“Hello and not Goodbye” to Regulation of Cryptocurrencies

US House Financial Services Subcommittee holds first formal hearing on cryptocurrencies.

by Marin Marinov
15 March • 5 min
In Regulation

US Congress should make legislation to clarify regulatory responsibility for virtual currencies, Bill Huizenga, chairman of US House Financial Services Subcommittee on Capital Markets, Securities and Investment, said on Wednesday. The subcommittee organized the first official public hearing about cryptocurrencies on Wednesday in Capital Hill, with the conclusion of the chairman that this is “hello and not goodbye” to regulation.
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Capitol Hill, home of the US Congress/Image`s source: govtrack.us

Huizenga insisted introduction of new legislation should be done after there is consensus and more clarity. But he warned: "We know that this [cryptocurrency market] has moved very quickly…This panel, this Congress is not going to sit by idly with a lack of protection for investors."

Securities or commodities 

One of the main topics of the discussion was whether digital coins should be classified as commodities or securities. This distinction should make it clear which authority will regulate them. The US Commodity Futures Trading Commission (CFTC) is responsible for futures and options markets, while the Securities and Exchange Commission (SEC) enforces securities laws regarding stock exchanges.

In 2015, the CFTC recognized Bitcoin (BTC) as a commodity, and presently three other cryptocurrency are also regarded as commodities – Ethereum (ETH), Litecoin (LTC) and Bitcoin Cash (BCH). This was recently confirmed by a court ruling. In a July 2017 SEC report, ETH was referred as a virtual currency but DAO tokens, built on the Ethereum Blockchain, were classified as securities. In a statement following the release of the report, SEC concluded that “offers and sales of digital assets” by “virtual organizations are subject to the requirements of the federal securities law.”

ICOs and regulation

Speaking at the hearing, Mike Lempres, Chief Legal and Risk Officer at the largest US crypto exchange, Coinbase, said there are a lot of confusions regarding initial coin offerings (ICOs), distinction between cryptocurrencies and ICO tokens and how investors should be more protected.

Peter Van Valkenburgh, Director of Research at CoinCenter, noted that “there is a fundamental distinction that must be made between scarce tokens that exist on a blockchain and are used for payment or to obtain computing services and, on the other hand, promises of future tokens representing the hopefully profitable efforts of a developer.”

Lempres added in his testimony: “There is so much uncertainty about the definition of a security and the scope of regulatory control that the market is being chilled. This is bad for everyone because the technology won't stop - it will simply move overseas and we will miss out on the opportunity to cultivate the benefits in the U.S.”

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The House Subcommittee hearing`s announcement/Image`s source: house.gov

ICOs and IPOs

Another main discussion was about difference between ICOs and initial public offerings (IPOs). Chairman Huizenga pointed at the rapidly growing market of ICOs, which fetched USD 6.6 billion in 2017 and USD 1.6 billion since the start of 2018. He doubted SEC and CFTC assurances that their structures are adequate to cope with the new issues that virtual currencies and ICOs put on the table.

Dr. Chris Bummer, Professor of Law at Georgetown University gave his definition of ICOs in his written testimony: “ICOs tend to serve a different purpose from most traditional IPOs. Instead of funding industrial companies transitioning into a more mature cycle of development, ICOs involve products developed by startups identifying technology-based problems (like limited or volatile cloud storage needs) and proposing the sale or financing of technology-based “solutions” (like a peer-to-peer platform for buying and selling cloud storage space). In return for financing, promoters offer coins with varying currency, utility or securities features.”

Risks

“Cryptocurrencies are a crock,” said leading democrat Rep. Brad Sherman. “They allow a few dozen men in my district to sit in their pajamas all day and tell their wives they're going to be millionaires.”

He argued that digital currencies have the ability to easily help terrorists, criminals, tax evaders and start-up companies that want to commit fraud.

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Bill Huizenga, chairman of US House Financial Services Subcommittee on Capital Markets, Securities and Investment/Image`s source: house.gov

Chairmen Huizenga cited a report of the Massachusetts Institute of Technology (MIT) that USD 270 million to USD 317 of the money raised by current coin offerings has “likely gone to fraud or scams”.

Legislation

Lawmakers from both parties agreed on the need of proper legislation. Committee member Rep. Carolyn Maloney said that she is working on a draft bill that "would regulate virtual currencies but not the technology”, with the goal of protecting investors.

Bummer stressed on the disclosure problem because it has always been the Bedrock of US security laws:

“Evidence of fraud is rife in many ICOs, necessitating welcome responses by regulators, but an awareness of the need for better policing of these markets is not in itself sufficiently instructive as to what one would like to see affirmatively disclosed in ICOs, whatever the overlying regulatory architecture. And this is a critical issue for this subcommittee, and the greater regulatory community.”