Transcripts For CSPAN3 Virtual Currencies 20180209

Committee met to discuss Virtual Currency, the Commodity Futures Trading Commission discussed the oversight and regulatory actions thus far. This is just under two hours. The committee will come to order. This morning we will receive testimony from sec chairman jay clayton, and cftc chairman Chris Giancarlo on the current world of the oversight conducted by their two agencies. Welcome, gentlemen. Virtual currencies are meant to act as a type of money that can be traded on online exchanges for conventional currencies such as dollars. We are used to purchased goods or services predominantly online. Additionally, developers and businesses and individuals are selling virtual coins or tokens through initial coin offerings also known as icos to raise capital. Over the last year, Many Americans have become increasingly interested in Virtual Currencies especially givenet meteoric rise in valuation and recent fall of bitcoin. Just for perspective in january 2 of last year, bitcoin broke the 1,000 barrier and then peaked in december 2017 at almost 20,000 and as of this morning is trading at roughly 6, 900. Today the market capitalization of bitcoin is roughly 115 billion. This is an incredible rise given that in 2013 when this committee had subCommittee Hearings on the topic, the total value of bitcoin in circulation was approximately 5 billion. As Virtual Currencies have become more widespread financial regulators and heads of Financial Institutions have noticed and voiced their opinions. Regulators and heads of industry have tried to educate investors so they make informed decisions and ensure that the markets they oversee and participate in are working appropriately. For its part the sec has put forth many statements and guide posts to help the markets and investors. Namely, the sec has issued investor bulletins on initial coin offerings, issued an investigative report on what characteristics make an ico security offering and issued several statements by chairman clayton on the issue and brought Enforcement Actions against fraudsters and issued joint statements with the cftc about the Virtual Currencyrelated products. The cftc is informing markets by launching a website to educate investors, bringing Enforcement Actions against individuals involved in cryptocurrencyrelated scams and issuing several statements by giancarlo and others and other commissioners on the issue and scheduling hearings on the topic. Much of the recent news about Virtual Currencies has been negative. Between the Enforcement Actions brought by your agencies, the hack of the International Coin Check Exchange and the concerns raised by various regulators and Market Participants theres no shortage of examples that increase investor concerns. It is also important to note that the Technology Innovation and ideas underlying these markets presents significant, positive potential. These aspects underpinning Virtual Currencies have the ability to inform for the composition of and the ability to access the financial landscape, thus changing and modernizing Capital Formation and transfer of risk. Technology is forward looking and we look to our regulators to continue carrying out their mandates including Investor Protection as markets evolve. I look forward to hearing more and learning more about Virtual Currency oversight from our two Witnesses Today, including what their agencies are doing to ensure appropriate disclosures and ofsafeguards for investors. Senator brown . Thank you, chairman crepo and welcome. Good to have you both here. Virtual currencies and bitcoin specifically have captured the attention of investors and speculators and computer programmers and regulators all over the world. I dont know how many people imagined how quickly and broadly bitcoin and the technology has spread. Nothing short to most of us its remarkable and critical for regulators to understand innovation and technology so the marks can grow and evolve while investors and consumers are protected, understanding the risks of emerging technologies is no easy task, but were relying on you to maintain the integrity of these new markets and minimizes risks to americans who want to participate in them. The volatility of bitcoin has been also remarkable, defying attempts to think of it as a traditional currency. Bitcoins 1,000 rise last year and 60 decline last month makes the dow jones record point drop look almost like a rounding error, but that growth has shown us the ingenuity and too often, greed, sometimes it appears scam artists and hackers may understand more about the technology than most Market Participants. That should concern all of us. I hope our Witnesses Today help us understand the evolution of the markets related to Virtual Currencies, and raise awareness of the threats involved and identify the regulatory gaps. Each of you has made several public statements recently explaining the threats to Investor Protection and the potential for abuses in Virtual Currency markets. I understand neither the sec nor the cftc has sufficient authority to police all aspects of Virtual Currencies, but you must make the most of the authority that you have. As you noted in the wall street journal, bitcoin mania has analogies to the dotcom bubble of the 90s. I hope there are areas that you do to protect investors. Virtual currency may be to fund Illicit Activity outside of the united states. I know the Regulatory Framework and many other countries is still in development. I am pleased that the u. S. And in particular has been a leader, but we can do more. I hope the chairman agrees that the committee has to look closely at the gaps and to regulate the area to get ahead of the curve. As we demand the demands posed by the currency, i call you both to not to forget your day jobs, not to forget your day jobs to pursue and punish misconduct to more traditional misconduct, but very serious misconduct wherever it might appear. That means main street and i confirm its business as usual by the big banks. The cftc imposed penalties for market manipulation, good, but then decided those firms deserve waivers from bad actor provisions under the Securities Law. That might make sense if this were an isolated incident, but the banks in question in Something Like 68 violations over the last ten years so its very, very serious. Too often, we see big banks pay fines and move right along with little contrition and frankly, no serious punishment. Res id vifts, and your unwillingness to pursue every avenue available. Its clear that Virtual Currencies bring us into a new age, but that doesnt mean we overlook the basic principles of going after the bad guys and being tough when they are repeat offenders. Thank you, mr. Chairman. Thank you, senator brown. Now we will turn to the testimony of our witnesses and first, today, we will receive testimony from the honorable jay clayton, chairman of the securities and exchange commission. Following him, we will then hear from the honorable Chris Giancarlo, chairman of the u. S. Commodity futures trading commission. Gentlemen, we welcome both of you here and we appreciate you coming to share your knowledge and understanding on this issue with us, and chairman clayton, you may proceed. Thank you. Chairman crepo, Ranking Member brown and distinguished senators of the committee thank you for the opportunity to testify before you today. On the important topic of cryptocurrencies and initial coin offerings and related training activities, the total market capitalization of all crypt on currencies was estimated at 700 billion earlier this year. In 2017, icos and initial coin offerings raised nearly 4 billion. These markets are local, national and international. Today ill level set to where we stand from a market regulatory perspective. My remarks may be viewed as overly simplistic and it will reflect how i present these issues to main Street Investors. For ease of analysis i break the space into three categories. First, a Promising New Technology referred to distributed Ledger Technology or block chain. Proponents of this technology assert that it will bring great efficiencies to our national and global economies including our capital markets. I hope that it does and the commission looks forward to working with Market Participants who seek to bring efficiencies including more effective oversight to our markets. The second and third categories are crypt on currencies and icos which are subsets of the products seeking to take advantage of the commercial opportunities presented by block chain technology. One is promoted to be a replacement for dollars. The other is leak a stock offering. Cryptocurrencies, some of the more widely known cryptocurrencies were us introoed as substitutes for traditional currencies such as the u. S. Dollar or euro. They have asserted they will make it easier and cheaper to buy and sell goods particularly across borders. They have asserted the transaction and verification fees and costs will be eliminated or reduced. To date, these assertions have proved elusive in many areas. Icos, from what ive seen, initial coin offerings are securities offerings. They are interest in Companies Much like stocks and bonds under a new label. Promoters use the term coin based on the fact that the security being offer side represented by a digital entry or coin on an electronic ledger as compared with a stock certificate and they related entry in a companys records. You can call it a coin about you if it functions like a security it is a security. Also, importantly, an ico may have nothing to do with distributed Ledger Technology beyond the coin itself. Buying an ico does not mean you are investing in block chainrelated ventures. There are many problems with the way cryptocurrencies and the ico marks are operating and first, the market for these products have substantially less oversight than our traditional securities markets. To be blunt, if you are trading cryptocurrencies on a platform that looks like a Stock Exchange, do not take any comfort from that look. Our Stock Exchanges have extensive rule sets and they are required to conduct surveillance. Also brokerdealers who facilitate Securities Trading have capital and conduct requirements. These requirements and others without a doubt, are necessary to protect those markets and our investors. Second, many icos are being conducted illegally. Their promoters and other participants are not following our security laws and some say this is because the law is not clear. I do not buy that for a moment. The analysis is simple. Are you offering a security . If so, you have a choice. Follow our private placement rules or conduct a Public