Transcripts For CSPAN2 Virtual Currencies 20180208

[inaudible conversations] [inaudible conversations] the committee will come to order. This morning we will receive testimony from sec chairman and cftc chairman carlo with the Virtual Currency and the oversight connected by their two agencies. Welcome. Virtual currencies are meant to act as a money to be traded with the online exchanges such as dollars used to purchase goods or services predominately online. Additionally developers and individuals are selling one selling virtual coins also known as the ico to raise capital over the last year Many Americans have become increasingly interested in Virtual Currency given the rays of valuation with bitcoin it broke the 1000dollar barrier and then peaked december 2017 and almost 20000 as of this morning trading at roughly 6900. Today the market capitalization is roughly 115 billion. This is an incredible rise given in 2013 when this committee had subCommittee Hearings the total value in circulation was approximately 5 billion. As Virtual Currencies are more widespread heads of Financial Institutions have noticed and voiced their opinions regulators have tried to educate investors to make informed decisions to ensure the markets they oversee and participate in our working appropriately. For its part the fcc have put guideposts to help the markets and investors it has issued invested the initial Coin Offering and the investigative report on what characteristics make the ico a security offering issuing several statements and brought Enforcement Actions against sponsors and issue joint statements with the cftc about enforcement of Virtual Currency related products the cftc has been helping the market to launch a dedicated website and Virtual Currency bringing Enforcement Actions to those involved with crypto currency related scams issuing several statements from other commissioners on the issue to schedule hearings on the topic much of the recent nerve news of Virtual Currency has been negative between Enforcement Actions brought by your agency and the hack of the exchange in those concerns raised by Market Participants there is no shortage of examples to increase investor concern also important to note that Technology Innovation and ideas underlying the markets present significant potential to underpin the Virtual Currency has the ability to transform and access the financial landscape changing and modernizing Capital Formation and transfer of Risk Technology is forwardlooking with the regulators to carry out mandates of Investor Protection as the markets evolve. I look forward to hearing more in learning more of Virtual Currency oversight from her witnesses including what they are doing to ensure appropriate disclosures for safeguards. I welcome the chair is good to to have you birth here on both here to capture the intention of investors and speculators and programmers and regulators all over the world. I dont know how many people imagine how quickly and broadly that bitcoin would spread to most of us nothing short of remarkable but critical for regular guest regulars to understand technology so the markets can grow and evolve to understand the risk of emerging technology is not an easy task we are relying on you to maintain the integrity of these markets to minimize their risks to americans who want to participate. The volatility of bitcoin is remarkable in terms of a traditional currency the 1000 rise last year 60 decline last month makes yesterday record drop look like a rounding error. But that has shown the intersection of ingenuity sometimes it appear that a scam artist may understand more of the technology than most Market Participants and that should concern all of us. Our witnesses need to understand the evolution of the markets related to Virtual Currencies and then identify the regulatory gaps. Each of you has made several public statements recently explaining the threats to Investor Protection and the potential of abuse for Virtual Currency markets understand thus fcc or cftc has sufficient authority to police all aspects of Virtual Currency but you must make the most of what you have as you noted that analogy of the comparable i hope those lessons that you draw to do your job in addition to the investment risk currency needs to be used to fund that elicit activity outside the United States and the Regulatory Framework and other countries is still in development i am pleased that the u. S. And senate in particular has been a leader but we can do more so the committee needs to look closely at the gaps of regulation with the ability to get ahead of the curve in as you begin to adapt of those regulatory demands i call on both of you not to forget your day job to pursue and punish misconduct of more traditional misconduct wherever it might appear that means street and wall street i am concerned it is business as usual with violation from the big bank just last week the he had imposed penalties for market manipulation but then decided they deserved waivers under Securities Law. That make sense if it was an isolated incident but the banking question had 68 violations over the last ten years so it is very serious. Too often we see big banks pay fines moving along with no serious pressure punishment violators will not stop breaking the law raising the issue of waivers over the years disappointment to pursue every avenue available it is clear Virtual Currencies bring us into a new age that doesnt mean we overlook the basic principles of going after the bad guys to be tough with repeat offenders. Thank you mr. Chairman. Now we turn to the testimony of our witnesses from the honorable clayton from the securities and Exchange Commission following him we will hear from the honorable mr. Carlo chairman of the u. S. Commodity Futures Trading Commission we welcome both of you and appreciate you coming to share your knowledge and understanding on this issue you may proceed. Distinguished senators of the committee thank you for the opportunity to testify before you today. On the topic of crypto currency and related trading activities the trap market capitalization was estimated at 700 billion billion dollars earlier this year and in 2017 those initial Coin Offerings were 4 billion these markets are local and national and international now where we stand with that market regulatory perspective to be viewed by overly conflicted but it shows how i present these issues to Mainstream Investors i break this space into three categories, first Promising New Technology that proponents of the technology assert it will bring great efficiencies to the national and global economies including capital markets. I hope that it does in the commission looks forward to working with participants to bring efficiencies including oversight to her markets. The second and third categories are crypto currencies and the ico that is a subset to take advantage of the commercial opportunity from block chain technology. One is like dollars the others like stock offerings. Currencies are more widely known were introduced as substitutes to traditional currency such as the u. S. Dollar or euro those who promote those currencies make it easier and cheaper your will cheaper to buy and sell goods across borders with those verification fees and costs to be eliminated and these assertions have proved true in many areas when i see initial Coin Offering our Securities Offerings they are an interest like stocks and bonds promoters use the term coin based on the fact