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

                                                        S. Hrg. 115-176




                               before the

                              COMMITTEE ON
                          UNITED STATES SENATE


                             SECOND SESSION




                            FEBRUARY 6, 2018


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


                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


                      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


                            C O N T E N T S


                       TUESDAY, FEBRUARY 6, 2018


Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    36

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2


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 
  Commission.....................................................     6
    Prepared statement...........................................   101
    Responses to written questions of:
        Senator Brown............................................   156
        Senator Sasse............................................   160
        Senator Schatz...........................................   161




                       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.


    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 
    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 
    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 
    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.


    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 
    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 
    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 
    Following him, we will then hear from the Honorable Chris 
Giancarlo, Chairman of the U.S. Commodity Futures Trading 
    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.

                      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 
    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 
    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 
    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 
    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.


    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 
    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--
    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 
    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, 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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, 
    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 
    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 
    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 
    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 
    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 
    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. 
    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 
    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 
    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 
    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, 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.
    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 
    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.
    Senator Kennedy. So I am not going to do that today.
    Senator Brown. Like I have the power to do that.
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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:]
    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 
    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 
    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.
           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 
    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/
     \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/
    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-
     \7\ See Reuters, ``Japan Raps Coincheck, Orders Broader Checks 
After $530 Million Cryptocurrency Theft'', Jan. 28, 2018, available at 
    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 
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 
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/
     \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-
    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 
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 
    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:/
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 
     \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 
    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/
    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 
    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.
    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/
    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-
     \20\ Press Release 2017-227, ``Company Halts ICO After SEC Raises 
Registration Concerns'' (Dec. 11, 2017), available at https://
    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/
    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-
    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 


          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. 
     \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://
    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 
     \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:/
    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://
    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 
    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 
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), 
     \9\ In re TeraExchange LLC, Dkt. No. 15-33 (CFTC Sept. 24, 2015), 
     \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/
     \11\ CFTC, Retail Commodity Transactions Involving Virtual 
Currency, 82 FR 60335 (Dec. 20, 2017), www.gpo.gov/fdsys/pkg/FR-2017-
     \12\ CFTC, A CFTC Primer on Virtual Currencies (Oct. 17, 2017), 
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/

  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 
     \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://
    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 
    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 

    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/
     \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-
    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://
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-
    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), 
     \28\ Telis Demos, ``Bitcoin's Blockchain Technology Proves Itself 
in Wall Street Test'', Apr. 7, 2016, Wall Street Journal, http://
     \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/
     \31\ Frisco d'Anconia, ``IOTA Blockchain To Help Trace Families of 
Refugees During and After Conflicts'', Cointelegraph.com, Aug. 8, 2017, 
    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.
    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 
    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 
    Thank you for inviting me to participate.
                        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 
    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 
    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 
[email protected] 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 
    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, 
[email protected], 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. 
    Did you consider any other individuals for Mr. Garrett's 
role? If so, what were these other individuals' backgrounds and 

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.

                        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 

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 
    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 [email protected] 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 [email protected] 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 

    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 

                        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 
    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-
    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

    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).


    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).

                        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 
    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 
    Does Howey apply to cryptocurrencies?
    More specifically, is the ``efforts of others'' requirement 
    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 

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 
    What role should States play in regulating 

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 
    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.


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 

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/
    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.


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 
    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 

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 

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.


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 

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 

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 
    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.