Offering registered with the sec. A note for professionals with these markets. Those who engage in semiattanti gymnastics in an effort to have a coin are in the crosshairs of the Enforcement Division. What are we doing about these problems . I look forward to discussing that question in more detail, but we will start on jurisdiction and a comment on enforcement. We, the sec and the cftc do not have direct jurisdiction over the popular markets that trade true cryptocurrencies. This is not an oversight. It is the result of a new product and market the traditional currency markets do not need the regulators such as the sec and cftc, they are solid backed and regulated with the long currency. Cryptocurrencies have no sovereign backing and we are oversight and are currently functioning as assets for trading and investment much more than mediums for exchange. Please do not view this description as a request for expanded sec jurisdiction. If asked, we will work with other regulators to evaluate and address this issue including our friends at the fed, our friends at the cftc and the state regulators and they all have a keen interest in this market. Ill close. I know my time is short. To the extent that Digital Assets like icos are securities and i believe every ico ive seen is a security, we have jurisdiction in our federal Securities Laws apply. We will enforce these laws. Many of these laws also include private rights of action. We are working with the doj and other regulators to enforce these laws. Thank you for your opportunity to testify before you today. Thank you for the opportunity to testify before you today and i stand ready to work with congress on these issues and look forward to your questions. Thank you, chairman clayton. Chairman giancarlo. Ranking member brown and distinguished members of the committee. Ive submitted a written statement and the details and the cftcs work and authority over Virtual Currencies. With your permission, i would like to begin briefly with a slightly different perspective and that is as a dad. I am the father of three collegeage children, a senior, a junior and a freshman. During their High School Years we tried to interest them in financial markets. My wife and i set up small brokerage accounts with a few hundred dollars that they could use to buy stocks. Yet other than my youngest son who owned shares in a video game company, we havent been able to peak their interest in the stock market. I guess theyre not much different than most kids their age. Well, something changed in the last year. Suddenly they were all talking about bitcoin. They were asking me what i thought and should they buy it . One of their older cousins who owns bitcoin was telling them about it and they got all excited, and i imagine that maybe members of this committee may have had some similar experiences in your own families of late. It strikes me that we owe it to this new generation to respect their enthusiasm about Virtual Currencies with a thoughtful and balanced response, not a dismissive one. And yet, we must crack down hard on those who try to abuse their enthusiasm with fraud and manipulation. I mean, we must thoroughly educate ourselves in the public about this new innovation and we must make good policy choices and put in sound, Regulatory Frameworks to reduce risks for consumers. Putting my cftc hat back on, i suggest that the right regulatory response to Virtual Currencies has at least several elements. And the first is to learn everything we can at the cftc we launched a new initiative to engage with these innovators and inform the agency about Virtual Currencies and other financial technology. Next is to put things in perspective. As of 8 00 a. M. This morning the total value of all outstanding bitcoin is 113 billion. We have a slightly different figure than you have, chairman, but close. The point is thats less than the market cap of one large, publicly traded company, mcdonalds. The total value of all Virtual Currency in the world is around 313 billion. In comparison, global money supply is around 7. 6 trillion and because bitcoin is sometimes compared to gold as an investment asset, the value of all of the gold in the world is around 8 trillion which dwarfs the size of the Virtual Currency market. The next task is to tell the public what we learn and educate consumers. There is a lot of noise around Virtual Currency and regulators must help set the record straight. The cftc has produced a large amount of Consumer Education materials and including written statements, podcasts, webinars and a dedicated bitcoin website. Weve each scheduled visits to libraries and briefings to seniors and weve never conducted this much outreach for any other financial product. Another element is regulatory coordination because no one agency has direct authority over Virtual Currencies. We have to work together. That includes us, the sec, the fed, the irs, the treasurys fins annette work and even state banking officials and the next element is to exercise our Legal Authority over derivatives on Virtual Currencies while clarifying our statutory limitations. To be clear, the cftc does not regulate the dozens of Virtual Currency trading platforms here and abroad. We cannot require them to meet requirements like trade reporting and market surveillance, standards for conduct, Capital Requirements or even cyber protections or platform safeguards. That if these are all standard regulations in the futures markets we oversee, yet through our authority over commodityderivative markets we do have enforcement power over spot coin marks and with newly launched Bitcoin Futures, the cftc can now obtain trading data and analyze it for fraud and manipulation in five underlying spot markets and that leads to the final element and that is tough enforcement. Led by the cftcs Enforcement Task force, weve launched civil actions over the past few weeks cracking down on fraudsters and manipulators and more will follow. In closing, we want to have something that the chairman and i wrote in the wall street journal. These markets are new, evolving and international and they are coordinated with state, federal and International Colleagues and engage with important stakeholders including congress. I am glad to be with you today, and i hope my kids are listening. Thank you very much. Thank you, chairman giancarlo. First, i will say ive had those dinner conversations with my own children, and youre right. This is afternoon incredibly interesting, but growing new area of financial challenge particularly among our at least my children and yours. Both of you have said in one way or another that neither of your agencies have complete jurisdiction over cryptocurrencies. The question i have is whether you have sufficient jurisdiction, and id like both of you to address that question. Should congress address revising and refining our financial law so that one agency or a group of agencies have complete jurisdiction or if you look at the jurisdiction of all agencies today, do we have sufficient jurisdiction in place today . Chairman clayton . Thank you. In my position you are cautious about speaking for other agencies. Understood. For saying that we should all come to be very direction, we should all come together, the federal banking regulators and the cftc and the sec and have a coordinated plan for dealing with the Virtual Currency trading market. I think our main Street Investors look at these Virtual Currency trading platforms and assume that they are regulated in the same way that a Stock Exchange is regulated and as i said, its far from that, and i think we should address that issue. Am i hearing you say that you dont think we need additional legislative authorities . I think we may. I think we may. First, you should get together and tell us what you can and cant do and then advise us. I think thats a very good way to put it, senator. Chairman giancarlo . I think thats exactly right. I think the first step is to recognize where the gap is so there is, as we both said in differe different ways what we call the spot market for bitcoin is not a regulated marketplace. For us at the cftc we are familiar with that because we generally dont have regulatory supervision over the spot markets for which derivatives apply. That is, a longstanding basis, we regulate derivative markets and the underlying markets we surveil and we will manipulatio we dont have the ability to set the standards in those markets. Thats what we have today in bitcoin. Unless its an ico, as the chairman described, he also doesnt have the jurisdiction. There is that gap. And i think the starting point for an informed conversation is there are that. There are other elements. There are are other agencies that come to bear on this. So state regulators, theres a patch work of state regulation across the nation. Some states have been very assertive in this area. Other states less so. And some states have nothing. Thin cents as you referenced is also in antimoneylaundering and know your customer requirements. So there are there is a match work here but theres not a comprehensive structure. And thats something that i think is a policy discussion and an important one to be had. Thank you. And youve led to my next question, much of the activity in Virtual Currency markets is crossborder and international. That raises the question of what challenges does that present and what is the appropriate role for thin sin . I only have about a minute left so take about 30 secretaries left, if you would. I will try to be quick. The International Market is probably why this patch work spt working. If it is a mainstream market. From thin cents perspective, there are reports we all have heard that this currency, particularly currency used for Illicit Activity. They step it up in some regard and i encourage them to do so. Market we face in many regards in the 21st century with the dawn of the internet work markets have become truly global and not just Virtual Currencies but so many things. It does become a challenge as we think about regulation. Weve had that challenge working with overseas regulators in the area. Derivatives regulations as a result of the doddfrank act. Bringing them together in a comprehensive hold is really a tremendous challenge for all of us. It requires a lot of new thinking. I appreciate the remarks on these issues. I encourage you to get together between yourselves, state regulators, other appropriate state regulators and evaluate exactly what our regulatory structures should look like in america to deal with this and let us know your thoughts, further thoughts on that. Id appreciate that. Thank you. Senator brown . Chairman clayton, nice to