Securities, Ripple, ICOs, ETFs and enforcement — SEC chairman lays it out at Consensus

Speaking to an audience in the ballroom of the New York Marriot Marquis hotel (and globally via livestream) SEC chairman Jay Clayton fielded questions from North Island founder Glenn Hutchins on the position of digital assets within the securities and commodities framework in the United States.

Bullish on blockchain

Clayton was certainly bullish regards the promise of blockchain technology giving examples of how immutable chains could be applied across a range of sectors like shipping in terms of supply chain management and in the government sector with the example given being replacing paper property records with blockchain solutions. Clayton identified the potential for blockchain solutions to significantly lower the cost of these type of transactions as very beneficial. "My lense is how can we improve what we are doing," he said, "without degrading investor protection?

The ICO landscape – for existing and future ICO projects.

Clayton’s advice for organizations that have conducted ICOs in the past and those planning to do so in the future was an unequivocal "get your act together". Clayton referred to the origins of the Howie test and the evolution of US securities laws and spelt out in simple terms what both founders and investors should recognize as a security. "I as the investor give you my money with an expectation of a return based on your efforts or the efforts of your affiliates… or I get the return because I trade it in the secondary market." In terms of historic ICOs, Clayton pointed to the recent SEC actions brought against Airfox and Paragon as good examples of how not to comply with US regulations. "What is clear from those actions is they were not compliant, they were securities being sold. They were not registered, and they were not exempted." Clayton said observers should not assume that the actions taken against Airfox and Paragon were a template for all future actions. "People should understand that was the remedy in this case but remedies in the future might be different."

For those planning ICOs in the future, Clayton said "If what you are doing is starting a venture and you are funding that venture by issuing tokens, start with the assumption that it is a security." Referencing the utility token argument that many ICOs have thought exempted them from US securities law Clayton said: "let’s be realistic. Look at it from the investor’s perspective. What is in it for them?" Clayton said it should be clear whether people had invested in an enterprise with a mindset that they were investing in something similar to stocks or shares, or because they genuinely wanted to use the token.

Turning to exchanges and the actions against 1Broker and EtherDelta, Clayton said when there was a platform facilitating open public trading of securities done through a matching of buyers and sellers then such an organization "must be registered as an exchange" or if not must register as an exception.

Bitcoin a currency?

Clayton reiterated that it is the SEC’s position that Bitcoin is a currency and not a security. He says Bitcoin was designed as a payment solution "akin to the dollar, the yen and the euro and it operates that way. People who purchase it expect it to operate that way. It is not centrally created or distributed." Asked for his opinion with regards to recent statements from the US Federal Reserve that Bitcoin was not a currency, Clayton said it could not speak for the Fed, but was clear that the SEC was sticking with its view that Bitcoin was a currency. He did point out that people needed to be clear that Bitcoin was different to currencies like the dollar and the yen in that bitcoin "is not sovereign backed" and there was no banking infrastructure (and by extension consumer deposit insurance provided by organizations like the FDIC). "People who use it should understand that it is not the same as a sovereign currency."

Turning to requirements for AML and KYC processes, Clayton pointed out that this was not part of the SEC’s remit — noting that these are the responsibility of banking regulators. He did say, however, that broker-dealers who were registered with the SEC who chose to accept Bitcoin deposits from clients would need to comply the AML and KYC regulations in the same way as if clients deposited cheques or cash in their trading accounts.

Is Ripple a security?

With XRP now the number 2 crypto by market cap, Clayton was asked when the SEC would make a call on its status as a security or a currency. Interestingly, his response was the most cagey of the entire fireside chat – saying only "We are open to people coming to see us, engaging with us and working through it with us."

When will the SEC approve an ETF?

For those hoping for a Bitcoin ETF approval by the end of the year, Clayton did not offer much hope saying that investors had the right to expect that the trading in financial instruments like an ETF "makes sense" and would be "free from risk or manipulation." He said traditional shares and similar financial products were currently trading on exchanges with considerable oversight designed to prevent market manipulation, unfortunately, he said, those safeguards did not exist within the crypto space. Equally, he observed that the custody solutions for cryptographic assets were also not up to scratch, saying: "we have seen thefts around digital assets that make you scratch your head." Asked what path crypto needed to take to address these concerns (self-governing for example) Clayton said he had no particular path in mind but that these issues needed "to be addressed before I would be comfortable."