SEC chairman Jay Clayton has delivered some negative news for the crypto market during the Consensus Invest summit in New York. While many hopes are (mistakenly) pinned on the approval of the eagerly anticipated bitcoin ETF, Clayton has affirmed that approval is not coming any time soon, unless measures were put in place to limit exchange manipulation –
“The prices retail investors are seeing are the prices they should rely on, and free from manipulation – not free from volatility, but free from manipulation,”
The SEC chairman on bitcoin ETFs and market manipulation
There are a wide number of bitcoin ETF proposals. Despite much hype, there is little chance of these being approved anytime soon given some of Clayton’s recent statements. There are no safeguards in place with regard to the DLT industry compared to the securities market, described by the SEC chairman as “the envy of the world.”
“Those kinds of safeguards do not exist currently in all of the exchange venues where digital currencies trade. . . When you see an asset trade on [the] Nasdaq or NYSE, there’s a great deal of surveillance preventing you and me from teaming up and pretending we’re decentralized. Those sort of safeguards do not exist in a lot of markets where digital currencies trade.”
Speaking at the Consensus Invest summit in New York, Clayton outlined that crypto ETFs would only be supported where there was no risk of theft or disappearance of the underlying. The difference is that gold (or some other commodity) lies in a vault and is more difficult to move as well as frequently audited and accounted for. On this asset, paper derivatives are created.
BTC is more easily lost or stolen, and the damage this causes could be exponentially worse if derivative markets were to be created on the underlying. Additionally, it is common knowledge that manipulation is widespread in the BTC market, which is largely unregulated with no accountability. This position is not entirely unreasonable. The statements come in the middle of a major crackdown on fraudulent ICOs, which have run rampant throughout 2017 and 2018.
On the other hand, it is more likely that if ETFs were approved, then custody solutions and third-party insurance and checks could easily be put in place. Custody solutions are already in the rise, and it cannot be all that difficult to validate BTC holdings in cold storage. Practically all exchanges keep their holdings in cold storage with audits and third-party insurance. Clayton stated that custody issues were still a concern, though it is difficult to see how this is the case. The SEC may have to meet the industry halfway, and cannot continue to keep taking a back seat and prosecuting companies for failing to adhere to vague guidelines.
Assume your ICO is a security
At least with regard to ICOs, the stance of the SEC chairman is clear. Clayton has issued further clarity on the security issue, stating that “You should start with the assumption that you’re starting with a securities offering”. He also indicated that if you can be identified as in control of a project, especially the token supply, then it will be a security. Legal scholars are currently debating this topic. In order for regulation to occur and fines to be enforced, it is necessary for a property to be owned, and digital tokens may not be deemed as a property in many instances. It can also be argued that the property was never “owned” by anybody, a legal position recently put forward by Charlie Shrem. The SEC chairman also further indicated that the level of decentralization plays a role in determining whether a digital token constitutes a security –
“When a store of value becomes truly decentralized [with] not one person or group of people controlling its supply…we’ve said that’s distributed…It does very much have to do with control and ability to direct the enterprise.”
But for practical purposes this means little. Another way of stating Claytons logic is that a project is truly decentralized when there is no one person or group associated with the project. This means, nearly automatically, that when it is impossible for the SEC to instigate proceedings, it will not be deemed a security. The SEC recently fined the EtherDelta decentralized exchange code creator, despite him having very little to do with the running of the platform, executed with open-source code. The takeaway may be that the DLT technicians have to up their game and develop truly decentralized and open source software with no personal ties.
Whatever the scholars and academics may say with regard to the legality of ICO prosecution, the fact of the matter is that most ICOs will be deemed securities in the eyes of the SEC. The Ripple court case is ongoing, and XRP could likely be deemed a security. This is not the case in other jurisdictions such as Germany, where courts have chastened the regulatory authorities for interfering in industries where they had no jurisdiction.
Digital Nomad with an interest in Zen and Blockchain technology.
Law graduate with 3 years experience as a consultant in the capital markets industry and 4 years experience freelancing on UpWork as a Creative Writer.