see you. Last year coin operators raise about 4 billion. Youve mentioned focussing on these transactions to watch out for investors. How much is that. It is not clear. It is hard to get a number on that. This is largely on an unregulated basis. But i imagine senator, a significant enough portion where we should be paying attention. And my understanding is that during the last few months, there have been four Enforcement Actions targeting coin offers for violations, that speaks volumes about the work that challenge is that in front of you. The chairman, in response to the chairs question, you both talked leading with you, chair clayton, about agencies working together on this and other issues, your testimony highlights cooperation between ftc and chair clayton and regulating bitcoin out of currencies. It doesnt mention cooperation with the protection bureau. There have been hundreds of complaints about Virtual Currencies. How have you been coordinating your work specifically on this but in other areas too with cfpb . On this issue, largely through fsoc, at fsoc, i believe i have made it very clear, my views in this area and that this is an area that we should all be on the look out for, on the look out with regard to with each of our perspectives, cfpb is a member of fsoc, and they have heard my comments there on an enforcement perspective, we are in the security areas. I dont we dont see the cfpb on the securities side of this. Im notware of any direct coordination on any particular enforcement action but i could check on that. In the fast few months, Deutsche Bank has been fined over 3 million by other regulators for other forms of market manipulation. One study by a georgetown law professor found that they stopped often referred to as wall street firms. How do we have confidence mr. Chairman that fcc is willing to hold wall street accountable when the action is going the wrong way . Yeah. I actually saw that, i saw that report. Probably doesnt come as a surprise to you that someone sent it to me. I found it annoying, to be honest. It doesnt reflect the fact that gestation period for cases we bring is roughly 22 to 24 months. Any type of statistics, you know, necessarily have a latency period to them. Our Enforcement Division put out a report that talks about the numbers in a comprehensive way. Im happy with that report. Im also confident that the people who are in our Enforcement Division and leading it, many of them former federal prosecutors, two of them heads of the Securities Task force in the Southern District of new york, former heads, are pursuing our Securities Laws vigorously. I have no doubt. They come to work everyday. And they have my full confidence. I hear you say that. And i believe i believe you when you say that. I remember the last scc and it wasnt you. The last sec under republican president how they were asleep at the switch. So as the chair of the Federal Reserve used to tell me, watch us and let us know youre watching us. But im further troubled by a statement by one of the secs enforcement codirectors last fall that sec might lose a hundred of its enforcement staff by not replacing those who leave compared to 2016 figures. This would be 7 reduction in enforcement head count. How are you staying on top of the developments in Virtual Currencies and other enforcement. All of the other areas we just talked about and in to be able to fight traditional misconduct . How are you doing that when youre not replacing it, if in fact thats the case . That is, senator brown, personnel is my biggest challenge at the moment. We have a hiring freeze as a result of natural increases in costs. A hiring freeze and people, you know, retiring or taking other jobs. It reduces the size of the work force at the sec. I could use more people in enforcement. I could use more people in trading and markets. Those are the two areas where i think the American People would get the greatest return for additional buys. So when you come in front of us, and i appreciate your candor, when you come in front of us and tell us you are having trouble filling those jobs and no trouble. I just cant. Okay. Then trouble that way. Because of the freeze. Isnt that message to those who those who want to game the system and those who want to defraud the system, the message with the sec is not the cop on the beat that even the new chair wants it to be . Do i want more bodies, yes, sir. Is the message that we are asleep at the switch . Absolutely not. With your budget coming out, our understanding is the budget, and i hope the freeze is lifted. I hope the budget is enough. And i hope that you will speak to us and ask particularly people in the other side of the ill for the dollars you need and the flexibility you need to put those cops on the beat. I think ive been straight about the incremental amount of money where i think value can be added. Thank you. Senator vshelby . Thank you, chairman. Chairman clayton, you and chairman jim carlo, you are two powerful regulatory bodies but you have different jurisdictions. Anything that smacks of security comes somewhere in your range, does it not . Dealing with the commodities. Something that could be deemed a commodity, clearly comes in your range. The Federal Reserve is the biggest Bank Regulator we have and also the treasures involved in this. How do you put together task force . Can you put it in the administration to deal with the crypto currency . You have feds, commodities, securities, perhaps others we havent thought about. Before this gets out of control somewhere in the world. Let me start yes, sir, go ahead. By recognizing treasury secretary. He has brought us together. Thats good. Cftc, sec and representatives of the Federal Reserve to talk about this. Because senator, youre exactly right. The funny thing about the crypto currencies is they only work if they are integrated with they only work for their purported purpose if they are integrated with the financial system. And so therefore it necessarily touches on all of our regulation. Just reinforce that treasury secretary has been out on front on this. Formed a Currency Working Group of ourselves, sec, fed and thints and we have preliminary conversations and work streams developed. Ive had buy bilateral conversations. It begun with wraud conversations establishing different jurisdictions so we are clear with what we are doing and with what we are not doing. Where the gaps are. Do you need Additional Information on this area, both of you, or do you think you could work a task force together to get your arms around this without that . I cant give you a definitive answer because we should work together. But senator, we may be back with our friends from treasury and the fed to ask for additional legislation. You know, we live in a virtual world. We go to the doctor. They give you a virtual examination, you know. We go here and this is virtual and this was not my world when i started out in pencil and paper in school, as you can imagine. But in my day. But it at the same time, this currency, this crypto currencies, they have they lack intrinsic value, it seems to me. They lack liquidity. Sure people have made a lot of money with them going up, main with them going down. Im not sure if the bottom was ever reached as opposed to a sovereign issue in currency. You disagree . No, senator. I dont know where the national equilibrium is. But some deposit that there is a relationship between bitcoin value and the difficulty or the cost of mining. The cost of electronically monitoring this. And the correlation that seems to be correlate until last summer when the price broke free of that correlation and that they it came back into correlation late at the end of the year last year. Now, im not an economist. I find these things fascinating, but im not an expert in it. But the point the economists are making is that there is some sort of floor. The level set is not zero. There is some floor tied in the cost of mining a bitcoin. Im not endorsing that point of view. Im just sharing that with you. Chairman clayton, do you have any comment . Yeah, look. The value of crypto currency and International Exchange and im not seeing the benefits manifesti manifesting themselves in the marketplace yet and from the perspective of, if i look at this as protecting main Street Investors, they should understand that. How do you put a value on crypto currencies . Does the market put a value on it . Or does it go straight up then straight down or what . Whats something is worth is what something is willing to pay. But in our world, securities world. You know, there are rules. That dictate how much you have to tell somebody. About what it is that youre selling. Part of your mandate or Security Exchange is to protect the investment, isnt that right . Thats right. And the chairman of the commodities trading has seen obviously commodities just go wild at times and your mandate is to watch the commodities, right . Market integrity is general perceived to be our core mandate. You also mentioned personnel. You know, you need personnel. Theres a hiring freeze on. We talked the other day about this gets in the realm of appropriations and so forth. Im hoping we will give you every tool you need to do your job and to hire the people that you need to execute that. Thank you very much. Thank you. Senator reed . Thank you very much. Thank you, gentlemen, for your testimony. And following on the questions of senator brown and senator shelby, you do need more personnel. But first specifically, do you have the technologists, computer experts, that can begin to understand how these crypto currencies work . Cry cryptologists . And not just for a daytoday basis. You know, to give you the temperature. But to look ahead and say, this is the direction its going which wou which could have different effects. Do you have anyone o like that on your staff. . The answer to your question is, we formed a crypto Currency Working Group. A cyber group. Theyve done an exceptional job getting up to speed on this in a short amount of time. And identifying some of the very issues you talk about. Could, in an emerging area like this, could you use more horsepower . Always. But you make a very good point, senator. In looking out across the ipt glalgs nature of this and trying to understand where its going to land. And do the things that people say add up. Thats a very important just, where are the technologists located, if you dont have them . I presume you dont. We have i would say, technology and technologists. It doesnt make economic sense. We have those people in our economics position and we also have some of them in enforcement and they work together. But you need