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SEC Chairman Jay Clayton's Comments on Cryptocurrencies Are Cause for Concern

Over the last few weeks, the prices of bitcoin and other cryptocurrencies had been tumbling, in large part due to real or perceived threats of crackdowns from regulators across the globe. So when the heads of the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) praised the technology—and acknowledged the importance of innovation—at a U.S. Senate Banking Committee hearing this week, it’s no surprise it boosted the price. Anything less than their calling for a total crackdown probably would have had a positive effect.

Yet there was a sharp contrast between the testimonies of CFTC Chairman Chris Giancarlo and SEC Chairman Jay Clayton. As New York Times technology reporter Nathaniel Popper tweeted:

In today's Senate hearing the chair of the CFTC, Giancarlo, came across as the guy who learned about virtual currencies from his kids, who think it is cool, while the chair of the SEC, Clayton, is the guy who learned about it from Wall Street lawyers, who think it is silly.

In fact, Giancarlo, who credited his niece with teaching him much about the cryptocurrency and the underlying blockchain technology, gained several followers on Twitter and became something of a social media hero. In contrast, the social media world saw Clayton as being at time more like Saturday Night Live’s “grumpy old man” on the crypto trend. A crypto expert with the handle VergeBull tweeted:

After watching the Banking Committee discuss #crypto it seems to me CFTC Chairman, Chris Giancarlo, is more informed & willing to work towards a crypto friendly future while SEC Chairman, Jay Clayton, seems uninformed and defensive again [sic]the technology

Unfortunately, Clayton’s tone may signal an increasingly heavy-handed regulatory approach for the SEC. Clayton has stressed that crypto technology shouldn’t escape regulation simply because it is new. Yet in his speeches, he increasingly seems to call for regulation more stringent for crypto than that for other sectors.

For instance, Clayton recently implied that a company simply adopting the word “blockchain” in its name could be prosecuted for misleading investors. He recently said at a conference:

I doubt anyone in this audience thinks it would be acceptable for a public company with no meaningful track record in pursuing the commercialization of distributed ledger or blockchain technology to (1) start to dabble in blockchain activities, (2) change its name to something like “Blockchain-R-Us.”

There are certainly scams in blockchain, as there are in every sector. But to broadly condemn “dabbling” in blockchain activities, as Clayton did, is to condemn the process of innovation itself. Much of the computer industry was started by novices “dabbling” in their garages.

And companies have traditionally been given wide latitude in their names, even if they don’t relate to the products they make. The company called Apple Inc., launched by entrepreneurs “dabbling” in their garage, does not grow any fruit to this writer’s knowledge (nor does the Beatles’ similarly named record label, a privately held company).

Then there is Clayton’s insistence that decades-old securities laws should apply to most new coin offerings. This stance is based on an expansive reading of securities laws that likely will be subject to court challenges.

More importantly, it could curb innovation and prove counterproductive in fighting real fraud, which other government agencies may be better equipped to do than the SEC.

CEI will have more to say in the coming weeks on cryptocurrency rules that give consumers recourse against bad actors while preserving the important principle of “permissionless innovation.”  

CEI Research Associate Nur Baysal contributed to this post.