The details of the reports of the chairmen of SEC and CFTC on the legal status and regulation of cryptocurrency in the US

February 6, 2018 the Chairman of the Commission, US securities and exchange Commission (SEC), Jay Clayton (Jay Clayton) and the Chairman of the US Commission on commodity futures trading (CFTC) George. Christopher Giancarlo (J. Christopher Giancarlo) made a report on «Virtual currency: the Supervisory role of the Commission, US securities and exchange Commission and the US Commission on commodity futures trading» before the U.S. Senate Committee on banking and housing construction sectors and the urban economy. The report was prepared with the aim to draw attention to issues related to cryptocurrency and ICO.

Clayton and Giancarlo think cryptocurrency ICO and related activities cause a number of problems in the financial market. Clayton said that the mission of the SEC is to protect investors and stressed that capital raising by conducting the ICO falls under the «securities Act» of 1933.

Giancarlo, in turn, outlined the jurisdiction of the Commission headed by him and voiced the mission of the CFTC is to create open, transparent, competitive and reasonable financial derivatives markets. According to him, the Commission seeks to protect market users and their funds against fraud and manipulation associated with derivative instruments subject to the «Law on the commodity exchange». These tools allow you to carry the risks of variable costs of production (such as the price of raw materials, energy, currency and interest rates) from those who cannot resist them to those who can. To ensure the integrity of the derivatives markets in the United States, the CFTC regulates the activities of participants.

The rapid growth of the cryptocurrency market and the development of the ICO has already attracted significant capital. However, the ICO procedure is fraught with significant risks such as the provision of false information, high volatility, manipulation and fraud.

Both speakers stressed an optimistic attitude to the development of financial technology, but note that investors deserve full protection under the laws.

About cryptocurrency

Before the SEC and CFTC have been tasked with creating a regulated environment for investors and other participants of the cryptocurrency market. The decision arising from this issue is intended to serve the long term interests of American investors, who largely are not aware of all the existing factors and risks and entitled to the benefits provided to them by state and Federal laws.

Clayton mentioned his December address to the investors, in which he urged them to carefully review information about the ICO and to use all available tools when making decisions about possible investments.

He also stressed that to date the SEC has not registered any ICO or the company that sells commodities, and any existing cryptocurrencies or related asset.

Chairpersons of the Committees were made warning about the output of activities cryptocurrency markets beyond national borders of the United States. This makes it possible cross-border movement of assets without the consent of investors, which hinders the SEC, CFTC and other regulators to suppress the activities of unscrupulous participants. To protect investors, the SEC and CFTC publish alerts, bulletins and statements about the risks of ICO and investing in cryptocurrency.

In addition, there is a risk of losing your investment and sensitive information due to software hacks online shopping platforms and individual wallets. More than 10% of the funds (almost $400 million) received during the ICO, was stolen as a result of hacker attacks. For example, just recently the Japanese market of cryptocurrency has lost more than $500 million as a result of the hacking trade system. Not surprisingly, the Chairman was approved by recent actions of some social media platforms limit users ‘ ability to promote ICO.

Clayton noted that digital currencies are elements of intrinsic value, similar to, for example, gold or cash. Supporters of the cryptocurrency focus on the possibility of transfer of funds without intermediaries and territorial restrictions at low transaction costs. However, critics point out that these benefits are not proven, and other benefits such as anonymity, contribute to illicit trade and fraud.

The growing popularity of digital currencies raises questions whether the existing traditional approach to the regulation of transactions in resulting the cryptocurrency market. According to Clayton, some of the trading platforms, positioning itself as the «exchange» actually aren’t, because investors in this case do not receive the protections provided by law.

A cryptocurrency platform have expressed their desire to be regulated as ordinary services of transfer of money. SEC has control over the operations with securities, but not over the transactions in the currencies or commodities, including foreign currency exchange trading platform. These payment services are not within the jurisdiction of the SEC or the CFTC. But, as stressed by Clayton, never translating services, conventional means do not affect the currency pricing and did not offer any related services. The current regulatory framework for electronic Commerce is not consistent with the type of trade, with which society is now faced. Clayton noted the openness of the Commission to study the question on necessity of strengthening regulation.

The speakers expressed belief that the attempt to apply to bitcoin the simple term «currency» does not deprive it of signs of matching securities. Many products are advertised as investment opportunities, and if bitcoin is a security, its promoters can’t make offers or to sell without compliance with Federal securities laws.

Brokers, dealers and other market participants must ensure that their actions on the cryptocurrency market do not conflict with their obligations to combat money laundering. These market participants should consider fees and other transactions with the cryptocurrency, as well as if the transferred cash.

