Lasting Impressions: Remarks before the CV Summit—Crypto Valley
Zug, Switzerland (By Video)
Nov. 7, 2018
Greetings to the Crypto Valley Summit from the United States. I am sorry that I cannot be with you in person, but I am honored to be able to address you by video. In some ways, it is fitting for me to be with you thanks to technology since technology has played such an important role in bringing the world together. Crypto and blockchain, by facilitating payment and information transfers across the world, allow people to interact with one another without regard to geographic location. As with any other human undertaking, many crypto projects will fail, but failure is part of the process of refining technology and discovering where and how it can be used to make people’s lives better.
Before I go any further, I have to give the standard disclaimer, one that will not come as a shock to you. What I say represents my own views and not necessarily those of the U.S. Securities and Exchange Commission or my fellow Commissioners.
The first time I was in Switzerland was as an eighteen-year-old. A friend and I were traveling around Europe by train and surviving on a diet consisting primarily of Nutella. Besides the diet, one of the clearest memories I have of the trip all these years later was the youth hostel in Geneva, which was the most wonderful place we stayed during our entire trip. It was well-laid out, spotlessly clean, and welcoming. The impression that Switzerland made on my young mind has stuck with me ever since.
The young people of today are on much more remarkable adventures than I was at their age. With their deep understanding of technology and unbounded imaginations, they are attempting to transform the way so many aspects of our lives work. Because that impression of the Geneva youth hostel has stuck with me all these years later, I cannot help but wonder what impressions are being seared into the minds of this new generation as they are on their entrepreneurial journey. Specifically, I wonder what views they are forming of the environment for entrepreneurship in different countries around the world. Their impressions of Switzerland, which has welcomed new technologies, may be as positive and long-lasting as my own early memories. There is a good reason you are meeting in Crypto Valley.
Will the United States regulatory environment leave a similarly welcoming impression in the minds of today’s entrepreneurs? I am concerned that the answer to that question is no, but there are some reasons to hope for a more positive answer. I will talk briefly about both my reasons for optimism and pessimism.
Let’s get the bad stuff out of the way first. The numerous state and federal regulators in the United States have taken a variety of approaches with respect to cryptocurrency, which makes it difficult for entrepreneurs to know what law will apply to their projects. This uncertainty is a natural consequence of our diffuse financial regulatory system. The benefit of such a system is that it allows for experimentation with different regulatory approaches, but the burden of such a system is that operating nationwide often means having to comply with multiple regulatory schemes. Particularly in a space like crypto, which seeks to bring individuals across far-flung distances into a single market, structuring one’s business to avoid a burdensome regulatory regime can in itself be a difficult legal exercise with large penalties for getting it wrong.
Regulators are coming to terms with crypto in different ways and do not always coordinate with one another, so the United States is admittedly sending mixed messages. For example, our sister regulator, the Commodity Futures Trading Commission, has allowed the development of crypto-derivatives markets, but the SEC so far has not approved any application to list an exchange-traded product based on cryptocurrencies or crypto-derivatives trade on U.S. exchanges. Each of these exchange-traded products, of course, is considered in light of its own facts and circumstances and the comments we receive, but the themes underlying the rejections so far concern me. There is a discomfort with the underlying markets in which cryptocurrencies trade, a skepticism of the ability of markets to develop organically outside of a traditionally regulated context, and a lack of appreciation for the investor interest in gaining exposure to digital assets as part of a balanced investment portfolio.
The SEC’s reaction to these exchange-traded products is not surprising; regulators have an unfortunate habit of allowing their own conservatism and their legitimate fear that they will be blamed when investments go wrong to curtail investors’ options. I, however, favor an approach that allows investors—informed by good information about the relevant exchange-traded product and encouraged to exercise a healthy dose of skepticism—to choose whether or not to buy the product. I am working on convincing my colleagues.
The SEC, in this area and many others, could do a far better job in providing information to investors. It has been a real honor for me to be able to talk with entrepreneurs involved in the digital assets space, but doing so also has made me aware of how difficult it is for people who are not used to interacting with the agency to understand what is happening inside our black box.