it is by additional entry or a coin on electronic ledger as compared to a stock certificate you can call it a coin but if it functions as a security it is a security also the ico may have nothing to do with Technology Beyond the coin itself to buy the ico does not mean you are investing in those ventures there are many problems with the way the crypto currency and ico markets are operating that you are worth particular attention first the market has substantially less oversight than traditional Securities Markets and to be blunt if you are trading crypto currencies on a platform that looks like a Stock Exchange do not take any comfort. Our Stock Exchanges that are required to conduct surveillance and to facilitate facilities trading with capital conduct requirements these without a doubt are necessary to protect those markets and investors. Second, many ico are conducted illegally with promoters and other participants are not fighting Securities Laws some say because it is not clear. I do not buy that the analysis is simple if youre offering a security you have a choice conduct a Public Offering with the fcc and with these professionals those who engage in semantic gymnastics in the effort to avoid having a wayne ba security are in the crosshairs of the enforcement division. What do we do . I look forward to discussing that question in more detail and comment on jurisdiction and enforcement we do not have direct jurisdiction over the popular markets to trade true crypto currencies. This is not oversight but the result of a new product the traditional currency market did not need direct regulation by market regulators they are sovereign back and regulated with a long history that crypto currency has no sovereign backing or oversight and are currently functioning as assets much more than mediums for exchange. We do not use this for jurisdiction if asked me will work with other regulators who evaluate to address this issue including our friends at the fad and the cftc who all have an interest in the market my time is short but to the extent Digital Assets are securities and i believe every ico i have seen is a security we have jurisdiction we will enforce these laws many also include private rights of action and working with the doj and other regulators to enforce these laws. Thank you for the opportunity to testify i stand ready to work with congress on these issues and look forward to your questions. Thank you chairman and distinguish members i have submitted a statement detailing cftc work over the Virtual Currency and with your permission i would like to begin briefly with a slightly different perspective as a dad as a father of three collegeage children senior, junior and freshman during High School Years we try to interest them in the Financial Markets my wife and i set up small brokerage accounts they could use to buy stocks. Other than my youngest son we havent been able to be there interest in the stock market i guess they are not much different cap kids their age but something changed last year suddenly they are talking about bitcoin and what i thought one of their older cousins was telling them about it and they got excited. I imagine some members may have had some similar experiences. It strikes me we are in a position to respect their enthusiasm about Virtual Currency with a thoughtful and balanced response not dismissive but yet we must crack down hard on those who try to abuse the enthusiasm with fraud and manipulation. We must educate ourselves in the public about this new innovation to make good policy choices to put in place the Regulatory Framework to reduce risks for consumers. Putting on my hat on the cftc first we must learn everything we can with that new initiative to engage with the innovators to farm the agency about Virtual Currencies next to put things into perspective as of 8 00 a. M. This morning the total value is 113 billion that is less than the market cap of a publicly traded company of mcdonalds. The total value of all Virtual Currency is around 313 billion in comparison the global money supply is around 7. 6 trillion. Because that coin is compared to gold the value of all the gold in the world is 8 trillion which dwarfs the size of the Virtual Currency market such as how the public what we learn there is a lot of noise around Virtual Currency and regulators must help set the record straight the cftc has produced a large amount of Consumer Education materials including written statements and podcast webinars and a dedicated that coin bitcoin website we have never conducted this much outreach for any other Financial Product and another element is regulatory coordination because no one agency has direct authority we have to Work Together that includes us ec, the fed the irs and state banking officials. To exercise our Legal Authority with derivatives while clarifying the statutory limitations and to be clear the cftc does not regulate the dozens of virtual platforms here and abroad we cannot require them to meet those requirements with market surveillance standards for conduct, Capital Requirements or cyberprotections with these are all standard regulations in the futures markets that we oversee but through that commodity derivative markets we do have enforcement power with newly launched futures the cftc can now obtain trading data to analyze that manipulation and that leads to the final element of tough enforcement. Led by the Virtual Currency task force we brought several civil actions over the past few weeks to cry crackdown and more will follow. Enclosing pro one looking at something we wrote recently in the wall street journal the markets are new and evolving international that require us to be numeral and forwardlooking to coordinate with International Colleagues and engage with stakeholders including congress. I am glad to be with you today i hope my kids are listening. Thank you very much. I have had those dinner conversations with the children and you are right this is incredibly interesting and growing new area of financial challenge particularly among at least with my children and yours. You both have said one way or another that neither of your agencies have complete jurisdiction over crypto currencies. The question i have is if you have sufficient jurisdiction i would like both of you to address that question should congress address revising and refining our financial loss so one agency or group of agencies have complete jurisdiction . If you look at the jurisdiction of all agencies today do we have sufficient jurisdiction in place today . Be back in my position youre always cautious speaking for other agencies but to be very direct we should all come together as federal banking regulators and states that are involved as well to have a coordinated plan to deal with Virtual Currency trading market. I think mainstreet investors look at the Virtual Currency trading platforms and assume they are regulated in the same way the Stock Exchange is regulated and think we should address the issue. See you dont think we need additional legislative authorities . We may. The first get together what you can and cannot do that and advise us . That is a good way to put it. I think that is exactly right but the first step is to recognize the gap as we both said in different ways what we call the spot market is not regulated so for us we are familiar with that because generally we dont have regulatory supervision over the spot markets for which derivatives apply that is a longstanding basis