A hearing Tuesday in the Senate could be a preview of what’s to come.
Leading U.S. financial regulators expressed an uneasiness Tuesday with the rapid rise of bitcoin — and signaled that new regulation of virtual currency could be on the horizon.
For lawmakers on the Senate Banking Committee, their hearing this morning elucidated a fresh sense that federal law may not be fully equipped to deal with a virtual currency that’s now valued at around $ 113 billion — not to mention the potential for theft and fraud and the arrival of so-called initial coin offerings, which are essentially fundraising rounds that rely on digital tokens.
In response, regulators at two key federal agencies — the Securities and Exchange Commission and the Commodity Futures Trading Commission — sought to strike a delicate balance in their testimony to the Senate panel. They acknowledged there are gaps in consumer and investor protections but stressed their interest in sparing a new, innovative market from too much early regulation.
Still, Democrats and Republicans alike continued to return to the same question: Is a new law governing bitcoin buying, selling and enforcement necessary?
“We may be back with our friends from Treasury and the Fed to ask for additional legislation,” said Jay Clayton, the leader of the SEC, referring to the Treasury Department and the Federal Reserve.
To be sure, bitcoin isn’t totally unregulated. By definition, the SEC regulates all securities — including bitcoin in cases where the virtual currency doubles as an investment vehicle, such as a stock. At the CFTC, meanwhile, the agency determined back in 2015 that bitcoin qualifies as a “commodity” that it can monitor under federal law.
But they do face limits in their oversight, which the agencies’ leaders acknowledged Tuesday. Neither entity has oversight when it comes to so-called “spot markets,” for example, or hubs like Coinbase where consumers can buy and sell bitcoin directly. Those largely are regulated by the individual states, and in the eyes of some critics, perhaps not very effectively.
“The spot market for bitcoin is not a regulated marketplace,” said the CFTC’s leader, Chairman J. Christopher Giancarlo. Federal enforcers can pursue “fraud and manipulation,” he said, “but we don’t have the ability to set the standards in those markets.”
For that to change, it would fall to Congress. While lawmakers on Tuesday didn’t offer any specific proposal to regulate bitcoin, many Democrats and Republicans came armed with a litany of concerns or criticisms about cryptocurrency — and the government’s ability to handle it.
Democratic Sens. Sherrod Brown and Jack Reed, for example, expressed doubts the federal regulators have enough technologists on hand to grapple with the rise of bitcoin.
For GOP Sen. Richard Shelby, the fear is “where the bottom is” when it comes to the value of virtual currency, which has whipsawed over the last few months — and lost as much as half its value in just weeks. After trading as high as $ 20,000 last year, it was worth under $ 7,000 as the hearing came to a close.
To Democratic Sen. Mark Warner, the cybersecurity of bitcoin platforms remains a challenge. His comments came on a day that South Korean officials alleged that North Korea is behind a major new theft of bitcoin.
Democratic Sen. Joe Donnelly pressed regulators on what they were doing to help “retail” investors — average Americans who have seized on bitcoin mania. In response, the CFTC’s Giancarlo said his agency and others had sought to arm libraries — where bitcoin is among frequent searches — with information about the industry.
Fellow Democratic Sen. Catherine Cortez Masto raised the recent trend of companies adding “blockchain” to their names to squeeze out more market value. Federal officials shared her complaints.
And many expressed their doubts with initial coin offerings, or ICOs. Democratic Sen. Elizabeth Warren sought to point out that none of the roughly $ 4 billion so far raised through ICOs had registered properly with the SEC, potentially depriving investors of information that might affect their decision making.
In recent weeks, the SEC has taken explicit aim at these ICOs, warning some and penalizing others. “Experience tells us that while some market participants may make fortunes, the risks to all investors are high. Caution is merited,” warned SEC and CFTC leaders in an op-ed in the Wall Street Journal last month.
On Tuesday, the agency’s leader, Clayton, stressed to the Senate: “We’ve made it clear what the law is.”
For now, though, committee leaders signaled they’d be interested in legislation that might address some of these ills. But Sen. Mike Crapo, the panel’s Republican chairman, suggested to the financial regulators who testified that they had to come to him with a proposal first.
“I would ask you to get back to me on recommendations … legislative system and whether we need to provide further clarification from Congress,” he said.
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