SEC Chairman Jay Clayton. (Photo: Diego Radzinschi/NLJ)

The heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission told lawmakers Tuesday that while the regulators do not have direct oversight of the U.S.-based cryptocurrency trading platforms that have elected to be regulated as money-transmission services, legislation may be needed to expand their authority.

SEC Chairman Jay Clayton told senators during a Senate Banking Committee hearing to explore the SEC and CFTC’s oversight of the cryptocurrency market that he and CFTC Chairman Christopher Giancarlo — as they’ve stated previously — “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.”

Senate Banking Committee Chairman Mike Crapo, R-Idaho, asked Clayton and Giancarlo whether the agencies have “sufficient” regulatory authority over the cryptocurrency market, or if “Congress should address revising and refining our financial law so that one agency or a group have complete jurisdiction?”

Clayton responded that all of the regulators should come together — the Federal Reserve, state regulators, bank regulators and Treasury’s Financial Crimes Enforcement Network, as well as the SEC and CFTC — to devise a “coordinated plan for dealing with virtual currency platforms,” adding that an “additional legislative” remedy may be needed.

Added Giancarlo: “There’s a lot of noise around cryptocurrencies, and regulators must help set the record straight. We’ve never conducted this much outreach for any other financial product.”

During his opening remarks, Crapo noted that “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 billion.”

Clayton reiterated 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.”

He added that “from what I’ve seen, ICOs are securities offerings.”

Sen. Elizabeth Warren, D-Mass., probed Clayton on why ICOs have not registered with the agency, asking “how do we make them safer?”

In 2017, Warren said, “companies raised more than $4 billion in ICOs. How many of those ICOs registered with the SEC?”

Clayton responded: “Not one.”

Warren probed further: “As of today, how many companies have registered for upcoming ICOs?”

Clayton responded: “Not one.”

Why? Warren asked.

“I don’t think the gatekeepers that we rely on to assist us to ensure our securities laws are followed have done their job,” Clayton said. “We’ve made it clear what the law is. As I’ve 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.”

What ICOs do, Clayton continued, “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 and just some other way to raise money. Well, I disagree.”

Said Warren: “So it is new, but it’s not OK, and it’s not another way to raise money?’

“Correct,” Clayton said.

As to allowing ETFs and other retail investor-oriented funds to invest in cryptocurrencies, Clayton told the senators that a number of issues must be “examined and resolved” before the SEC will permit them.

These include “issues around liquidity, valuation and custody of the funds’ holdings, as well as creation, redemption and arbitrage in the ETF space.”

Dalia Blass, director of the SEC’s Division of Investment Management, issued a staff letter on Jan. 19 halting approvals of Bitcoin ETFs until a list of questions are answered as they relate to cryptocurrency funds.

Both Clayton and Giancarlo also said that their agencies need more resources to devote to technology and keeping up with cryptocurrency oversight.

The SEC “formed a crypto working group, a cyber group; they’ve done an exceptional job getting up to speed on this” cryptocurrency space, Clayton said. “In an emerging area like this, could you use more horsepower? Of course.”

Personnel, Clayton said, “is my biggest challenge at the moment. We have a hiring freeze, and people retiring or taking other jobs. It reduces the size of the workforce. I could use more people in enforcement and trading and markets.”

In 2017, Giancarlo added, the CFTC made moves to “get ahead” by hiring a chief innovation officer, creating LabCFTC — “the focal point of CFTC fintech policy consideration and development,” and formed a crypto task force. “We do need more resources.”

— Check out Shining a Light on Bitcoin on ThinkAdvisor.