For example, when it comes to the crypto-exchange-traded product approval process, the fact that these decisions are generally made in the first instance at the staff-level through delegated authority from the Commission is very confusing. The quick explanation is that there are five of us Commissioners. We have the final say on enforcement and regulatory decisions by the Commission, but because our jurisdiction is quite large, we allow the staff to make certain routine decisions on our behalf. Once the staff publishes its decision, if one of the Commissioners or the affected party does not like the decision, it can be reviewed by the Commission.
Another example is our recent decision to suspend trading for ten days in two foreign exchange-listed crypto-based products that were being traded in the United States over-the-counter markets. The SEC was concerned that there was confusion about just what the products were because they were not being described consistently. Unfortunately, we too confused investors. We did not make it clear that even after the ten-day suspension was up the products would not automatically resume trading in the way they had prior to the suspension. Before trading as usual could resume, there would have to be a whole new round of paperwork and a new regulatory approval. We need to do a better job at explaining how and why we make decisions and what those decisions mean to you, the investor.
That brings me to the positive. Last month, the SEC launched its Strategic Hub for Innovation and Financial Technology, which is a virtual forum for thinking through the regulatory challenges associated with developing technologies. FinHub, as it is known, is just a start, but it does reflect the SEC’s interest in being a better source of information for people attempting to understand how to operate legally under a regulatory framework developed over so many decades. Our use of the securities laws to go after frauds masquerading as crypto-ventures is another positive development. Resources that would have been contributed by eager investors to these fraudulent projects can instead go to those of you who are seeking to build something with real value to society. I am hopeful that we can also offer some guidance to help people trying to raise money for legitimate purposes to do so legally. Indeed, some members of Congress have asked us to do just that.
More generally, there is a growing eagerness in regulatory agencies to understand the promise of the new technology. The SEC recently appointed someone to “coordinate efforts across all SEC Divisions and Offices regarding the application of U.S. securities laws to emerging digital asset technologies and innovations, including Initial Coin Offerings and cryptocurrencies.” The CFTC recently held a two-day FinTech Forum. The Bureau of Consumer Financial Protection has an active Office of Innovation.
Thank you all for allowing me to join you from afar. I am sorry that I could not be there for this morning’s “Initial Coffee Offering” and the fascinating conversations that have undoubtedly followed it. If you are in Washington, DC, please stop by for a visit. I would be interested in hearing about the exciting work you are doing and how the SEC can make the United States more welcoming for entrepreneurs in crypto and blockchain. In the meantime, I hope that you have a productive and enjoyable conference.
 Bitcoin Tracker One and Ether Tracker One, Exchange Act Release No. 84063 (Sept. 9, 2018), available at https://www.sec.gov/litigation/suspensions/2018/34-84063.pdf.
 U.S. Sec. & Exch. Comm’n, Investor Bulletin: Trading Suspensions (May 2012), available at https://www.sec.gov/investor/alerts/tradingsuspensions.pdf.
 Letter to Jay Clayton, Chairman, U.S. Sec. & Exch. Comm’n (Sept. 28, 2018), available at https://budd.house.gov/uploadedfiles/budd_davidson_emmer_soto_sec_letter_final.pdf.
 Press Release, U.S. Sec. & Exch. Comm’n, SEC Names Valerie A. Szczepanik Senior Advisor for Digital Assets and Innovation (June 4, 2018), available at https://www.sec.gov/news/press-release/2018-102.
 Press Release, U.S. Commodity Futures Trading Comm’n, CFTC Announces Agenda for FinTech Forward 2018 Conference (Sept. 28, 2018), available at https://www.cftc.gov/PressRoom/PressReleases/7810-18.
 BCFP Office of Innovation Proposes “Disclosure Sandbox” for Fintech Companies to Test New Ways to Inform Consumers, Bureau of Consumer Fin. Protection (Sept. 13, 2018), https://www.consumerfinance.gov/about-us/blog/bcfp-office-innovation-proposes-disclosure-sandbox-fintech-companies-test-new-ways-inform-consumers/.