SEC Chair Jay Clayton: No Need to Adjust Securities Laws to Suit Cryptocurrencies

The Chairperson of the SEC, Jay Clayton, spoke about the regulation of cryptocurrencies Thursday evening with reporter and author Andrew Ross Sorkin at a “Times Talk” hosted by The New York Times.

Sorkin began by stating that Clayton may have “the swing vote” regarding the future of this technology.

But Clayton disagreed. “Our job (at the Securities Exchange Commission) is not to vote,” he said. “It is to provide a level playing field and…(ensure) disclosure…We want to be fair arbiters of the market…”

Clayton said that when he was sworn in as Chairperson in March 2017, he was not asked a single question about blockchain or cryptocurrencies, and has essentially been cramming in the car since while his wife drives him around with his giant pile of documents.

Sorkin asked Clayton’s views on comments like Warren Buffet’s, who likened bitcoin to “rat poison squared.”

“My view is that our rules have stood the test of time,” he said. “I’m not going to change (investor protection) rules just to fit a technology.”

Clayton called the men and women who crafted current American securities laws, alluding to the Howey Test, “geniuses”:

“What’s a security?…The folks who came out of the (1939) crash and crafted the rules, those men and women were geniuses…If you offer a token (etc.)…and you are expecting a return for it, that’s a security…and its ripe for fraud…We’ve created a 20 trillion economy based on those rules.”

He repeated sentiment he has expressed previously that Bitcoin does not look like a security because it is, “…so disaggregated…that it looks like a currency.”

To Clayton (and not necessarily the SEC), Bitcoin resembles a security more than a commodity because unlike cocoa, gold, etc., it has no industrial use.

When asked if he, like Christine Lagarde, thinks a nationally-issued cryptocurrency is possible, Clayton said, “I think we’ll see,” adding that staying mum is an important part of his job:

“We all at the commission try not to comment on things that could move markets…I won’t comment on a particualar company or…stock. It’s just not appropriate for me to do so…I just don’t know where it goes…I want try to be fair and clear…(where) we’re not picking winners and losers but we are protecting investors…”

Many times, Clayton reiterated that the SEC’s function is one of investor protection:

“The markets have a lot of sophisticated players and complexities…but in the long term we are running these markets for the retail investor…it is their money that fuels this…”

But in the question period he also said this means not depriving investors of access to innovative companies:

“I worry that investors don’t get exposure to companies until they are very mature…You should just know that that’s on my mind as well.”

Clayton kept the door open as to whether or not other blockchain systems (Ethereum comes to mind but was not mentioned) will eventually be classed as securities:

“What is the permanent use case for anything? That’s how you look at an investment.”

He acknowledged that blockchain-style tech, “…adds efficiencies to the trust issues (in the issuing of securities)…this tech has great promise in that regard…”

…but wasn’t awed by claims that creating a supposedly “decentralized” network for tokens with the features of a security renders them non-securities:

“I expect that over time that distributed ledger technology will become part of the market ecosystem. What I’m not willing to say is, ‘You know what? If you wanna raise money in a public offering, you used to have give people financial statements. You used to have to take responsibility for disclosure, but this technology is so good, we’re gonna get rid of that protection.’ I’m just not going there.”

He also questioned whether a network governed by smart contracts could entirely automate responsibility, as is often envisioned in crypto circles:

“…Our securities laws do produce responsibility…underwriters and accountants (etc. are held responsible)…We almost take it for granted…(But) if you are gonna distribute an ecosystem and say no-one has responsibility…well hey, nothing better go wrong.”

Clayton said there are plenty of securities laws that already apply to crypto, and “many more laws apply” including anti-money laundering laws, but new laws could be created if ICOs were somehow falling through cracks.

Clayton said the various agencies are very cooperative and willing to work together to harmonize their approach, and that he’s totally comfortable calling up the CFTC and others.

Sorkin pressed Clayton on how difficult it has become to do an IPO in the US.