and to take enforcement action for manipulation but we dont set the standards in those markets and that is what we have today with bitcoin so there is that gap in the starting point is that there is that so there are other elements with agencies that come to bear like the state regulators there is a patchwork across the nation some have been very assertive and others have been less so also to be active with Money Laundering and know your customer requirements so there is a patchwork but not a comprehensive structure but that is a policy discussion to be ha had. Leading to my next question much of the activity in the Virtual Currency market is crossborder and international. So obviously what challenges does that present i only have about a minute left. The International Nature of the market is why a patchwork is probably not sufficient if it will develop as a significant market there are reports that these currencies are used for Illicit Activity and i encourage them to do so up with this this activity but this is a challenge we face in many regards of the 21st century markets have become truly global not just Virtual Currencies but it does become a challenge as we think about regulation we have had that challenge working overseas regulators as a result of the dodd frank act to bring these together is a tremendous challenge for all of us and requires a lot of new thinking. I appreciate your remarks on these issues i encourage you to get together between yourselves and the state regulators and evaluate what our structure should look like and let us know your thoughts on that i would appreciate that. Ac last year the initial Coin Offering was raised by policing these transactions to protect investors, to that 4 billion was raised in the u. S. . Its not clear it is hard to get a number on that because this has been conducted on largely unregulated basis but i imagine senator a significant enough we should Pay Attention. So the sec has taken action for serious violations so that speaks volumes about the challenges in front of you. But the chairman in response to the question about agencies working together, your testimony highlights cooperation between the two with bitcoin it doesnt mention cooperation with the Financial Protection Bureau they have files complaints so how have you been coordinating your work specifically on this but other areas with cfpb . On this area largely through the f soc i have made it very clear my views in this area we should all be on the lookout from each perspective to be as a member of fs f soc on the enforcement perspective with the securities area we dont see the cfpb on the Security Side of this i am not aware of any direct coordination on a particular enforcement action but i could check on that. Deutsche bank credit suites have been fined over 300 million by other regulators for various forms of market manipulation but the fcc has been quiet once that he found the fcc has virtually stopped enforcement action against large entities referred to as wall street firm so how do we have confidence the fcc is willing to hold wall street to come accountable . The i actually saw the port that doesnt come as a surprise but i find that annoying to be honest because it does not reflect the fact of the gestation period of the cases that we bring is between 22 and 24 months of any type of statistics that have a latency. We put out a report that talks about the numbers in a comprehensive way. Under republican president at the swipe of a switch, so theres the chair of the enrichment Federal Reserve used to tell me. But im further troubled by a statement by one of the codirectors last fall that sec might lose one of its enforcement staff compared to 2016 figures this would reflect a 7 reduction in enforcement headcount so how will you stay on top of these into th and ther enforcement and all the other areas we talked about to be able to fight traditional misconduct how are you going to do that when you are not replacing them if that is the case . Personnel is my biggest challenge at the moment. We have a hiring freeze as result of natural increase in cost, a hiring freeze and taking other jobs. It reduces the size of the workforce at the sec. I could use more people in enforcement and trading and markets. Those are the two areas where i think the American People would get the greatest return for additional bodies. When you come in front of us and i appreciate your candor, and you tell us you are having trouble filling those jobs [roll its no trouble, i just cant. Thats true because the freeze. Isnt that a message to those who want to game the system that isnt a cop on the beach but even the new chair wants to be . Do i want more bodies to do this, yes. With your budget that is coming out, our understanding is i hope the freeze is lifted into the budget is enough and i hope you will speak to us and asked particularly people on the other side of the aisle for the dollars we youeed to put those caught somebody to [rol cops one beat. Thank you. Senator shelby. Chairman clayton, youre the chairman of two powerful regulatory bodies that you have different jurisdictions. This comes somewhere in your rain, does it not . Even in the commodities but it clearly is in your range the Federal Reserve is the biggest tank regulator that we have and also the treasury is involved in this. How are you going to put together a task force and can you do that on your own through the administration to deal with the rnc because youve got the fed, the treasury, commodities, the securities perhaps some others we havent thought about. Before this gets out of control somewhere in the world. Let me start by recognizing the treasury secretary. Hes put us together to talk about this because you are exactly right the funny thing about these currencies is the only work if they are integrated in their purported purpose and if they are integrated in the Financial System so therefore it touches on all of our regulati regulation. The secretary ha the secretary has been out front on this and the Virtual Currency working group, the fed and since then weve had a had d disciplinary conversations and work strengths developed in a number of bilateral conversations with the secretary and we are going to be coordinating a various response to. D. You need additional legislation in this area. We may be back with our friends from treasury and the fed to ask for additional legislation you go to the doctor and get a virtual examination and this was not my world, at the same time, they lack Intrinsic Value and liquidity. Im sure people have made a lot of money or lost a lot of money going down but im not sure where the bottom is if it was ever reached as opposed to a sovereign issue in the currency. Do you disagree . Know, senator. I dont know where the natural equilibrium point is on this but there are some economists who pause bu that theres a relationship between this value and the difficulty or the cost of mining which is a process of electronically reducing fees and that there are some charts ive seen that part of that correlation seems to be correlated until last summer when the price broke free of that correlation and that they get back late into the year last year. Now im not an economist and i find them fascinating but im not an expert. Im not endorsing the point of view. To the value of the crypto currency and International Exchange im not seeing the benefits in the marketplace and so from the perspective of protectinprotecting main streetd