more . Ill take that as a yes. Mr. Giancarlo, do you have the technologists working together . Thank you, senator reed. Weve done a couple of things in 2017 as senator brown said, to get ahead of the curve. We hire the agencies first ever chief innovation officer. Someone who comes with a deep background in a lot of these new financial Technology Innovations. We also created something called lab cftc which is our innovation hub. You asked where is it located. It is actually located in new york city. So much of the innovation is taking place there. We wanted to be close to these innovators to be close to them. We also formed a Virtual Currency task force. That task force brought three civil actions against bitcoin fraudsters. As i said in my testimony, theres more to come. As to the resource question, we do need more resource. I used our bypass authority last year to put forward a budget request. We had been flatfunded for three years and we need Additional Resources and built into the resources are Additional Resources for cyber and crypto currencies specifically. Let me just elaborate a bit. We continue to refer to bitcoin. Thats just one crypto currency. It seems to me, proliferating, everyday there is a new variety of crypto currencies. Some now are fraudulent. Some of them based on Bitcoin Technology process. But these crypto currencies is an issue, one. And two, my time is up. I want one other unrelated question to chairman clayton, is are you tracking all these different daily emerging currencies, one. And two, again, going back to my stepback question, is someone looking longterm at the systemic effects . Where are we going to be . This is eerily reminiscent of the late 90s in derivatives which were nominally small parts of the market that weres esoteric, et cetera, then exploded. Why dont you answer, then i will fop up with the chairman. Youre right. Bitcoin is one of many. A handful have significant traction. Thats important for listeners to know becausesome are fraudulent, as you said. Some a fraudulent, as you said. Me are fraudulent, as you said. Ae are fraudulent, as you said. Ne are fraudulent, as you said. Ye are fraudulent, as you said. Are fraudulent, as you said. We went after one that was known as my big coin, which was called my big con. It was ponzi scheme. Taking consumers money and using it to buy houses and furniture and jewelry. We went after them, went after them hard, and will continue to do so. This is a relatively small market just by ratio. But as you say, we have to watch it and watch it carefully. The sec doesnt have direct jurisdiction over crypto currencies. But weve had to watch it. They are integrated with the marks that the we do oversee. To your question is zen 10 make sense or 15 or 20 make sense . No. I have my hard getting my head around that. If it is an efficient median of exchange, 15 probably doesnt make sense. But thats where im at. On systemic, i agree with chairman giancarlo. If people are ripped off, that represents reputational risks. That can have systemic effects. We can wrap up the questions. Just changing gears one second and ill make a comment and then follow up with a written question. There is some consideration for the sec allowing in Public Offering, initial Public Offering, bars to sue forced arbitration. I this that i would be a very bad idea. And ill make the argument and write to you. Im happy to address the question. Were out of time on that right now. We will have to do it in writing. You can well talk. Senator . Thank you, mr. Chairman. Gentlemen, im curious, i go back to where i learned with a pen and pencil to begin with as well. We did not have a quill at that time. But we did have number 2 lead. This is fascinating how quickly everything is moving and everything translates back to dollars and senseia. This sounds almost like bartering to me. It is bartering which could avoid the determination of a value in dollars and cents. Which brings up the question, how do you tax it if you need to. How do you recognize income. But in this case, i noticed that both of you have existing resources and regulatory capabilities you are utilizing today. And while i question whether there are saemts that have to be filled, it would appear that some of the basics that maybe a lot of us dont quite understand still have to be answered. I want to start out, because i think mr. Clayton, you started with this discussion, with regard to the issue of whether or not you had control over an ico. And the fact if they are issuing in this particular case, bitcoin or the opportunity to mark tet , you had at least the stock or value of something, what is, in this particular case, that thread that you utilize once again . And can you delve in more about how your Agency Responds to the regulatory mean in this particular case . What is the specific item that you look at as being an item subject o your review . Subject in what . Destination of security is broad. And it includes, im going to not use the technical terms, there are Supreme Court cases and such. But it includes when if you are offering the security, or offering me something, a coin. And i give you money and the purpose of me giving you that money is to profit from your efforts going forward. If i give you money, you give me a coin, and i say im taking the money and growing a business and thats going to increase the value of that coin, and by the way, chairman clayton, you can trade it to somebody else. So you may be able to get value for it tomorrow. In fact, you probably will get money for it tomorrow. By now, so you can get more value for it in a few days. Thats a security. So commodity wise, if we look at trading kmoz its, you would not have an interest in the subject of investigating or reviewing whether or not a trading of an ag commodity is something, and yet when we talk about the cftc, we are talking about a different story. Where commodities most certainly are an item of interest to you. Is bitcoin, or are these as currently traded, are they a commodity or are they a security or are they both . What is challenging is it has kark ti characteristics of multiple things. Bitcoin is a medium of exchange, value or account. Those things have different connotations to them. If it is a medium of exchange, then it is a currency like instrument. Yet as we have seen, a number of means of exchanges is closed to bitcoin. A Bitcoin Conference stopped accepting bitcoin because they couldnt register payments. It is spoken of as a means of account. And in that case, it has implications from the fed and currency. From our point of view, when it is used as a store value then it is like a commodity or value. What we hear of it people buying and holding. If you go on to the twitter universe you see phrase hodl which means hold on for dear life. And thinking is, that they buy it and hold it. I mentioned in opening remarks, my 30yearold niece, who bought bitcoin years ago and she is in hodl. She says, im going to own it. I dont know what will come of it, but i want to hang on to it. She is not a fraudster or manipulator, she is just a kid. I was fascinated in talking to her. There are a lot of folks that think there is something to this, i want to hold on to it. In that regard, from our point of view, it is a commodity. If there is a derivative on that, we regulate it. The problem is in the cash market, we dont have regulatory. We cant set stands standards. But we are looking for fraud and manipulation and we attend to be aggressive. If for nothing else, for people like my niece can have security that there are not fraudsters or manipulators, and there are far too many of them. Thank you. And your idea of bringing it back at a later date after looking at the differences would be very appropriate. Thank you. Senator warren . Thank you, mr. Chairman. So chairman clayton, on january 26, bloomberg published an article entitled sec weighs a big gift to companies. Blocking investor lawsuits. Now, as you know, class action lawsuits are how investors can hold Companies Accountable when they defraud people. And the article says the sec is thinking about letting Companies Sell shares in initial Public Offerings while at the same time allowing those companies to prohibit investors from bringing class action lawsuits against them. Wow. Are you forcing invstors to give up class actions when theyve been defrauded . The sec has never allowed corporations to bar investors who get cheated from bringing class action lawsuits. So i just want to get a straight yes or no answer from you on this. Do you support this enrmous change in sec policy . I think you know i cant prejudge an issue that may come before the sec. But i would be happy to talk to you about this. Fs i cant, i cant dictate whether this issue comes before us or not. Because of the way as come per the sec in the past. But im not anxious to see a change in this area. Okay. Im reading tea leaves here. No. You run this agency, the change cant happen without your approval. I think it is clear for the thats actually not right. If it came up before the agency, im only one of five votes. Im going to guess there will be at least two votes against that. And that you at best i just saw you vote. Senator, i dont want to prejudge the issue. I want to be practical, if this issue were to come up before the agency, it would take a long time for it to be decided because it would be the subject of a great deal of debate. And like i said, in terms of where we can do better, this is not an area on myly for where we can do better. Ill tell you what, chairman clayton, im not letting you get away with that. Because what im reading is real skepticism about a rule like this. The secs mission is to protect investors, not throw them under the bus. And i cant think of anything that would do more harm to investors than saying they have to prewave their rights to sue a company and class action when that Company Cheats them. It is not a change thats on i hear you. So let me ask you about Something Else. Thats the fiduciary rule. Financial advisors who put the high fees, commissions, kick backs, prizes they can get, for recommending a specific product ahead of the interest of their clients, cost hardworking americans trying to save for their retirements about 17 billion every year. And thats why president obama and the department of labor put the fiduciary rule in place to eliminate the conflicts of interest in retirement accounts like 401 k s and iras. Less than a month after you were sworn in as chairman of the sec, you issued a request for information asking for Public Comment on rule making related to the stand artards of conduct Investment Advisors and broker dealers. Can you