Cryptocurrency can be identified as the product of securities under the Federal securities laws. There are several problems that must be solved before market participants start investing in cryptocurrency. It is the issues related to liquidity, assessment and storage conditions of the funds ‘ assets, as well as issues issue, redemption and arbitration in the ETF space.

Chairman Clayton reported that last month several major investment players on the SEC started to work for registration, withdrew their registration application. The Director of the SEC division of investment Management, called for active discussion of the conditions and requirements for the registration of investors. Clayton expressed his willingness to continue the dialogue with all stakeholders.

On the regulation of ICO

A significant rise in the value of cryptocurrencies for a short period late last year has led to a proliferation of ICO as an instrument to attract capital. According to estimates by the SEC, the market for ICO in 2017 amounted to $ 4 billion.

According to Clayton, each market participant ICO should ask themselves a key question: whether the coin or token a security? In his opinion, the existing structure of the ICO are directly linked with the Federal securities laws.

25 July 2017, the SEC issued a report of investigation against token-ICO DAO. The Commission came to the conclusion that tokens DAO are securities and are subject to relevant Federal laws. The report also explained that companies using the technology of distributed database, or issues securities based on the technology of the blockchain, are required to register with the SEC the offer and sale of these securities.

Tokens, which emphasize the profit potential, contain the characteristics of securities. They are bought in the calculation of the potential growth of their cost with the option of profiting by resale in the secondary market or to obtain benefits from token based on the efforts of others, which is the key and distinguishing features of securities.

Clayton has warned market participants of advertising the sale of coins without a preliminary determination whether the securities laws to these actions. Excessive promotion token can be an indicator of manipulation and fraud. There was also a warning for those who run cryptocurrency platforms and has an impact on pricing — they probably operate on an unregistered exchange in violation of the law «About the stock market» from 1934.

In the final part of the report of the chairmen of the Commissions briefly announced actions taken by the SEC and the CFTC in regulating the cryptocurrency market and ICO. In September 2017 it created a new cyber unit that focused on crimes related to the technology of distributed databases and ICO, the dissemination of false information via electronic and social media, capture brokerage accounts, as well as hacking for the purpose of receiving confidential information. The cyber division works in collaboration with the group on the technology of distributed database, which was established in November 2013.

About the measures

Clayton reported that the SEC has already implemented a number of coercive measures in relation to the ICO over alleged violations of Federal securities laws:

  • In September 2017, one of the participants of the market were charged with cheating investors in several ICO, allegedly supported by investments in real estate and diamonds. According to the SEC, investors have provided funds in the amount of 300 000 USD. They had been promised significant results, despite the fact that none of the company’s real activities were not conducted.

  • In December 2017 was frozen the assets of one of the companies to prevent fraudulent ICO, which, presumably, had attracted up to $ 15 million from thousands of individual investors, beginning in August 2017. According to available information, the fraud was ruled a repeat offender is a violator of the securities law. Investors promised more than 1300% profit in less than 29 days.

  • In December last year, after the intervention of SEC, one of the companies stopped the ICO for the purposes of the audit products based on the blockchain. During the proceedings it became clear that ICO is the unregistered offer and sale of securities in violation of the Federal securities laws. As a result, the company returned the funds to the investors even before the distribution of tokens.

  • Recently was stopped fraudulent ICO, aimed at retail investors and position themselves as the world’s first decentralized Bank. The SEC managed to freeze some of the illegally obtained assets of cryptocurrency and arrest the recipient.

Clayton also expressed concern that a number of public companies announcing changes to their business models and titles, to focus on the technology of distributed database, without specifying what changes will be made. SEC closely monitors companies that change their business model to benefit from the intended implementation technology of distributed databases, especially in the context of the offering of the securities.


The chairmen of the SEC and the CFTC have expressed solidarity in the approach to the solution of the problems. They proposed to continue the active protection of the new existing markets and recommended enforcement action against those who hold ICO or participates in other activities related to cryptocurrency in violation of the Federal securities laws. The Chairpersons of the Commissions expressed their willingness to continue working closely with Federal and state counterparts, including Federal Treasury, Ministry of Justice, General prosecutors and securities regulators. individual States

At the end of the report, it was suggested that the technology of distributed registries and other new technologies have the potential to improve capital markets and financial services industry. Businesses, particularly small and do not have effective access to traditional capital markets, new financial technologies can help in raising funds to create and Finance their operations, enabling them to be more competitive both within the country and around the world. Also, these technological innovations can provide new opportunities to investors, but their implementation in full measure is possible only when they are conducted in accordance with applicable Federal laws.

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