inspectors they should understand that. How do you put a value on the crypto currency does the market put a value on it or does it go straight up and then straight down . That is what someone is willing to pay you for it, so in the securities world there are rules that dictate how much you have to tell somebody about what is that you are selling them. What part of the mandate to protect investors and the chairman of the commodities future trading is seeing obviously commodities just going wild at times. There is a hiring freeze that gets in the realm of appropriations and so forth and im hoping that we will give you all the tools you need to do your job and to hire the people that you need. Need. Thank you very much. You do need more posts on our do you have the technologists and computer experts to understand how these. In working with a cyber growth, theyve got an exceptional job getting up to speed on this in a short amount of time and identifying some of the very issues you talk about. In an emerging area like this, could you use more horsepower . You make a very good point on looking out against the International Nature of this and trying to understand where it is going to land a. It is a question of heres what the technology is. We also have some of them in the enforcement and Work Together. The same question, do you have the same Technology Working to gather . We have done a couple of things in 2017 as the senator brown said the ticket ahead of the curve we hired the agencies someone that comes with a deep background. We also created our Innovation Hub and give asked where it is located. It is located in new york city. We wanted to be close but in terms of protecting consumers we formed a virtual Enforcement Task force and the possible actions against fraudsters and as i said in my testimony there is more to come. We have been funded for three years and we do need Additional Resources in the crypto currency specifically. That is just one crypto currency. They seem to be proliferating every day there is a new varie variety. Some of them are based on the same technology or process. Looking at the systemic effects. In the derivatives that were nominally esoteric etc. And so years later exploded a. Its important for listeners to know the cause so many of these as you said when after one. I was a ponzi scheme taking the consumers money using it to buy houses and furniture and jewel jewelry. In terms of the Systemic Risk right now this is a relatively small market by the ratio that we have to watch it and watch it carefully over the crypto currency is we have had to watch it. I have a hard time getting my head around that because if it is a medium of exchange it doesnt make a lot of sense to me, but on that systemic, i agree with the chair in. But if people are getting ripped off, that presents reputational risks. I will make a comment and followup for the written question. That would be a very good idea. Im happy to address the question. They didnt have a quill at that time. Everything we talked about seems to translate back into dollars and cents. That hasnt changed until now. We are talking about a new type of exchange and its somewhat like bartering to me which could avoid that determination will value of the dollars and cents that brings up the question of how do you tax it on the recognized income but also in this particular case both of you identified you had these resources and Regulatory Oversight capabilities that you are utilizing today. You started with this discussion with regards to the issue of whether or not you had control over the fact if they were issuing in this particular case. With the regulatory needs in this case. The security an in watch, the definition of what . Im going to not use the technical terms or Supreme Court cases but it includes if you are offering security or something and i give you money and the purpose of me giving you that money is to profit going forward, so if i gave you money and you say im going to take the money and thats going to increase the value of that claim and by the way, you can trade it to somebody else and you may be able to get value for it tomorrow in fact he probably will get value for it so you can get more for it in a few days. In the interest of investigating or reviewing whether or not the commodity was something and we talked about the cftc, we are talking about a different story where the commodities are in interest to you. Rp is currently being traded in quantity or security or are they both . If it has characteristics of multiple Different Things one of the praises that is often used is bitcoin as a medium of exchange, restorative value or the needs of the count. Those three things have different connotations to them if it is a medium of exchange than it is a currenc crazy instt and as we have seen a number of the exchanges that have been close it was recently a conference stopped accepting it for registrants because they couldnt process the statements but yet it still spoke of the means of the account. From our point of view when it is used as a store of value its like an asset commodity you will see the phrase hold on for dear life and the thinking is if they buy it and hold it. Im going to own if i dont know what is going to come of it and she isnt a fraudster or manipulator just a kid and im fascinated talking to her and she represents a lot of folks who think theres something in this i want to hold onto it, soo in that regard it is a from our point of view it as a commodity and if there is a derivative, the problem is in the cash market, we dont have Regulatory Authority and we cant set the standards. If nothing else, people like my niece can have security but theres not fraudsters and manipulators for far too many of them. You are suggesting earlier we bring them both again at a later date after theyve had an opportunity to look at the differences. Thank you gentlemen. Thank you mr. Chairman. On january 26, bloomberg published an article entitled a big gift to companies blocking investor lawsuits. Now as you know, class action lawsuits are how investors can hold people accountable when they frog people. The article says they think about selling the shares in initial Public Offerings and at the same time allowing those companies to prohibit investors from bringing classaction lawsuits against them. Are you forcing investors to give up class actions when they have been defrauded . Theyve never allowed them to bar investors who get cheated from bringing classaction lawsuits, so i just want a straight yes or no answer from you on this. Do you support this enormous change in the policy . I cant prejudge an issue that comes before u us but i wod be happy to talk with you about this. This. What we get to the bottom line. I am not i cant dictate whether this comes before us or not im not anxious to see a change in this area. You run this agency if things have been without your approval im going to guess there will be at least two votes against that and that the best i dont want to pre judge the issue. If it were to come before the agency, it would take a long time for it to be decided because it would be the subject of a great deal of debate. Like i said, in terms of where we can do better this is not an area that is on my list. What was i in reading his real skepticism about a rule like this. Financial advisers. They cost hardworking americans trying to save for their retirement about 17 billion every year. Less than a month after fewer sworn in as