SEC Chair: Calling Something A Crypto-Currency Doesn't Mean We Can't Regulate It

Josh O'Neill

12 December 2017

Labelling a digital asset as a crypto-currency does not necessarily mean issuers will be exempt from regulations, the chairman of Wall Street’s main watchdog has warned.

Although there is a general consensus that crypto-currencies are not securities and that their offer and sale is beyond the scope of the Securities and Exchange Commission, whether this proves correct will depend on an asset’s characteristics and use, Jay Clayton said in a statement yesterday.

“In any event, it is clear that, just as the SEC has a sharp focus on how US dollar, euro and Japanese yen transactions affect our securities markets, we have the same interests and responsibilities with respect to crypto-currencies,” he said. “This extends, for example, to securities firms and other market participants that allow payments to be made in crypto-currencies, set up structures to invest in or hold crypto-currencies, or extend credit to customers to purchase or hold crypto-currencies.”

Clayton’s announcement came a day after trading of the hotly-anticipated bitcoin futures began on an exchange run by Cboe Global Markets, sparking a swift spike in the crypto-currency’s price as the provider’s website experienced outages due to heavy traffic.

Clayton said that in order to answer questions surrounding crypto-currencies’ legality, and whether they should be subject to certain regulations, will require “in-depth analysis”, and “answers will differ depending on many factors”.

Until this is carried out, he has urged what he called “main street investors” - those investing on their own behalf - to be wary of crypto investment opportunities guaranteeing returns that seem “too good to be true”, as they often entail amplified risks because of overseas exposure and lacking regulation.

Such investment opportunities often come in the form of initial coin offerings , which are a meld of crowdfunding and initial public offerings used by crypto start-ups to grow their business. However, unlike an IPO which gives an investor shared ownership in the company being floated, ICOs typically reward investors with a new crypto-currency whose value is directly tied to the business’ performance in exchange for an established crypto-currency, such as bitcoin.

In most markets, ICOs are not currently regulated, and therefore associated fraud risks are inherently higher. However, the SEC earlier this year said that some digital tokens issued through ICOs could be considered securities and, therefore, be subjected to US securities laws.

“I believe that initial coin offerings – whether they represent offerings of securities or not – can be effective ways for entrepreneurs and others to raise funding, including for innovative projects,” Clayton said. “However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require. A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed.”

Bitcoin, the first crypto-currency launched in 2009, has seen its value skyrocket this year from less than $1,000 in January to highs exceeding $17,000 this month.

Ethereum, the second-largest crypto-currency, has also enjoyed strong gains, as its value has soared more than 7,000 per cent since the start of this year.

Litecoin, another rival, since yesterday has climbed nearly 100 per cent to reach an all-time high of nearly $300 per coin.