Food for thought: Regulators and central bankers weigh in on virtual currency

On Sundays, I post about interesting content I came across during the previous week. Today’s rundown includes commentary on the future of virtual currency from two major US regulators and the general manager of the Bank for International Settlements.

Senate hearing on the oversight role of the SEC and CFTC

On Tuesday, the Senate Committee on Banking, Housing, and Urban Affairs held an open hearing with testimony from the Chairman of the US Securities and Exchange Commission (SEC), Jay Clayton, and the Chairman of the US Commodity Futures Trading Commission (CFTC), Christopher Giancarlo.

Prepared remarks and other background materials are available on the committee’s website, and provide a trove of information for anyone interested in the inner workings of initial coin offerings (ICOs) and the virtual currency market.

Chairman Giancarlo opened with a statement about the relative size of the virtual currency asset class. As of the morning of February 5th, he noted:

  • The total value of all outstanding Bitcoin is about $130 billion (based on a price of $7,700).
  • The Bitcoin “market cap” is less than the market cap of a single large cap company, such as McDonald’s (~$130 billion).
  • The total value of all outstanding virtual currencies is about $365 billion.
  • If we’re going to compare virtual currencies to gold as an investment vehicle, we must recognize that the total value of all the gold in the world is approximately $8 trillion.

“Clearly,” continued Chairman Giancarlo, “The column inches of press attention to virtual currency far surpass its size and magnitude in today’s global economy. Yet, despite being a relatively small asset class, virtual currency presents novel challenges for regulators.”

Here’s one highlight from SEC Chairman Jay Clayton—something that might be keeping him up at night:

I also have been increasingly concerned with recent instances of public companies, with no meaningful track record in pursuing distributed ledger or blockchain technology, changing their business models and names to reflect a focus on distributed ledger technology without adequate disclosure to investors about their business model changes and the risks involved. A number of these instances raise serious investor protection concerns about the adequacy of disclosure especially where an offer and sale of securities is involved. The SEC is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with the federal securities laws, particularly in the context of a securities offering.

Long Blockchain Corp (f.k.a. Long Island Ice Tea Corp) and Riot Blockchain Inc (f.k.a. Bioptix Inc) might want to take note!

Unregistered ICOs violate securities laws

The hearing ended with Senator Elizabeth Warren asking how many of the companies who raised more than $4 billion in 2017 ICOs registered their offering with the SEC. The answer: Not one. And there are zero registrations on file for upcoming ICOs.

Chairman Clayton said, “We want people to raise capital, but we want them to do it right. ICOs take the ‘disclosure light’ 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.” Senator Warren and Chairman Clayton agreed that raising money in this manner is indeed a violation of law.

Agustín Carstens makes headlines, calling bitcoin a “Ponzi scheme”

Later in the week, we heard from Agustín Carstens, General Manager for the Bank of International Settlements (and former Governor of the Bank of Mexico). His remarks were focused on the role of central banks in the era of digital money.

He certainly didn’t mince words, and the media gobbled up his “savage” comments about bitcoin. His full lecture is also worth reading: He provides a broad perspective on the fundamental nature of money and its relationship to central banks. Here’s one bit to consider:

At the end of the day, money is an indispensable social convention backed by an accountable institution within the State that enjoys public trust. Many things have served as money, but experience suggests that something widely accepted, reliably provided and stable in its command over goods and services works best. Experience has also shown that to be credible, money requires institutional backup, which is best provided by a central bank. While central banks’ actions and services will evolve with technological developments, the rise of cryptocurrencies only highlights the important role central banks have played, and continue to play, as stewards of public trust.

As an asset class, virtual currency might be small, and you may choose to never invest—but we can’t ignore the conversations it ignites about the role of regulators, the meaning of money and the transformative potential of distributed ledger technology.