the chairman you issued a request for information asking for Public Comment on rulemaking related to the standards of content for Investment Advisors and brokerdealers. Can you state to the committee that any rulemaking you do on this topic will not weaken the existing protections for their Retirement Savers . Making an absolute statements like that an absolute statement. Let me tell you what im trying to do. The relationship between dealer and the client in a very simple area. They all have different standards. My Main Objective is to bring clarity to death without jeopardizing investor protecti protection. There is an insufficient standard of a lack of clarity and also the standard is only as good as the remedy. One of the things we are looking at is what dollars do you collect when somebody has done you harmed because you could have a strong stand that if there are no dollars there, that is a problem. I agree with you if you want to strengthen enforcement of the rule, count me in that that is what the people look for. We see a jurisdictional arbitrage. Do you see that today in this developing crypto courtesy and icos . Who pays for the frivolous classaction lawsuits, shareholders. I would argue customers, employees, all of the above. To be frank, the tax loss in and things like that, of course they are. They are the ones that predominantly play into this and you said before most of the current investment i dont know if we all know about that yet south korea and china are heavily invested in a. Each country is taking a perspective of du etc. Which also goes to how functional is this asset class. Theres an understanding of your average investor and how you would know. I understand there is interaction between all the other there is another access that you have to coordinate for thwiththe other country regulats well. What are you anticipating we need to do either legislatively or rulemaking to combat that . We are also seeing price arbitrage as well. There is so much interest that drives the price up slightly higher. Perhaps as the market matures, a single price may develop. In terms of the regulation, i think sometime ago, the middle of last year, there was a perception that it was off the regulatory grade and one of the things which are man and i have been working so hard to do is to dispute that notion. We set up regulatory standards on the platforms but when it comes to enforcement, we are using our full authority to drive the message and others are giving that as well. We have had frequent conversations with the head of the Japan Financial Service Agency about things going on. This is not off the grid, and i think were seeing that in the price as the word is getting out that we will go after misconduct i think you are starting to see that reflect the price and that is an important step. With all of the time we have left i would like you to respond to the efforts are underway right now. You see this beginning to develop. I know you are both involved in this. Can you address with your agencies are doing to combat that . This is one of the things im worried investors dont understand. When you have an unregulated exchange, the ability to manipulate prices goes up significantly. Just a few coordinated sales can change the price. A fraudulent email. Ive mentioned before but this currency task force and we have some good people on this and we brought three actions in the last few weeks and they said there were more to come. We are digging deep and we see a lot. I dont want to get ahead of that other than to say we are working hard right now. Now that the crtc has jurisdiction in the public and the risks closed by currency operators what other ways can you agency prevent the investors from falling victim to the fraud and manipulation . The Ranking Member asked what we would do and we formed a partnership to the Consumer Education. One of the things i learned recently is a place where a lot of people go into research. One of the frequently searched items we are teaming up to go out to americas libraries to educate librarians to provide Library Patrons to use the resources we are getting creative in the area of Consumer Education. We have several podcasts on the subject with thousands of downloads, we are working as hard as we ever have and weve never done so much on Consumer Education as we have done with Virtual Currency. We also have an office of Investor Education that has been engaged with a number of groups on this and i think they have te a terrific job getting the word out. The investors will remain vulnerable to the online solicitations that are sometimes more difficult for you guys to pick up . In the broad range of marketplaces, they seem to be the choice for fraudsters and manipulators whether it is in Precious Metals or Foreign Exchange or a whole range of products we see and prosecute a. They guarantee 100 returns in d things like that and it is a big part of our enforcement efforts. This goes to the perspective and hopes and dreams, but what warnings would you give, theres an article in the Washington Post yesterday about good hard working americans and the people that have worked really hard and want to have, the title was the bitcoin. What would you say to them to help protect them from winding up in a situation where a few years from now it didnt work out quite the way they were hoping . It is troubling which is why we are putting out so much materials. What i would say is the same advice if it sounds to be too good to be true, it is if they are promising a ridiculous return, they are ridiculous. If you are going to get the money you better be prepared to use it to the. There are things like Disruptive Technologies that come along but they shouldnt disrupt the way you look at markets for us with a way thathe way that you look t investing. Putting all of your money into a Disruptive Technology has a very high likelihood of not working out for you as individuals. When we see Disruptive Technologies come along, there will be winners but there will be many losers, that is the way that it works. To ensure the Virtual Currencies are not used by terrorist groups or nations like north korea to avoid sanction. We work very closely with Law Enforcement and we reached a program with the fbi where we have fbi agents in order to look at this. At the end of the debate, the use of the cash market is going to require cooperation across multiple agencies especially those who because of their Money Laundering obligationsmoneylau, they see some of these issues and to bring the expertise to bear and coordinate. I think you are both doing a terrific job. [inaudible] i pretty much put my investing before i started at the commission. I didnt read it cover to cover but i will do this i didnt read it cover to cover. How many investors do you think that . What is the point. Im putting aside the issue. What is your point of the disclosure if nobody is reading it . And why do we want to do the same thing with bitcoin . Its been one of the foundational principles of the securities that adequacy of disclosure and full disclosure. I will tell you having been in business that most Business People will tell you they studied the perspectives of me to see what they can sue if something goes wrong. I dont think the disclosure that we have right now works. Its good for the lawyers and for the Financial Advisors but i think we over disclosed. And i bet you have smart lawyers on your staff you can go to him to say right t write me a good