual Currencies'' (July 23, 2013),
    available at https://www.sec.gov/investor/alerts/
    ia_virtualcurrencies.pdf.
         \9\ See ``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#_ftnref8.
    ---------------------------------------------------------------------------
        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 entrepreneurs 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 long-established 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\
    ---------------------------------------------------------------------------
         \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.
    ---------------------------------------------------------------------------
        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
    (including 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.
    ---------------------------------------------------------------------------
         \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.
    ---------------------------------------------------------------------------
        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
    cryptocurrency-linked 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.
    ---------------------------------------------------------------------------
         \12\ See ``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.
    ---------------------------------------------------------------------------
    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 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 technology-based 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.
    ---------------------------------------------------------------------------
         \13\ Section 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.
         \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.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
         \15\ See 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.'').
    ---------------------------------------------------------------------------
        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\
    ---------------------------------------------------------------------------
         \16\ See ``Opening Remarks at the Securities Regulation
    Institute'' (Jan. 22, 2018), available at https://www.sec.gov/news/
    speech/speech-clayton-012218.
    ---------------------------------------------------------------------------
        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.
    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.
    ---------------------------------------------------------------------------
         \17\ See Press Release 2017-176, ``SEC Announces Enforcement
    Initiatives To Combat Cyber-Based Threats and Protect Retail
    Investors'' (Sept. 25, 2017), available at https://www.sec.gov/news/
    press-release/2017-176.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
         \18\ Press 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.
         \19\ Press Release 2017-219, ``SEC Emergency Action Halts ICO
    Scam'' (Dec. 4, 2017), available at https://www.sec.gov/news/press-
    release/2017-219.
         \20\ Press 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.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
         \21\ Press Release 2018-8, ``SEC Halts Alleged Initial Coin
    Offering Scam'' (Jan. 30, 2018), available at https://www.sec.gov/news/
    press-release/2018-8.
    ---------------------------------------------------------------------------
        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 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.
    ---------------------------------------------------------------------------
         \22\ See 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.
    ---------------------------------------------------------------------------
    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.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                 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 real-time, 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\
    ---------------------------------------------------------------------------
         \1\ See 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.
         \2\ See 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?abstract_id=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-thiel-says.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-just-a-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.
    ---------------------------------------------------------------------------
        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\
    ---------------------------------------------------------------------------
         \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.
    ---------------------------------------------------------------------------
        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 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\
    ---------------------------------------------------------------------------
         \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.
    ---------------------------------------------------------------------------
        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).
    ---------------------------------------------------------------------------
         \6\ See CFTC, ``Mission and Responsibilities'', http://
    www.cftc.gov/About/MissionResponsibilities/index.htm.
    ---------------------------------------------------------------------------
        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 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).
    ---------------------------------------------------------------------------
         \7\ Testimony 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/
    labcftc_primercurrencies100417.pdf.
    ---------------------------------------------------------------------------
    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.
        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:
    ---------------------------------------------------------------------------
         \13\ On 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.

      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).
    ---------------------------------------------------------------------------
         \14\ Each CME contract represents 5 bitcoin.
         \15\ The price changes day to day.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
         \16\ Prior 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.
    ---------------------------------------------------------------------------
        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 regulations 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\
    ---------------------------------------------------------------------------
         \17\ See 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.'').
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
         \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.

        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.
    ---------------------------------------------------------------------------
         \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.
    ---------------------------------------------------------------------------
        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 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.
    ---------------------------------------------------------------------------
         \21\ The 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.
    ---------------------------------------------------------------------------
    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

        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\
    ---------------------------------------------------------------------------
         \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.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
         \24\ See, 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/.
    ---------------------------------------------------------------------------
        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\
    ---------------------------------------------------------------------------
         \25\ See 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-blockchain-1434140571; see also Pete Harris,
    ``UBS Exploring Smart Bonds on Block Chain'', Block Chain Inside Out,
    June 15, 2015, http://harris-on.typepad.com/block_chain_io/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.
    ---------------------------------------------------------------------------
        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 infrastructure 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\
    ---------------------------------------------------------------------------
         \26\ See, 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).
         \27\ Santander 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.
         \28\ Telis 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-proves-itself-in-
    wall-street-test-1460021421.
         \29\ Based on conversations with R3 CEV, http://r3cev.com/.
    ---------------------------------------------------------------------------
        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\
    ---------------------------------------------------------------------------
         \30\ Emiko Terazono, ``Commodities Trader Louis Dreyfus Turns to
    Blockchainhttps'', Financial Times, Jan. 22, 2018, www.ft.com/content/
    22b2ac1e-fd1a-11e7-a492-2c9be7f3120a.
         \31\ Frisco 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-to-help-trace-families-
    of-refugees-during-and-after-conflicts.
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
         \32\ See supra n. 22.
    ---------------------------------------------------------------------------
    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\
    ---------------------------------------------------------------------------
         \33\ The 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.
    ---------------------------------------------------------------------------
        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.
        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\
    ---------------------------------------------------------------------------
         \34\ See supra n. 5.

        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.

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

            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 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.
    ---------------------------------------------------------------------------
         \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.

    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 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. 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 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 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.

    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.
    ---------------------------------------------------------------------------
         \2\ See testimony appendix
    ---------------------------------------------------------------------------
        Again, we have been clear on this issue. We have applied
    our securities law framework to a number of different ICOs and
    shown 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 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 response 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.
    ---------------------------------------------------------------------------
         \1\ See, 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.
    ---------------------------------------------------------------------------
        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 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.

    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.
    ---------------------------------------------------------------------------
         \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].''
    ---------------------------------------------------------------------------
        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.
    ---------------------------------------------------------------------------
         \3\ Section 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.''
    ---------------------------------------------------------------------------
        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 accelerate 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.
        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.
    ---------------------------------------------------------------------------
         \4\ See 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).
    ---------------------------------------------------------------------------

    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.
    ---------------------------------------------------------------------------
         \5\ See, 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'').
         \6\ See, e.g., Allen at 778 (fn 141).
    ---------------------------------------------------------------------------
                                    ------

            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?

    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 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 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.
    ---------------------------------------------------------------------------
         \1\ SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th
    Cir. 1973).
    ---------------------------------------------------------------------------
        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 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 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 markets 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.
        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
    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-
    and-comment process under the Administrative Procedure Act
    (APA) and require a Commission vote to implement.
                                    ------

            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
    ``self-certification 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 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?

    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.