On Monday, chairman of the SEC Jay Clayton scolded securities lawyers for helping companies raise capital with cryptocurrency in a manner that potentially circumvents securities law. Meanwhile, CFTC chairman Christopher Giancarlo on Friday addressed concerns about the approval and clearing of cryptocurrency derivatives. Many market participants have demanded special measures for these products to safeguard markets.
Initial coin offerings are a way of raising capital by issuing cryptocurrency "tokens", which generally give investors some sort of reward or revenue guarantee related to a project or enterprise. Critics have argued that ICOs are a way to avoid giving investor protection to potential buyers.
“First, and most disturbing to me, there are ICOs where the lawyers involved appear to be, on the one hand, assisting promoters in structuring offerings of products that have many of the key features of a securities offering, but call it an 'ICO', which sounds pretty close to an 'IPO',” said Clayton.
“On the other hand, those lawyers claim the products are not securities, and the promoters proceed without compliance with the securities laws, which deprives investors of the substantive and procedural investor protection requirements of our securities laws.”
The news comes after the SEC published a paper in July last year, saying certain ICOs could fall under securities law, depending on the individual circumstances.
“Second are ICOs where the lawyers appear to have taken a step back from the key issues — including whether the 'coin' is a security and whether the offering qualifies for an exemption from registration — even in circumstances where registration would likely be warranted,” added Clayton.
“These lawyers appear to provide the 'it depends' equivocal advice, rather than counselling their clients that the product they are promoting likely is a security.”
Clayton added that clients then go on to launch the coin offerings because they are “willing to take the risk”.
Over in Europe, ESMA, the pan-European securities watchdog, issued a warning on the practice last November, signalling more regulatory involvement as member state regulators start establishing their policy on ICOs.
'Recognition, reflection, and wisdom'
The SEC recently rejected the viability of cryptocurrency Exchange Traded Funds, saying there were investor protection concerns to be addressed before the organisation could allow them to go forward.
The Commodity Futures Trading Commission, which regulates the derivatives side of the cryptocurrency market, last Friday charged two companies with fraud related to bitcoin. On the same day, chairman Giancarlo dedicated the greater part of a speech to the ABA derivatives and futures section conference in Florida to addressing concerns around bitcoin futures.
“Virtual currencies demand the focused attention of this group. We cannot ignore them,” he said. “This is not the time or place for denial or misunderstanding or personal preference. This is the time for recognition, reflection, and wisdom… a time to set the course for the future… navigating through new waters. Not tomorrow. Today.”
The Chicago Mercantile Exchange and the Chicago Board Options Exchange launched cash-settled futures contracts referencing bitcoin last December.
During the speech, Giancarlo said that, after a CFTC review of the futures, the regulator had managed to convince the CME and CBOE to cooperate in taking "unprecedented" measures.
These steps included higher initial and maintenance margins to be posted to derivatives clearing organisations, as well as guaranteeing a regular dialogue with CFTC surveillance staff on "trade activities".
Clearing concerns
The chairman also outlined that he was "attentive" to concerns about bitcoin futures' speedy rollout, brought up by “a few clearing members” of “at least one” of the derivatives clearing organisations involved with the products.
The Futures Industry Association, an industry trade body, in December called for more dialogue between regulators, exchanges and clearing houses about the correct levels of margin and stress testing for cryptocurency derivatives, which have a notoriously volatile underlying.
Chairman Giancarlo said he asked his staff to look into the governance of derivatives clearing organisations with respect to the clearing of new products, potentially to make changes down the line.
He also said he recently told his staff to make sure swap execution facilities and derivatives contract markets operated by CBOE and CME conducted due diligence over concerns from trading firms and futures commission merchants about cryptocurrency derivatives.