disclosure for bitcoin. And you would get it back and look at it. Tell me if it makes sense to you. Then what is the point . How far do you think we ought to go in terms of the currency separating this from the block technology. China applauded in south korea has, to back. Do we just go out and fully disclose, is that what we got to do . That is the question that we are here to put forward. I am not, as just a person watching it, i am not satisfied when i see people thinking that these trading platforms of the currencies have the same kind of protections. These things make me unhappy and figure out how to deal with them is why we are here. I agree that we should be careful not to go too far. When the people are violating our security flaws worked pretty well but the disclosure could be improved. I ask question asked questions a little carried away i think i went over three minutes. The Ranking Member put me on a double probation [laughter] you can expand the disclosure and you havent done anything. Im not suggesting that we shouldnt have disclosure but you have to have a disclosure that makes sense and helps people other than the lawyers. I agree with my senator from louisiana. I dont think that you can separate the underlying distributor from some of these assets. And if we have the same rate of increase we would be up north of 20 trillion caught up in this area by 2020. Iran were i was lucky enough to get in the cell phone business in the 80s. I think we are looking at the same kind of transformation about to take place and we are going to have to write our arms around this we talked about the Consumer Protection Money Laundering issues and Cyber Security issues and the exchanges have been hacked between 2009 and 2015. I am not exactly sure what the right regime ought to be, but i would argue while i commend them for putting a working group to gather, we created this in the first place and this rises to the level of the systemically relevant event and i would be curious whether you believe this ought to elevate to this analysis. There is a big rise if it keeps going this is one of the reasons we brought it up in a fsoc. I want to go back to separating the currencies. We should regulate them likely regulate the securities. On the issue of disclosure sometimes what we are seeing isnt disclosure but its false disclosure which is a fraud and i think we need to step in. As the chairman mentioned, we have these discussions and in addition there have been discussions led by the Financial Stability board and also the International Organization of the commissioners. So, these discussions are taking place at the right levels of debate but there is so much more to be done. You have a whole new platform where they are creating filesharing and i am not sure what kind of assets does fall into. Into. Are they potentially regulated within your realm or if there is a Creative Exchange between access computer time im not sure where that gets at this point. The definition of security, they were smart and they did it on a principled basis that basically said if you are giving people money in exchange for the future development of a business with the hope of a return and whether that return comes in the form of server time or your ability to solve server time, it is a security. I think thereve been some very bad behavior. Yet certain they have not stopped in others they have stopped. There was a tremendous amount of activity in the country and if we were going to rely on the gate keepers to help us enforce those enforce those rules and accounts for the lawyers, underwriters, sellers and the like, i am counting on them to do their job and ive made that clear. I think we have moved too fast on allowing futures trading on bitcoin, and yet theyve not allowed etf. Do we need a more coordinated effort because i think the potential atlarge on these assets into the underlining could be as transformational and i think we are going to need a much more coordinated effort. I do my thing is expired. It is important that we coordinate a list. We are both individually and collectively understanding our authorities and the technology around it. There was a communication about myself, the treasury secretary and others in connection. They are quite different. Bitcoin is an anonymous area that has a future transparent to the regulator. The future is mostly institutional in the network. We are now having visibility into the stock markets and the data that we wouldnt otherwise have. I break this down into three areas. We need to look across and see the treasury and there are Securities Offering supercold ico that should be taken as a security offeringthesecurity oft with the regulatory regime. Thank you for your appearance today. I want to continue on the questioning. Putting aside bitcoin or other kinds of currencies that are based on the block chain what are your thoughts on the technology of the block chain and distributed enterprises . There would be no technology out of that initiative. In the potential applications, and by the way i am no pieinthesky dreamer i just report what i read but the applications range from enormous potential in the Financial Services industry and Banking Industry right down to the way that dollars are spent and refugees are accounted for in the globe. There was an article about the technology for 2. 5 billion people around the world who dont have access to the services. One of the areas, american soybeans were just handled through a transaction by the Dreyfus Company for sale to china said it is being used in the American Transportation logistics system and more importantly, the potential technology for the regulators to be able to do close market surveillance and if it had been available in the 2008 it would see the credit exposure of one bank to another in real time with precision that would enable more precise choices so i think it has an enormous potential. I agree that potential seems very significant. Just look around anywhere in our economy where the verification Record Keeping harecordkeepingt are potentially reduced in an opportunity that is just one of them and i hope people will pursue it. Lets turn attention now over to crypt crypto corinthian bitcs the most prominent. Yesterday dow jones had a decline in the point scale as a percentage which is high but not the highest ever but that obviously generated a lot of news coverage. 