WASHINGTON — Market regulators acknowledged to Senate lawmakers on Tuesday that they are falling behind the curve when it comes to virtual currency regulation and may need Congress to help them catch up.
Testifying before the Senate Banking Committee, the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission said the two agencies are not ignoring the fast-growing cryptocurrency sector and they have some oversight powers. But they indicated that they might need more.
Treasury Secretary Steven Mnuchin has led an interagency working group of financial regulators that is looking at virtual currencies, but it is not clear whether the group has enough regulatory authority to handle issues within the sector.
“Do you need additional legislation in this area?” Sen. Richard Shelby, R-Ala., asked SEC Chairman Jay Clayton.
Clayton responded that regulators might opt to request greater powers.
“We may be back with our friends from Treasury and the [Federal Reserve] and ask for additional legislation," said Clayton, who added that regulators need to gather more information.
“We should all come together, the federal banking regulators, CFTC, the SEC — there are states involved as well — and have a coordinated plan for dealing with virtual currency trading markets,” said Clayton.
In his prepared remarks, CFTC Chairman Christopher Giancarlo said a relatively hands-off approach is worth considering for distributed ledger technologies, but he noted that a tougher approach might be worthwhile for virtual currencies.
“'Do no harm' was unquestionably the right approach to development of the internet. Similarly, I believe that 'do no harm' is the right overarching approach for distributed ledger technology," Giancarlo said. "Virtual currencies, however, likely require more attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space."
Yet he said the perception that virtual currency is completely unregulated is unfounded.
“Unfortunately … there was this perception that bitcoin was off the regulatory grid and one of the things that Chairman Clayton and I have been working so hard to do is to diffuse that notion that we are limited in our regulatory authority," Giancarlo said, adding, "When it comes to enforcement, when it comes to [initial coin offerings], we are using our full authority to drive the message” that there is regulation.
He noted that U.S. market regulators are having discussions with Japan's financial services regulator and that Clayton spoke about the issue to the Financial Stability Board.
“The message is getting through that this is not off the grid and I think you are seeing that in the bitcoin price,” said Giancarlo, pointing to a recent sell-off in which the value of bitcoin fell by half in recent months. “I think that is an important step.”
Sen. Mark Warner, D-Va., however, was skeptical about Giancarlo's argument that there can be two different regulatory approaches for virtual currencies and their underlying technologies.
"I don't think you can separate the underlying distributed ledger ... from some of these crypto assets," he said.
Clayton focused his comments on ICOs, which are treated as securities by the SEC. Clayton said there has been a crackdown on fraudsters preying on consumers caught up in the virtual currency hype and said that will continue to be an area of focus.
“I am very unhappy that people are conducting ICOs like public offerings of stock when they know they should be following private placement rules,” said Clayton.
Sen. Elizabeth Warren, D-Mass., also raised concerns about ICOs later in the hearing, noting that $4 billion has been raised in 2017 through ICOs.
Clayton said none of the 2017 ICOs registered with the SEC and there are none in the pipeline.
During an earlier question, he also said the public might have a perception problem when it comes to virtual currency.
“On Main Street, investors look at these virtual currency platforms and assume they are regulated the same way a stock exchange is regulated and I said that is far from true,” said Clayton.
Warner also asked whether virtual currencies pose a systemic risk and should be evaluated by the Financial Stability Oversight Council.
“I think this rises to a potentially systemic event,” said Warner, who noted that if cryptocurrency prices continue to rise at the same velocity as the last couple years it could reach a market value of $20 trillion by 2020.
“I think we may be on top of something that is transformational,” said Warner, while comparing it to wireless technology, an industry that helped Warner amass his wealth before his political career.
Clayton said he has not determined whether bitcoin's price fluctuation presents a systemic issue yet, but the virtual currency's volatility has been discussed with the FSOC.
Shelby expressed skepticism about cryptocurrencies generally.
“This currency, these cryptocurrencies, they have — they lack intrinsic value, it seems to me,” said Shelby. “They lack liquidity. Sure, people have probably made a lot of money going up, and lot of them made money and lost money going down, but I don't know where the bottom is, if the bottom was ever reached, as opposed to a sovereign-issued currency.”
In a separate hearing Tuesday before House lawmakers, Mnuchin said the FSOC group working on cryptocurrency issues is focused on two areas.
"One, we want to make sure that [virtual currency] ... exchanges can’t be used for moving money to bad people," he said.
The other area is consumer protection. "We’ve done a lot of work with the regulators to make sure that where there is concern, consumer protection is appropriate," he said.