state to this committee that any rule making you do on this topic will not weaken the existing protections or Retirement Savers . Im making an absolute Statement Like that . Yeah. An absolute statement that you are not going to weaken rules for people who are are trying to save for their retirement. Based from what baseline . We have a rule from the department of labor. Now you could strengthen the rule, you could pass the same rule or you could weaken the rule. I want to know that youre not going to weaken the rule. Thats all that youim asking. Here is what im trying to do. The relation ship between the Adviser Broker dealer and the client in a very simple area. They have 401 x, annuity an stocks is regulated. Throw out banking regulators. It is regulated by no less than five people. And they all have different stards standards. My main is to bring it to light without jeopardizing the question thats why im asking about whether or not injury not jeopardizing protection clarity right now cost american investors saving for their retirement 17 billion a year. It is combination of insufficient standard in some places in which we are looking to increase. Glad to hear that. Lack of chair clarity. And also, the standard is only as good as the remedy available. And also, the standard is only as good as the remedy available. One of the things im also looking at believe me, ive spent a lot of time in this space trying to get it right. What dollars do you collect when someone has done you harm. You can have a strong standard but if there are no dollars there, thats a problem. I agree with you, mr. Chairman. If you want to strengthen enforcement of this rule or strengthen the rule itself. Count me in. But thats what the American People look to the sec for. Thank you. I do. Thank you. Thank you, mr. Chairman. Senator purdue. I want to change the subject a little bit back to bitcoin here. Or to crypto currencies. We see in ipos and tax jurisdictional arbortribes. Do you see that today in icos . Chairman clayton, you want to start with that . Yeah. And by wait, who pays for frivolous lawsuits . Shareholders. Yes. Customers, employees, all of the above, right . Yes. Would you answer the question above, please . Regulatory arbitrage is one of the many i see in this market. To be frank, tax loss and things like that are there. Of course they are. Because Record Keeping is difficult to trace. South korea and china are the ones that predominantly play in this war. You said before most of the current investment comes in the u. S. Im not sure i dont know if we all know enough yet to know that, right . South korea and chien yar heavily invested. South korea has a new rule that says you have to rouse realname Bank Accounts in order to trade in this. Yeah. And those are the kinds of things im asking for. Is there arbitrage going on around the world here . You are making a great point. Because this was a largely unregulated space across the world. Now you see each country taking a perspective of view, action, et cetera, which also goes to how functional is this asset class . How would we regulate it . How does it work . There is a lot happening that is beyond the kind of understanding of your average investor. How would you know . How would we and two agencies here, and i understand between all of the regulatory agencies and there is an axis here you have to coordinate. Correct. Im asking both of you, what are you seeing and what are you anticipating we need to do either legislatively or rule making to combat that. Chris, do you want to let me jump in. I identify two areas of arbitrage we see. One is regulatory. We are also price arbitrage as well. There is a kimchi premium for bitcoin traded in south korea because there is so much interest there that it drives the price up there slightly higher. In the early days of many markets, every American City add Cotton Exchange and prices were different there before you developed a national market. Here we have different regional and International Markets and perhaps as this market matures, if it matures, a single price may develop. On terms of regulation, some time ago, middle of last year, there was this perception that bitcoin was off the regulatory grid. And one of the things that chairman clayton and i have been working so hard to do is to disuse that notion. We are limited in the regulatory standard on underlying plat forms. But when it comes to enforcement, when it comes to icos, were using full authority to drive the message and other countries are doing that as well and weve had frequent conversations and i had communication recently with the head of the Japan Financial Service Agency about some things that were going on there. Jay clayton spoke very eloquently at the fsb meeting recently in basil, switzerland. I think the message is getting through that this is not off the grid. I think part of that is now you are seeing it in the bitcoin price. As the word is getting out that we will go after misconduct i think you are starting it see that reflect in the price and i think thats an important step. With the little time we have left, there is pomp and domp circumstance. Can you both address what your agencies are doing that combat that . This is one of the things that investors dont understand. Me too. When you have an unregulated exchange. The ability to manipulate prices goes up significantly. Right. And just a few coordinated sales can change a price. For email, fraudulent email. Yes. I mentioned we formed this Virtual Currency Enforcement Task force. Weve got some really good people on this. As we brought three access were there are more to come. We are digging deep and learning a lot and seeing a lot. And i dont want to get ahead of that other than to say we are working the beat hard right now. And have you jurisdictional right to do that, right . We have enforcement jurisdiction, yes, we do. Thank one mr. Chairman. Senator darling . Thank you, mr. Chairman. Thanks to both witnesses. This would be to both of you. Now that there is asserted jurisdiction and warned the public of the risks posed by virtu Virtual Currency operators, what other ways can your agency prevent Retail Investors from falling fraud to manipulation . We have actually formed a partnership with the cfpb, Consumer Education, area of bitcoin. One of the things ive learned recently is that americas libraries are a place where a lot of people go and research bitcoin. They use the Library Computers. One of the most frequently searched items from a Library Computer is bitcoin. We are teaming up with cfpb to go out to americas librarians, to train librarians, and to get patrons to use our resources. We are really getting very creative in the area of Consumer Education. We have several pod casts p with thousands of down loads. We are working as hard as we have ever worked. Weve never done as much work on Consumer Education as weve done with crypto currencies. There are a noumber of group and they have dawn phenomenal job getting the word out. There are actors we are counting on to act responsibly in this area. Okay. Let me ask a followup. It goes to the point you just made about the libraries and others. Are you concerned that Retail Investors will remain vulnerable to fraudulent and manipulative online solicitations sometimes more difficult for you to pick up . Senator, in the brd range of marketplaces, seniors seem to be that the choice, the prey of choice for fraudsters and manipulators, whether it is in Precious Metals or foreign exchange, or whether its in a whole range of products, we see and we prosecute continuously fraudsters who seek to prey on either less sophisticated, seniors who may maybe dont have the full retirement they may need or fall prey to rich quick schemes or schemes that say we guarantee 100 return or nonsense like that. It is a big part of our enforcement agency. Let me ask you this, and this goes to perspective and to hopes and dreams. But and there is an article with the Washington Post yesterday. And it was about good hardworking americans. People who have worked hard and want to have a pension. Even our friends and neighbors from kentucky. Title of the article is bitcoin is my potential pension. What would you say to them to help protect them from winding up in a situation a few years from now where it didnt quite work out the way they were hoping . It is such a troubling development. Which is why we put on so much materials. What i would say is, it is the same advice i give my children. If it sounds too good to be true, it is. If they are promising a ridiculous return, they are ridiculous. If you are you go to give them money, you better be prepared to use it. I agree with all of that. There are also things like Disruptive Technologies that come along. But they shouldnt disrupt the way you look at markets, for us, or the way you look at investing. Pumping all of your money into a Disruptive Technology has a very high likelihood of not working out for you as an individual. When we see Disruptive Technologies come along, there will be winners, but there will be many losers. Thats the way it works. Let me ask you one other question. How can both of you best assist Law Enforcement and federal authorities to ensure these Virtual Currencies are not used by terrorist groups or nations like north korea to evade sanctions . We work very closely with Law Enforcement. We commenced prt grthe program we have fbi agents with our agency in order to look at this. At the end of the day, use of this cash market for that is going to require Cooperation Among multiple agencies, especially who often because of there antimoneylaundering operation, they see some of the issues before we can. Then bring our expertise to bear and coordinate with our Law Enforcement agencies. Same here. I would supplement that with we also have a Dark Web Working Group to tries to monitor what is going on in that space in order to identify these types of issuees. Thank you, sir. Senator kennedy . Thank you, mr. Chairman. Welcome, gentlemen. I think youre both doing a terrific job. Chairman giancarlo, when is the last time you bought a fund, mutual fund or bond . So i hold generallytraded funds. Yes. When is the last time you bought one . Probably before i i pretty much quit my investing a year ago . Probably before i started at the commission. Two years ago . Yes. When you bought it, what did you buy . Equity or bond . Index funds mostly. Okay. When you bought it, did you sit down and read the prospectus or the index fund . Im not as a lir, im not supposed to say i didnt read it cover to cover but i will confess i didnt read it cover to cover. How many investors do you think do that, dont read