“There are tales of fortunes made and dreamed to be made,” said the chairman. “We are hearing the familiar refrain, “this time is different”.
At 2:30pm London time on Tuesday, cryptocurrency pack leader bitcoin was trading at roughly $17,000, according to website coinmarketcap.com, after bitcoin futures made their debut on Sunday at the Chicago Board Options Exchange. At 2:44pm last week, Bitcoin was trading at $11,983.
Addressing main street investors, Clayton warned that cryptocurrency trading could take place on platforms outside the US, and that funds could “quickly travel overseas” without investors knowing. This could in turn mean that the regulator would not be able to "pursue bad actors or recover funds".
Mt. Gox, a bitcoin exchange in Tokyo, collapsed in 2014 after bitcoins worth many millions of dollars went missing.
“As with any other type of potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost,” added Clayton.
"Pump and dump"
The chairman also acknowledged that initial coin offerings, a way of raising funds for projects on a blockchain, could be an effective means of capital raising. However, he also warned that ICOs that are classified as securities should be covered fully by securities law, with investor protection, disclosure and other requirements in place.
“Selling securities generally requires a license, and experience shows that excessive touting in thinly traded and volatile markets can be an indicator of “scalping,” “pump and dump” and other manipulations and frauds,” he said.
Clayton's statement on Monday came alongside an SEC announcement that a food review company in California, Munchee, was forced to stop its ICO after the SEC determined that the tokens it was issuing were securities. Munchee was looking to raise $15m to improve its iPhone app, and was planning to "buy and sell goods and services" using the tokens, according to the SEC.
The SEC issued a paper in July, in which it warned that certain tokens issued in ICOs could be classified as securities depending on certain conditions, including a "reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others".
The European Union’s securities watchdog ESMA also recently entered the fray, issuing a warning on ICOs in November. However, lawyers that spoke to GlobalCapital did not anticipate much in the way of increased regulation in the short term. They expect European national competent authorities will examine the rapidly changing space before establishing consensus.
Exercise caution
Clayton also warned brokers and market participants allowing customers to buy cryptocurrencies on margin to “exercise particular caution”, saying they they should make sure their policy on cryptocurrencies does not violate anti-money laundering and know-your-customer rules.
The news comes as the CBOE, one of the largest exchange operators in the world, allowed Bitcoin futures trading last Sunday, ahead of its rival the Chicago Mercantile Exchange. CBOE saw 4,127 contracts traded on their first day in market.
The CME will launch futures contracts on its exchange on December 18. Both companies self-certified the futures contracts with US derivatives regulator, the Commodity Futures Trading Commission, on December 1.
Christopher Giancarlo, the chairman of the CFTC, commended Clayton on his “strong statement” on cryptocurrencies and ICOs, emphasising that CFTC and SEC staff were working together on regulating the rapidly growing asset class.
"I want to reiterate my previously stated emphasis that market participants should take note that the relatively nascent underlying cash markets and exchanges for bitcoin remain largely unregulated markets over which the CFTC has limited statutory authority," he said.
"Investors should be aware of the potentially high level of volatility and risk in these markets.”