2 inflation or less, however they see a 32000 increase since the value of the last five years has declined by some 60 and just in the last 30 days what are the factors driving that price volatility in relation to the companies wer or the u. S. Dollar . It wasnt as large as the volatility in some other Asset Classes known as the volatility age so we have seen extraordinary volatility, but in the commodity derivatives we are used to volatility and that is one of the things the product is made to do is provide those that are exposed beams hedging at mitigating the risk to the volatility. I dont know what is driving the crypto courtesy. They are not correlated with swofford currency, so it must be Something Different than what drive the dollar. But that is one of the issues before us but does appear to be a motive volatility compared to the media that they are supposed to be a substitute for. For the legal tender of the nationstates or the transnational organization. You raised a good point. Maybe that is handsdown but an asset that is highly volatile. If you agree on number one you expose yourself to significant risk. I do want to associate myself with the remarks of senator donnelly about the risks that are currently posed for the terrorist organizations to make the same shins not just in trading. Ive been actively following venezuela and russia and currencies. I asked about this a few weeks ago when she was here before the committee. Under what circumstances would the fcc and the cftc have the role in engaging or regulating the new currencies more broadly the cftc to play a role in preventing the use of Digital Currency to avoid un sanctions . Our jurisdiction should be very limited in that area. For the fraud and manipulation we thought the instrument was being used. But if you are manipulating to the u. S. Sanctions . I would have to speak to the enforcement council, bu counsele would certainly look at it very i would like to have you back and hear from the committee. Arargue interacting to the extet that you may have limited jurisdiction or integrated into the financial Regulatory Network that watches for illicit activities or is there a gap to create useful abilities . As mentioned, senator cochair antiquated and i are part of the Virtual Committee task force put together by the treasury secretary. The cooperation between the agencies so i look forward to asking the question as well. I would say to both of you to the extent that you have a role to play and you have the President Authority to do so, i would like to know about that if you determine that is necessary because i sense of crypto courtesy is largely driven to evade the u. S. Sanctions and undermine the swofford kerensky. Let me ask you this. If we see a dramatic increase in the number of the offerings where private companies are using digital tokens to raise money going to the capital markets, the journal reported that initial offerings grew from about 96 million in 2016, two over 4 billion in 2017. What can the sec do to better protect investors to have those initial Coin Offerings without understanding the risk . I will not comment on a specific instance but some time ago we put out an alert that said if you are promoting securities you are taking on Securities Law liability. I believe that has tamped down some of this enforcement activity but i will say it again if you are promoting securities potentially you are taking on Securities Law liability. So let me ask you, i appreciate that i hope you do more to protect consumers they can you walk us through why the sec is not comfortable with approving the significant investments of crypto currencie currencies . The etf product space is retail and we have made it clear to the marketplace there are a couple of issues having an etf based on a crypto currency going to price discovery, custody and other issues around volatility we let the industry know that that is a concern to us and we dont approve the etf product with the crypto currency underwire until we are comfortable with those issues. Senator. Im sorry have to crane so left to have a conversation with me but im delighted to be back on the committee. Thank you very much. Let me first start by suggesting that if you have suggestions i will not have a chance to see you in the appropriations subcommittee before we take a look at fy 19 assuming we are successful on fy 18 and budget caps we will have an opportunity to reconsider spending levels for fy 18 with a major request through the budgetary process but if there are priorities going back to increase funding at any level of jurisdiction i would welcome your input as to what is the highest priority i heard earlier one of the questions to senator reid was the hiring freeze has created challenges i dont know if we can overcome that but if there are other things that are useful for me to know. I dont want to get ahead of the process but fy 19 request reflects the sentiment i have expressed today. I dont know if we will see that before the potential increase of funding depending on the president s budget is released unless there any suggestions you would like to convey but the issue, maybe you answer the question with senator menendez, but you were reluctant or unwilling to approve the etf proposal, and doesnt the etf reduce the volunteer in volatility to reduce risk . So really doesnt that help alleviate those challenges we face or is crypto currencies so unique it is different than other items traded . Been at the cftc product has that effect largely institutional you can take both sides of the market and he gives people a chance but with the etf can but predominantly they are offered for a long investor some but he wants exposure to the rise and fall of other currencies and that is a different dynamic than a futures product in taking that Investor Protection view with those types of products that is embodied liquidity custody. If we are comfortable with those rules, then we can move forward. Let me raise a different topic. One of the things i tried to Pay Attention to in cooperation with the senator from mexico to modernize the it system within the federal government and you indicated chairman of the 500 milliondollar loss from the crypto currency in your written testimony. Now we have passed as part of the National Defense authorization modernizing Government Technology to create a fund for federal agencies to bid themselves of their legacy technologies and have access to all or to replace that legacy and encourages moving to the cloud along with opportunities to have Better Technology and safer Technologies Systems to reduce folder abilities. You have a lot at risk in the safety and security and i welcome your reassurances that im sure youll tell me you are spending many millions of dollars working diligently but im guess if we ask agencies of the federal government who have been hat and whose data has been released, they would have told us the same thing prior to that occurring to them. First of all i would be delighted to be assured we will not be reading in tomorrows paper there has been a hack at cftc or scc and offer the opportunity to look at that legislation how it might be a benefit to your agencies and suggest ideas for what congress can do to further strengthen cybersecurity. I have another Committee Hearing going out the same time i apologize but i appreciate your comments and your conversation today is so important. As somebody who was attorney general in the state of nevada working on Consumer Protection issues obviously any type of fraud is important but i have a couple of questions i understand that companies originated outside the crypto currency stage like kodak or burger king have jumped into crypto currency space however some critics said they are using block chain as an opportunistic venture to pump up the stock prices long island i. C. E. Tea changed its name to long block chain so are you concerned companies could be utilizing this as a scheme to pump up stock prices . The short answer is yes. The longer answer is i put out a warning in this space to Securities Lawyers as well that nobody should think it is okay to change her name to something that involves block chain with no real underlying block chain Business Plan to try to sell securities based on that type. What does that mean when you put out a warning . On the sec website that this is an area of concern to us anytime there is something new that people seek to raise the value of their securities without the underlying goods to be there is problematic. So the jurisdiction of the cftc. The leader is correct