CFTC doesn't want to do crypto any harm

The heads of the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are holding a hearing before the Senate Banking Committee on Tuesday, February 6, at 10:00 am EST (15:00 GMT). Amid the intensified regulatory crackdown in Asian countries, this testimony is regarded as one of the key events for the crypto community. Traders and investors in digital assets are trying to guess, whether the American authorities will take a hardline approach and send the prices down to the abyss.

In prepared remarks, SEC Chairman Jay Clayton advised investors to be cautions with cryptocurrencies and gave an overview of the commission's efforts so far, while CFTC Chairman Christopher Giancarlo proposed measured approach. 

Below are the key quotes from the written testimony of J. Christopher Giancarlo before the Senate Banking Committee

There is clearly no shortage of opinions on virtual currencies such as Bitcoin. In fact, virtual currencies may be all things to all people: for some, potential riches, the next big thing, a
technological revolution, and an exorable value proposition; for others, a fraud, a new form of temptation and allure, and a way to separate the unsuspecting from their money.

CFTC regulatory effort

In 2015, the CFTC determined that virtual currencies, such as Bitcoin, met the definition of "commodity" under the CEA. Nevertheless, the CFTC does NOT have regulatory jurisdiction
under the CEA over markets or platforms conducting cash or “spot” transactions in virtual currencies or other commodities or over participants on such platforms. 

Over the past few weeks, the CFTC filed a series of civil enforcement actions against perpetrators of fraud, market manipulation and disruptive trading involving virtual currency. These recent enforcement actions confirm that the CFTC, working closely with the SEC and other fellow financial enforcement agencies, will aggressively prosecute bad actors that engage in fraud and manipulation regarding virtual currencies.

Answering to the Bitcoin futures critisism

After the launch of Bitcoin futures, some criticism was directed at the self-certification process from a few market participants. Some questioned why the Commission did not hold public hearings prior to launch. However, it is the function of the futures exchanges and futures clearinghouses - and not CFTC staff - to solicit and address stakeholder concerns in new product self-certifications. The CFTC staff’s focus was on how the futures contracts and cash settlement indices are designed to bar manipulation and the appropriate level of contract margining to meet CEA and Commission regulations.

Regulatory approach 

The CFTC has sufficient authority under the CEA to protect investors in virtual currency derivatives over which the CFTC has regulatory jurisdiction under the CEA. As noted above, the CFTC does NOT have regulatory jurisdiction over markets or platforms conducting cash or “spot” transactions in virtual currencies or over participants on those platforms. 

DLT potential benefits

I have spoken publicly about the potential benefits of the technology underlying Bitcoin, namely Blockchain or distributed ledger technology (DLT).

Distributed ledgers – in various open system or private network applications – have the potential to enhance economic efficiency, mitigate centralized systemic risk, defend against fraudulent activity and improve data quality and governance.

When tied to virtual currencies, this technology aims to serve as a new store of value, facilitate secure payments, enable asset transfers, and power new applications. 

Comparing crypto to internet

Two decades ago, as the Internet was entering a phase of rapid growth and expansion … and governments and regulators were to act in a thoughtful manner not to harm the Internet’s continuing evolution.

This simple approach is well-recognized as the enlightened regulatory underpinning of the Internet that brought about such profound changes to human society. “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. Virtual currencies, however, likely require more attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space. 

Conclusion

We are entering a new digital era in global financial markets. As we saw with the development of the Internet, we cannot put the technology genie back in the bottle. Virtual currencies mark a paradigm shift in how we think about payments, traditional financial processes, and engaging in economic activity. Ignoring these developments will not make them go away, nor is it a responsible regulatory response. The evolution of these assets, their volatility, and the interest they attract from a rising global millennial population demand serious examination.