He repeated a quote from James Freeman, founder of Blue Bottle Coffee, who sold his company to Nestle because he didn’t want to go through an IPO and said:

“An IPO seems like a way of living in hell without dying.”

Clayton said he is aware of the problem and of the diminishing number of public companies in the US:

“(Freeman’s) not the only on who feels that way…and the numbers don’t lie. We’ve gone from…8400 publicly traded companies to just over 4000. The size of companies entering the markets is much larger…(There are) multiple contributing factors to this…(that) need to look at…”

He also said, “You probably shouldn’t regulate (small companies) the way you regulate top companies…”

He said that public companies lose advantage when management has to spend too much time on compliance rather than growing the company.

He said he is working on how to “streamline and reduce” the regulatory burden while maintaining investor protections, but also insisted:

“Our securities laws have been so effective that they have grown this economy.”

He then commented on President Trump’s tweeted suggestion that companies should only be required to do semiannual reports, not quarterly. “Markets thirst for those quarterly reports,” he said, which are already backward-looking.

Regarding ICOs, Clayton said, “Many of these ICOs were non-compliant with our securities laws.”

He made clear two ways to do a compliant security:

  1. a private placement
  2. an IPO (obliged to register and do disclosure)

He said the SEC enforcement division has strong prosecutors with, “general direction from me”:

  1. “We need strong deterrents
  2. “I wanna get investors who’ve been wronged their money back
  3. “I want bad actors out of the market.”

“It’s a privilege to work in this industry. If you work in this industry, you make a lot of money. And if you are a bad actor you shouldn’t be there…On those measures I’m extremely satisfied with the prosecutors.”

He also noted that despite strict conditions in the US, “Money returned to investors in ’17 in ’18- the highest years…Now, some of that is the work of my predecessors’ [because] it takes a while and let me give them credit. But that’s a very important metric.”

During the question period, he repeatedly invited entrepreneurs to chat directly with the SEC regarding their compliance questions.

An audience member suggested that tokens move governance to favour stakeholders over shareholders, but Clayton disagreed that tokens are the only way to change that balance:

“There are closely-held companies that much different suites of rights among their shareholders than your typical public corporation…I’m not going guess where this comes out with regards to the age-old principle-agent problem.”

Clayton told Sorkin that exchanges too, must follow relevant laws:

“If you are exchanging securities, you have to register with us or have an exemption. And we recently brought actions to say, ‘You can’t just act like a securities exchange, and not follow our rules.’…”

He said that expectations when trading at offshore exchanges should be that, “..the safeguards are not of the same calibre”:

“I was a patriot before I started this job. I’m even more of a patriot now. Let me throw a stat out. We have 4.4% of the world’s population. We have 52 of the top 100 companies. The standards we set…essentially become adopted by other places. I feel a responsibility to keep that going…”

US rules are used to create standards across the world, he said, and give investors confidence and stability:

“The value of a US compliant offering…private or public…it still has tremendous value…there are a lot of people who do a lot of things to get that good-housekeeping seal of approval.”

Clayton said approving a Bitcoin ETF is a matter of being able to verify pricing, sound custody and being able to enforce:

“(With) an ETF…you’re generally creating a…product for retail investors…They expect good accounting, they expect good custody…and they expect that the price…is a good price…and it’s been set in a way they can be comfortable with.”

He acknowledged that manipulation is a factor:

“Is…the risk of manipulation sufficiently low? It’s not necessarily jurisdictional. It’s how comfortable can we get that the rule set to that trading is enforceable and its good. You know rules are great. You can have the prettiest rules in the world. But you’ve gotta be able to enforce them.”

The final question was from a woman working for a boutique accounting firm that was asked to do accounting for ‘Singularity TV,’ a company billing itself as ‘on the blockchain.’

“What does that mean for us?” she asked.

Sorkin laughed off the question and Clayton said he’d have to ask his wife to drive him around the block again so he can read up on it.

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