SEC Chairman Lays Out Rules of the Road for Crypto’s Next Phase

Digital assets are here and they’re likely here to stay, in some form or other.

People and companies with money in one of the world’s most interesting alternative investments seem to also have no small amount of interest in bringing it mainstream. New crypto investment products on a myriad of platforms are bubbling up left and right, but are they ready for primetime?

Volatility in the market and a general lack of understanding among traditional investors and advisors how cryptocurrency and blockchain even works are just a couple of the hurdles in the way of widespread adoption.

CoinDesk’s Consensus: Invest conference in New York on Tuesday was more serious in tone than many crypto gatherings of the past. People in suits talked about satisfying regulators; boning up on compliance; creating a code of conduct; tackling issues of trading, custody and valuation; and meeting institutional needs. They said forget the price movements and look at the infrastructure being built and the big players entering the scene.

A discussion with U.S. Securities and Exchange Commission Chairman Jay Clayton, whose agency has denied multiple bitcoin ETF applications due to risks of fraud and manipulation, drew the largest audience of the day.

Clayton reiterated that he needs to see better market surveillance and custody practices for cryptocurrencies before he can get comfortable with the idea of an ETF for bitcoin. He said his agency has seen some real head-scratchers in terms of thefts around digital assets.

“What investors expect is that the trading in that commodity underlying the ETF is trading that makes sense, is free from the risk, or significant risk, of manipulation,” Clayton said, adding there needs to be “good” custody of underlying assets to ensure the risk is in the value of those assets rather than their theft or disappearance.

In the current environment, he said, investors may be unable to get a fair and reliable assessment of bitcoin’s price.

Clayton told investor Glenn Hutchins, who moderated the discussion, that trades on stock exchanges are subject to rules and under surveillance designed to prevent manipulative techniques, “such as the two of us agreeing to sales at high prices in order to drive the price up so that we can then sell our securities when others jumped in.”

“Those kinds of safeguards do not exist currently in all of the exchange venues where digital currencies trade,” he continued.

Some free advice

On issuing initial coin offerings, Clayton said the chances are it’s subject to SEC regulations.

“We are happy to engage with people in this space,” he said. “If people have questions, they or their lawyers can come to us. But I will say, if what you’re doing is starting a venture, and you’re funding that venture by issuing tokens, you should start with the assumption that you’re conducting a securities offering.”

Clayton suggested looking at it from the investor’s perspective.

“What is in it for the person purchasing the token? Are they doing this in the same way that they would invest in a new company that was issuing stock, or are they doing it as someone who purely wants to use it?”

However, Clayton had said bitcoin is decentralized and designed to be a payment system replacement for sovereign currencies.

“An asset like bitcoin, we’ve determined that doesn’t have the attributes of a security,” Clayton said. “As far as I am concerned, it’s designed to be akin to the dollar, the yen, the euro, and it operates that way. People who purchase it expect it to operate that way.”

He also said if bitcoin is indeed a currency he would expect it to go through know your customer (KYC) and anti-money laundering (AML) screening as would cash.

When the topic of crypto startup Ripple and how the SEC might define its digital asset XRP came up, Clayton was predictably tight-lipped. XRP has come under fire recently for being centralized, as it was pre-mined and is controlled by Ripple.

“We are open to people coming in to see us, engage with us, discuss their particular situation, and work through it with us,” Clayton said in response to Hutchins’s question when the marketplace can expect a determination on what XRP is. “Some of these questions require a lot of information in order to get to a definitive position.”

He said many are “very obvious” examples of securities, however. To illustrate: “I’m selling you my token, I’m going to go off and produce a venture and, hopefully, you’ll get a return for having purchased that token.”

Clayton also said those looking to pitch tokens to potential investors shouldn’t be surprised that the SEC expects consistency between what is being told to agency and what is being conveyed to potential investors.

“If there’s a big gap between what you’re telling us and the way you’re marketing your venture, that’s not a good place to start.”

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