instructions on amendment numbered 1932. Mr. Mcconnell i ask for the yeas and nays on my motion. The presiding officer is there a sufficient second . The yeas and nays are ordered. Mr. Mcconnell i have an amendment to the instructions. The presiding officer the clerk will report. The clerk the senator from kentucky, mr. Mcconnell, proposes an amendment numbered 1933 to the instructions on the motion to refer h. R. 1892. Mr. Mcconnell i ask the reading be dispensed with. The presiding officer without objection. Mr. Mcconnell i ask for the yeas and nays on my amendment. The presiding officer is there a sufficient second . There appears to be. The yeas and nays are ordered. Mr. Mcconnell i have a seconddegree amendment at the desk. The presiding officer the clerk will report. The clerk the senator from kentucky, mr. Mcconnell, proposes an amendment numbered 1934 to amendment numbered 1933. Mr. Mcconnell i ask the reading be dewitt. Dispensed with. The presiding officer without objection. Mr. Mcconnell i ask the mandatory quorum call be waived. The presiding officer without objection. Mr. Mcconnell i ask unanimous consent the senate be in a period of morning business with senators permitted to speak therein for up to ten minutes each. The presiding officer without objection. Mr. Mcconnell i ask unanimous consent that the appointment at the desk appear separately in the record as if made by the chair. The presiding officer without objection. Mr. Mcconnell now, mr. President , i ask unanimous consent that when the senate completes its business today, it adjourn until 10 30 a. M. Thursday, february 8. Further, following the prayer and pledge, the morning business be deemed expired, the journal of proceedings be approved to date, and the time for the two leaders be reserved for their use later in the day and morning business be closed. Finally, following leader remarks, the senate resume consideration of the house message to accompany h. R. 695, with the time until the cloture vote equally divided between the two leaders or their designees. The presiding officer without objection. Mr. Mcconnell so if there is no further business to come before the senate, i ask that it stand adjourned under the previous order. The presiding officer the the presiding officer the the senate will vote on the budget bill tomorrow. Now we return to the recorded Public Affairs programming. As they were expected to function in yesterday with the volume since november 2016 there was a significant price change, but we have to types of limits we have single stock but neither one of those were hit with a single stock was nine the Circuit Breakers did not get hit so as i said here today there is nothing that came out of that that concerns me from a functioning standpoint. But days like yesterday our job is to look out. From the regulatory standpoint you say you dont say any one see anything amiss . Yes. But what spooked the markets . With inflation perhaps with those that watch the markets that they see the fed is beginning to raise Interest Rates as they see it and then if they have information he economy is hot and unemployment is low . Can we say . I cant say. There is a lot of opinions on those things but our job is to look at the functioning and Systemic Risk and i ask myself is there anything that happened yesterday different than the day before . So far it is no. That is the question i ask myself almost every day. But when the market is going up people are lazy that is natural when it is going down not everybody is elated. That is fair. Do you have any comment . Just a recollection of the saying that my introduction into the Financial Markets used to say when i would ask him what brought the market up or down he would say it was a . Oh it was down . So he said when you listen to the pundits and they say it was because of this it may or may not have been why but but the pundit needed a reason so they pick something out and that is the reason of the day not to be facetious but markets are very complex sometimes it is oversimplified you hear it on the nose or the stock mom on the news but nobody really knows. So now with fundamental changes our job is to look at the structural underpinnings to see if there is anything not functioning you will not be surprised to know we had a late night last night Early Morning this morning checking in with the exchanges to make sure things were in order with those marginal levels with no significant breach and i can say this system held and worked as it was designed to do the margin levels worked so the right systems and the right policies are in place the markets are always evolving that is why we need to stay very close to them. The market always corrects maybe not an ordinary correction but it will correct itself and we go from there. Mr. Chairman, going back to Virtual Currency asking about the ico. Some raise money for legitimate companies but others are just a ponzi scheme and many of those investors are every day americans went high returns. It is now so bad facebook recently banned all ads for currency related products and the ico because there were so many quote deceptive and misleading advertising that targeted regular consumers. How do we make the ico safer . So to recognize the risk and announced last summer that bitcoin is securities that they have to be registered and comply with disclosure requirements. In 2017 Companies Raise more than 4 billion of dollars of ico. How many of those registered with the fcc . Not one. How many have registered as of today for upcoming . Not one why is that so . Yes. I dont think the gatekeepers that we rely on to assist us to make sure Securities Laws are followed have done their job. We have made it clear what the law is and as i have said many times there are thousands and thousands of private placements that go on every year in the United States we want them to go on and we want people to raise capital to do it right. But icos take the disclosure benefits of a private placement then add to with the public general solicitation and Retail Investor promise of the secondary market without registering with us to focus somehow got comfortable that this was okay and not a security but another way to raise money but i disagree. It is new but it is not another way to raise money so it is a violation of the law as i understand it. Registration matters when companies dont register they can hide information in the sec does not have the information it needs to monitor the market. I am perfectly happy for private placements but do it right dont do it as a private placement to get all the benefits. So should i take today you are sounding a warning though that the sec will pay closer attention . Yes. Its not the first time but i appreciate the opportunity to do it today. Thanks to the witnesses we appreciate not only your testimony today but what youre doing in this critical area. Get back to me and recommendations as you refine your evaluations of the current financial legislative system and if we need to provide further clarification from congress. This hearing is adjourned this hearing is adjourned. [inaudible conversations] [inaudible conversations] [inaudible conversations] good afternoon calling the subcommittee meeting on emerging threats is called to order starting with an Opening Statement and then we will move on to our witnesses thanks for being here spent the committee on emerging threats meets today to receive testimony on the efforts with weapons of mass destruction