it . I think most. So whats the point . Were talking about all of the dangers and risks of crypto currencies like bitcoin. Im putting aside the shyster fraud issue. I mean, whats the point of all this overdisclosure if nobody is reading it . Well, and why do we want to do the same thing with bitcoin . Ill say, historically, one of the foundational principles, Securities Laws, adequacy of full disclosure is one of the boxes. I will tell that you having been in business that most Business People will tell you, they study the prospectus only to see what they can sue on if they need to sue on something if something goes wrong. I think you see where im going. Im going to ask you both a philosophical question in a second about how far you think we should go to protect people from themselves. But i dont think the disclosure we have right now works. I think its good for the lawyers. And is good for the financial advisers. But i think we overdisclose. And i dont i think you can i bet you each have a smart lawyer on your staff. You could go to them and say write me a good disclosure for bitcoin. And you would get it back and look at it and then pick names from the washington, d. C. Phonebook and to ask them to come in an say, read this and tell me if it makes sense to you. Whats the point . How far do you think we ought to go here . In terms of crypto currency. Im separating this from the block chain technology. China outlawed it. South korea has too, i think. What are you suggesting that we just go after the smiestehyster fully disclose . Is that what you think we ought to do . Secretary . Or chairman . I think that is exactly the question we are here to pose and take forward. What is the right way to deal with this new technology . Im not as just a person watching it, im not satisfied when i see people thinking that the training plat forms of crypto currencies have the same kind of protections that a Stock Exchange would. And im very unhappy that people are conducting icos like Public Offerings of stock. When they should know they should be following the Product Placement rules, unless they are registering with us. Those two things make us unhappy. Figure out how to deal with them is why we are here. I agree we should be be careful not to go too far. For me in the ico space, it is clear. People violate our laws work pretty well. Im going to make this suggestion, because i will good over and last time i asked questions, i got a little carried away. I think i went over three minutes. And a Ranking Member put me on double secret probation. So im not going to do that today. Like i have the power to do that. He does. I just, full disclosure, you can extend the disclosure we have now, to bitcoin, and you havent done anything. Im not suggesting we shouldnt have disclosure. But you have to have disclosure that makes sense and helps people. Other than the lawyers. I agree, senator. Senator . I agree with my friend from louisiana. I think that we may be on top of something that is transformational. And i dont think you can separate the underlying distributed ledger of block chain from some of the Crypto Assets. And if we looked if we had the same rate of increase that we that the next two years that weve had the last couple of years, we are talking now a couple hundred billion, we would be north of 20 trillion caught up in this area. By 2020. I remember back, i was lucky enough to get into the cell phone business in the early 80s. Everyone thought it would be a small business. They were wrong and i got rich. I think we are looking at the same transformation about to take place. We are going to have to wrap our arms around it. We talk about Consumer Protection issues. But we have moneylaundering issues. Cybersecurity issues. A third of the bitcoin exchanges have been cyber hacked between 2009 and 2015. Im not exactly sure what the right regime ought to be, but i would argue that, while i commend the treasury secretary for putting a working order together, i think this rises to the level of systemically relevant event and im curious as to whether or not you believe, and i commend what you both are trying to do, but whether this ought to elevate to an fsoc level analysis. So, senator, i had the same question you had. There is a big rise here. If it does keep going, is this a systemic issue . Which is one of the reasons we brought it up at fsoc. Talk about it at fsoc. I commend the treasury secretary for forming the working group. I wanted to go back to separating icos. And crypto currencies. Icos that are security offerings, we should regulate it like security i have a couple more thank you, senator. On disclosure, sometimes we arent seeing absence of disclosure, it is false disclosure. False disclosure is often fraud, and i think we need to step in there. In terms of discussion as chairman clayton mentioned, we have begun discussions at fsoc. There is also discussions led pi chairman clayton at the Financial Stability board and also at the International Organization of security commissioners. These discussions are taking place at the right levels of debate but there is so much more to be done. And again, to my friend from louisiana, we have this we are focused a lot on bitcoin and Crypto Assets and kipt crypto currencies. But you have whole new plat forms where they are creating file sharing or extra computer time. Forms where they are creating file sharing or extra computer time. Im not sure what sort of assets they fall in. Are they potentially regulated within your realm or if there is trade, trading exchange, tokenization exchange, between excess computer time . Im not sure where that fits at this point. The definition of security, i believe, the people who wrote the 34 act, the 33 act, they were smart. They did it on a principle basis and they basically said, if you are giving people money in exchange for a future development after business, with the hope of a return, and whether that return comes in the form of server time, or your ability to sell server time, it is a security. I concur with the approach in terms of the icos and there has been bad behavior. Yet the certain icos the se kre hasnt stopped and others they have stopped. Are you going to go back and review those that have gone forward . Let me Say Something about the 33 and 34 act. When written they were written with a tremendous amount of secure knits this country and we would rely on gate keepers to help us enforce those and help us enforce those rules. Accountants, lawyers, underwriters, sellers and the like p. M. Im counting on those people to do their jobs. And i made that clear. Mr. Giancarlo, we may have moved too fast on allowing futures trade awniing on bitcoi. You have allowed future trading on bitcoin, yet they are not allowing btfs. I wonder if they need a moore coordinated effort because of the potential among Crypto Assets and could be as transformational as wireless was years ago. I think we need a much more coordinated effort. I know my time is expired but if you could quickly comment on that, i would appreciate it. I believe it is important. I believe we are all both individually and collectively understanding our authorities and this new Technology Working around it. There was communication among myself, chairman clayton, treasury secretary and others, and bitcoin future and Bitcoin Futures are quite different than the bitcoin market. Bitcoin is an anonymous area. Fully transparent to the regulator. Bitcoin retail. Bitcoin futures mostly institutional and high net worth. Bitcoin futures regulated. Bitcoin futures unregulated. And now visibility into underline spot markets and data from the markets and that did not otherwise have. Completely agree. I break it down into three areas. There is Great Technology that i agree with you as promised there are these pure crypto currencies which we need to take a look at across thinsin, treasury, fed, and securities offerings that are called icos that should be undertaken as securities offerings. Consistent with the regulatory regime. Senator cotton . Thank you. Thank you, gentlemen, for your appearance today. I want to continue on a line of questioning that senator warner began. Putting aside bitcoin or other kinds of crypto currencies based on block chain or distributed Ledger Technology, what are your thoughts on the potential value of that Underlying Technology of block chain and Ledger Technology, both enterprises and consumers and perhaps to Government Agencies . It is important to remember that if there were no discoin there would be no Ledger Technology. It grew out of that initiative. And potential applications, and by wait, im no pie in the sky dreamer, i just report what i read. But the applications range from enormous potential in Financial Services industry and banking industry. But right down to the way Charity Dollars are spent. The way perhaps refugees are accounted for across the globe. There was an article just this morning about use of distributing Ledger Technology for 2. 5 billion people around the world that dont have access to banking services. One of the areas that in our own area of agriculture futures, 66 million tons of american soy beans were just handled through a block chain transaction for sale to china. So bitcoin is now used, it is used in the Transportation Logistics system. And most importantly the potential of distributed technology for regulators to be able to do really close market surveillance and if it had been available in 2008, if we had been able to do the credit exposure of one bank to another bank in realtime with precision, that would have enabled much more precise policy choices that would be made without being in a rush for data. I think there is enormous pro ten shl. How it is realized, when it is realized, what are the other challenges, those we cant say. But the potential seems extraordinary. Thank you, mr. Clayton . I agree that potential seems very significant. And just look around. Anywhere in our economy where verification and Record Keeping has cost, that is potentially reduced, is an opportunity for this technology. Thats just one of them. And i hope people pursue it vigorously. Thank you. Lets turn our attention to crypto currency and bitcoins since it is the most prominent. Yesterday the dow jones had its single large et decline in a points scale, 4. 