The cryptocurrency market took a nosedive in early February after the U.S. stock market tanked and the Peoples Bank of China issued a statement that it would block access to all domestic and foreign cryptocurrency exchanges. Further uncertainty was facilitated by scheduled testimony of the Chair of the Security and Exchange Commission (“SEC”), Jay Clayton, on February 6 to the Senate Banking Committee about regulating cryptocurrency and Initial Coin Offerings (“ICOs”). If the United States followed suit with China, the cryptocurrency sell-off would likely be massive.
At the hearing, the SEC Chair was cautiously optimistic and intrigued about the cryptocurrency industry. He took the view in favor of regulating cryptocurrency rather than banning the entire industry, including lawful actors. This came to the relief of many cryptocurrency investors and startups as reflected by an immediate uptick in the market.
While this is certainly good news for the industry, the SEC Chair did express skepticism. Most notably, on the issue of whether cryptocurrency holds intrinsic value, he took a non-committal position:
“There are a lot of smart people who think there’s something to the value of cryptocurrency and the international exchange and I’m not seeing those benefits manifesting themselves in the market yet. I look at this from the perspective of Main Street investors and they should understand that.”
It was also clear that the SEC Chair was concerned about investors losing money to fraudulent exchanges and ICOs. But the SEC Chair’s view that blockchain has technological value was unambiguous.
Given the vast information asymmetry and uncertainty with respect to cryptocurrencies, the SEC will likely move very slowly in regulating this industry. For example, the SEC has not authorized any cryptocurrency ETF funds despite several attempts by notable firms to gain the SEC’s approval and the support of the Chicago Board Options Exchange. The SEC’s position is that there are too many unanswered questions involving valuation, market manipulation, volatility, and security concerns. For now, investors who qualify as accredited investors can invest in cryptocurrency index funds through Reg D like HOLD 10, which is backed by former Paypal investors.
While it remains unclear how the SEC will regulate cryptocurrency and related funds—one thing is for certain—the industry will continue to move at break-necking pace.
* Fob James is an Associate in the Birmingham, AL office of Burr & Forman LLP. He can be reached at (205) 458-5311 or firstname.lastname@example.org.