On February 6, 2018, Chairman Jay Clayton of the SEC and Chairman J. Christopher Giancarlo of the Commodity Futures Trading Commission (CFTC), in their testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs, discussed the role of their respective agencies with respect to regulatory oversight of virtual currencies. In opening remarks and published testimonies, Chairman Clayton and Chairman Giancarlo emphasized their desire to ensure the safety and soundness of U.S. financial markets, as well as to punish those who engage in fraudulent, manipulative and deceptive conduct in the virtual currency marketplace.

Building on central themes from their recent joint op-ed published in The Wall Street Journal, Chairman Clayton and Chairman Giancarlo said that, while they were confident that their agencies can achieve their regulatory mandates, they perceived potential gaps in the U.S. regulatory apparatus. For example, they said that the agencies lack authority to regulate some aspects of the virtual currency spot markets, often referred to as "exchanges." They said that these exchanges, which are generally subject only to state money transmission laws and CFTC anti-fraud and anti-manipulation regulations, require further consideration.

Chairman Clayton and Chairman Giancarlo said that they expect more virtual currency-related enforcement actions in the coming months. Chairman Clayton expressed frustration with the recent explosion of unregistered initial coin offerings (ICOs), and those "gatekeepers" responsible for advising on such issuances—i.e., lawyers, investment bankers, accountants and consultants. He repeated his recent warnings to industry practitioners that "[t]okens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the [...] efforts of others continue to contain the hallmarks of a security under US law."

Chairman Clayton said that the SEC is not yet ready to approve virtual currency-based exchange-traded funds or other funds available for retail investors, citing concerns about liquidity, valuation and custody of the funds' holdings and creation, redemption and arbitrage in the exchange-traded funds space.

Several Senators shared concerns over regulatory arbitrage in international virtual currency markets. Chairman Clayton and Chairman Giancarlo responded that, while regulatory arbitrage is an open issue, they are optimistic that increased cooperation between U.S. regulators and within international bodies, such as the Financial Stability Board and the International Organization of Securities Commissions, will enhance stability in the global marketplace and assist regulators in achieving their respective aims.

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