6 as a percent, which is high, not the highest ever. That obviously generated a lot of news coverage. The dollar has faced 2 inflation or less now for many years. Bitcoin, however, has seen 32,000 percent increase in its value in the last five years. Declined by some 60 i think in just the last 30 days. What are the factors drieching volatility in bitcoin relative to security in publicly traded companies or the u. S. Dollar . Well, just recently you see bitcoin was not largest volatility we have seen in some other Asset Classes such as the vix product which is known as the fear volatility gauge. So we have seen extraordinary volatility in bitcoin. But in our world, in commodity derivatives we are used to this. And thats one of the things that the emergence of futures product is meant to do is to provide those who are exposed to that volatility means of hedging and mitigating the risk to that volatility. Mr. Clayton. I dont really know whats driving the volatility in bitcoin and cryptocurrencies. They are not correlated with sovereign currencies, so it must be different from what would drive the dollar. But thats one of the issues before us is there does appear to be a lot of volatility compared to the medium they are supposed to be a substitute for. So what does that kind of volatility portend for cryptocurrencies future as a potential alternative to legal tender of nation states or Transnational Organization . You raise a great point. Maybe that volatility taps down to a stable. But an asset is highly volatile is not a very effective means of exchange. Because you dont know how much you are getting by the time you receive it or how much you are paying at the time you have to pay it. If you agree on a price on day one but has to source it on day ten, you exposure self to significant risk. Thank you. My time is expired. I do want to associate myself with remarks of senator donnelly at the end of his remarks about the risks that cryptocurrencies are currently posing as a way for rogue nations, terrorist organizations, criminal organizations to evade sanctions not just in trading but in hacking as well, as we have seen media reports from north korea. So im glad to hear you are working closely with our Law Enforcement and intelligence agencies and i hope that continues. Thank you. Senator menendez. Thank you. I have been actively following both venezuela and russias interest in developing cryptocurrency for purposes of evading u. S. Sanctions. Last night i sent alert to senator mnuchin and a few weeks ago when she was here before the committee. Under what circumstances would the sec and the cftc have a role in engaging or regulating the proposed new petro or crypto rubble currency . More broadly do they have parole to play in preventing the use of Digital Currencies by foreign governments to evade u. S. Sanctions . Our jurisdiction would be very limited in that area, senator. We, as ive spoken about before, we do have Enforcement Authority for fraud and manipulation. So if we thought that instrument was being used for fraudulent purposes, we would not hesitate to take authority. But you are probably touching on an area where the jurisdictional lapse is probably greatest for the two agencies sitting before you today. And so let me ask you manipulation, what if you are manipulating to avoid u. S. Sanctions . Id have to talk to our enforcement counsel see how that fits in. Id love you to do that and love to hear back to the committee. Are you interacting with fin sen to the point you have limited or have you gotten gaps to avoid vulnerabilities . As we mentioned before, senator, chairman clayton are part of a task force put together by the secretary that includes that. And we have had our first meeting to set out some work streams. We will have more to come. Just so happens im actually meeting with fin sin Virtual Currency team to get some introductory discussions started between our agencies so i look forward to asking them this question as well. I would say to both of you, to the extent that you have a role to play and you lack the present authorities to do so, i would love to know about that if you determine that is necessary. Because my sense of cryptocurrencies largely driven to evade u. S. Sanctions and to undermine sovereign currencies. Both of them are a challenge to the natural interests of the united states. Let me ask you this, we have seen a dramatic increase in the number of initial crime offerings where they are using digital tokens instead of going to the capital markets. Wall street journals said it grew from 96 million in 2016 to over 4 billion in 2017. Many of these are relying on promoters to get up the sales. Last year floyd may weather the fighter used internet. And i have used prepaid card space where we have seen celebrities like the kardashian to use their status, and this feels early similar to that. Just the next exploitation. And i worry about the investors that dont understand the risks. What account fcc do to help this . Senator, im not going to comment on a specific instance. But. Broadly. Some time ago we put out an alert that said if you are promoting securities, you are taking on Securities Law liability. I believe that that has tamped down some of this endorsement activity. Ill say it again right here. If you are promoting securities, you are potentially taking on Securities Law liability. Well, let me ask you, i appreciate that, and i hope you will do more to protect consumers. Can you walk us why they are not cot comfortable with improving this . Our etf product base is largely retail product base. And we have made it clear to the marketplace that there are a couple of issues with having an etf thats based on a cryptocurrency. They go to price discovery, custody, and some other issues around volatility. We have let the industry know those are issues that are of concern to us. And that we dont want to approve an etf product with a cryptocurrency under liar until we can get comfortable with that. Thank you very much. Im sorry you have to crane to your left to have a conversation with me but im be delighted to be back on the committee, mr. Chairman, thank you very much. Let me first start by suggest to go you if you have suggestions ill probably not have the chance to see you in the subcommittee before we take a look at fy 19 assuming we are successful in the next few days on fy 18 and budget caps well be able to reconsider spending for fy 18. You made your request through the budgetary process and an appearance before the subcommittee. But if there are priorities to go back increase funding in any levels of jurisdiction within fsgg i would welcome your input what is the highest priority. I heard the commentary earlier in regard to one of the questions i think to senator reed was the hiring freeze has created challenges, i dont know that we can overcome that. But if it is personnel in ha particular way or other things, it would be useful for me to know. Thank you very much. And i didnt want to get ahead of the pros serks and our fy 18 request reflects the sentiment. I dont think ill see the fy 19 request before taking a look at potential for fy 18 dpeending when the president s budget will be released. But i would offer it doesnt need to be today if there are any suggestions oud like to convey to me. The issue you may have answered this question just now with senator menendez, senator clayton, but doesnt you indicated why you were unwilling at the moment to approve an etf proposal. But doesnt etfs just as options do on its exchange reduce the mitigate the concerns, reduce the volatility and increase price discovery and reduce risk . So additional products my question really is dont additional products help an alleviate some of the challenges we face . Or is bitcoin and cryptocurrency so unique its different from other items traded on exchanges . I think that ht cftc product has that effect. Its largely an institutional product and you can take both sides of the market and it gives people a chance. Etfs you can take both sides of an etf, but predominantly they are offered for a long investor, someone who wants exposure to the rise and fall of bitcoin or other currencies just as it would. And thats a different dynamic than a futures product. And we have long taken an Investor Protection view of approving those types of products. Which is embodied in our liquidity pricing rules. If we get comfortable with those rules, then we can move forward. Very good. Let me raise a different topic than cryptocurrency. One of the things that ive tried to Pay Attention to and often in cooperation with the senator from mexico, senator udall is trying to modernize our it system, particularly within the federal government. And you indicated, chairman clayton, about the 500 million loss cryptocurrency in your written testimony. We have now passed as part of the National Authorization defense bill whats been labeled as mgt act, moderning government technology, and what it does is create a fund for federal agencies to rid themselves of their legacy technologies and have access to dollars to replace that legacy. It encourages moving to the cloud. Again, with the opportunities for us to have better technologies and Safer Technology systems to reduce our vulnerabilities. I just would encourage you, you have a lot at risk in the safety and security of the data that you hold. And i welcome urea suyour reass, im sure you are telling you are spending lots of money and working diligently and have right personnel in place. But i guess if we ask agencies of the federal agency who have been hacked and data released, they would have told us the same thing it to that occurring to them. Id be, first of all, delighted to be reassured that we will not be reading into tomorrows paper or next months papers that there has been a hack at cftc or sec, and then second littly i w offer you to take the opportunity at that legislation and see how it might be of benefit to your agencies. And to suggest any ideas you would have for what congress can do to further strengthen Cyber Security within your worlds. Thank you. Mr. Chairman, thank you. Thank you, senator cortez masto. Thank you. I apologize ive had another Committee Hearing going on at the same time. But i appreciate your written comments. And the conversation today is so important. And as somebody who was attorney general of the state of nevada and worked on consumers protection issues, obviouslily weeding out any time ype of pros important as well. Let me start with a couple of questions. I understand that companies that originated outside the cryptocurrency space, like kodak and burger king, have recently jumped into the cryptocurrency space. However, some critics have warned that companies are using block chain as an opportunityist venture to pump up stock prices without having a clear Business Plan. One company, long island ice tee i understand changed name to long block chain and watched stocks soar. So are you concerned that Companies Might be using block chain as a scream to pump up their stock prices . The short answer is yes. The longer answer is ive put out a warning in this space. And ive put out a warning to Securities Lawyers as well, which is nobody should think its okay to change your name to something that involves block chain when you have no real underlying block chain Business Plan and try to sell securities based on the hype around block chain. When you say you put out a warning, what does that mean . We published on the sec website, made a speech regarding this. But this is an area of concern to us. Any time there is something new that people seek to raise the value of their securities without the underlying goods being there is problematic. Right. Thank you, senator. So as you know, the jurisdiction of the sfct and sec is slightly different in this regard. So chairman clayton is rightly concerned with coin offers misrepresenting this. We focus on fraud manipulation broadly in instruments where there is wild claims. We recently broad Long Island Firm called my big coin which was my big con, nothing there, taking peoples money and not investing in anything other than their own jewelry and houses and fancy cars and this kind of thing. Weve been a very aggressive in using our Enforcement Authority. We recently brought three cases last month alone. I said there would be more. And we are looking into this and monitoring markets very carefully. We believe that our big task is bringing enforcement cases and letting people see that as well as Consumer Education, which ive also said. Because it has deterrent effect, you hope it does. Yes. Thank you. Il its also been reported more than 3 million bitcoins has been stolen that is about 14 or 1 in every 7 bitcoins. And japan firm was hacked. This follows 500 million from another exchange mount gax. If people put money in into a stock or bond they would have help. For example, federal government still trying to help invest divorors from bernie madoff. When people get this stolen what can they do . This did get to emphasize. When you engage in investing online with an offshore entity, the chances that we can do anything practical to get your money back are very, very low. In our futures market for example we have what we call system safe guards requirements that future companies have best practices. But thoese Underlying Companies we dont require them to have cyber safe guards in place. They are young, startups, focusing what resources to developing into their technology. And in some of the cases you mention, what i understand was the cyber protections wasnt there. I know its been aggressive ton this. Weve had conversations with them. We asked questions what are they doing. But unfortunately the theft has already happened. So this is a problem. These underlying stages while we do have Enforcement Authority, we dont have the same Regulatory Authority that we have in the markets that we oversee thats our day job as one of our colleagues mentioned earlier, so therefore this is a gap. We are the same kind of protection rules like custody. It was gone. Yeah, so old actixe onbuyer beware. So education is important, i would imagine, from federal agencies to buyers so they know unless Something Else can we be. I notice my time is up. Thank you very much. Thank you, senator. I had not planned on having a second round, but i have agreed to allow senator shelby and senator warren to each have one brief question. Senator shelby. I want to get in the area whats on a lot of peoples minds today. I know you dont control it. The stock market. You know what goes up, comes down, as we all know, and we dont know when and so forth. Is this perhaps more than an ordinary correction . Or do you have a judgment on that at all . Chairman . So your question is exactly the question i asked my staff and some of my colleagues across the federal government. Okay. Because we should be asking those questions. By this morning there was nothing to indicate that any of our systems didnt function as they were expected to function yesterday. This was the largest volume since november 2016. There was a significant price change. But it was not a price we have two types of limits. We have single stock limits and market limits circuit brokers. Neither one of those were hit at great detail. Single stock was 9. Circuit breakers didnt get hit. So as i sit here today, there is nothing that came out of this that concerns me from a functioning standpoint. But days like yesterday, our job is to look at them. From a regulatory standpoint, are you saying that you dont see anything amiss . Yes. From a regulatory standpoint . Yes. You cant control what goes up and goes down. But what spooked the markets . Is it profit taking perhaps . Is it a whiff of maybe inflation out there because people that watch the markets and participate in the markets see that the fed is beginning to raise interest rates, and the fred has informati fed has information that we perhaps dont know, economy is hot, unemployment is low, so forth . There is a combination of all . Or can we really say . Well, i cant really say. Because, you know, there are a lot of opinions on those things. Our job is to look at the functioning. Absolutely. And look at the systemic risks. Thats right. And im asking myself is there anything that happened yesterday that gave me different view than i had the day before and so far no. But thats a question i ask myself almost every day. Of course we know when the market is going up, people are elated, thats natural. When its going down h some people profit but not a lot of people are elated. Is that fair . Fair. Do you have any comment, mr. Chairman . Im just smiling because a recollection of saying that a mentor of mine who actually my introduction into markets would say, when i asked him what drove the market up yesterday or down, he would say oh, it was up, oh, more people bought than sold. Oh, it was down, more people bought than sold. And we laugh. But what he said to me, he said when you listen to the pundits and they say the market was up because of this, that may have been why or may not have been why. But the reporters or the pundit needed a reason, so they picked something out and that becomes the reason for the day. And i dont mean to be facetious but markets are very complex. And sometimes its over simplifying and you hear it on the news and hear it by people because they are stock pickers, its because of this. I dont know how anybody really knows. Now if there are fundamental moves and changes, thats where we have to do it. And i share chairman claytons view, our job is to look at the structural underpinning and see if there is anything thats not functioning. See if the fundamentals are sound. So you wouldnt be surprised to know we had a late night and Early Morning checking in with exchanges to making sure things are in order and margin levels held and make sure there was no significant margin breaches. And i can say that the system held. The system was worked as they were designed to work. And so the right systems and right policies are in place. But markets were always evolving, always organic, thats why we need to stay very close to them. The market always corrects. The question is is this ordinary, maybe not ordinary correction, but is it a correction the market will correct itself and we go from there. Is that fair . Yes. Thank you, mr. Chairman. Sflenator warren. Thank you, mr. Chairman. So i want to go back to Virtual Currency and ask about initial coin offerings. Icos. Many of the investors in icos are just every day americans lured by aggressive marketing promising and very high returns. In fact, it is now so bad that facebook recently banned all ads for virtually currency related products and icos because there were so many, quote, deceptive and misleading advertising that targeted regular consumers. So i just want to ask a little bit of question around how we make icos safer. Chairman clayton, the fec recognized the risk, so it announced last summer that it would consider certain coins to be securities under the securities act, meaning they have to be registered with the kpigs and comply with disclosure requirements. In 2017, companies raised more than 4 billion in icos. How many of those companies registered their ico with the sec . Not one. Not one. And as of today how many company vs. Registered for upcoming icos . Not one. So still at 0. Can you say a word about why thats so . Yeah. I dont think the gate keepers that we rely onto assist us in making sure our Securities Laws are followed have donekeepers that we rely onto assist us in making sure our Securities Laws are followed have done their job. We have made it clear what the law is. As ive said many times, there are thousands and thousands of private placements that go on every year in the u. S. We want them to go on. We want people to raise capital. But we want them to do it right. What icos what they do is take the disclosure light benefits of a private placement, then add to it the public general solicitation and Retail Investor promise of a secondary market without registering with us. And folks somehow got comfortable that this was new hand it was ok and it was okay and it was not a security and some other way to raise money. I disagree with them. So it is new, but it is not okay another way of raise money. Correct. I understand you to say it is a violation of law. Correct. Registration really matters, when companies dont register they can hide information and sec does not have the information it needs to monitor this market. I am perfectly happy yoor these people to do private placements but do them right. Dont try and do it as a private placement that get all the benefits. And lever over. And do all the other shenanigans. So should i take the today as sounding a warning bill maybe should take closer attention to the law or sec will pay closer attention to them. Yes, and its not the first time. But i appreciate the opportunity to do it today. Thank you. Senator s senator, and thank you to our witnesses we appreciate not only your testimony today but the work you are doing in this critical area. I would ask you to get back to me on recommendations as you refine your evaluation of our current financial legislative system. And whether we need to provide further clarification from congress. And with that, this hearing is adjourned. Are you hearing that . Okay. H. Tonight on our companion network cspan, a discussion with black women journalists on their experiences covering the presidency of donald trump. Well hear from april ryan, sender of the news hour, of cnn and darlene of the associated press. Their conversation from George Washington university is tonight on cspan at 8 00 p. M