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US regulators are struggling to rein in illegal cryptocurrency offerings

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Photo by Chip Somodevilla/Getty Images

Regulators are in uncharted territory trying to regulate illegal cryptocurrency public coin offerings, US officials told Congress today. Securities and Exchange Commission (SEC) chairman Jay Clayton had harsh words for those dodging SEC regulations today at a Senate banking committee hearing: “Many ICOs [initial coin offerings] are being conducted illegally. Their promoters and other participants are not following our security laws,” Clayton said. “Some people say that’s because the law isn’t clear. I do not buy that for a moment.”

Clayton and J. Christopher Giancarlo, chairman of the Commodity Futures Trading Commission (CFTC), testified today in front of members of the US Senate banking committee and answered their questions on virtual currencies.

Spelling it out, Clayton said that his team was watching those who are raising ICOs: “Those who engage in semantic gymnastics or elaborate structuring exercises in an effort to avoid having a coin be a security, are squarely in the crosshairs of our enforcement provision.”

When pushed to elaborate by Senator Elizabeth Warren (D-MA), Clayton admitted that zero ICOs have registered with the SEC as of yet. Some sites estimate that ICOs raised nearly $4 billion last year. “Folks somehow got comfortable that this was new and it was okay and it was not a security, it was just some other way to raise money,” he said. “I don’t think the gatekeepers that we rely on to assist us in making sure our securities laws are followed have done their job.”

While agreeing that more regulation on cryptocurrencies was needed to crack down on fraud, Chairman Giancarlo had kinder words to say about bitcoin enthusiasts, which include his college-aged children who expressed interest in finance only after Bitcoin grew popular. He said, “It strikes me that we owe it to this new generation to respect their enthusiasm about virtual currencies with a thoughtful and balanced response, not a dismissive one.”

Some senators on the committee expressed their own interest in gaining a better understanding of cryptocurrency and even named some of the benefits of blockchain technology. Senator Mark Warner (D-VA) brought up the cloud-computing potential of ethereum and compared the innovation of blockchain technology to the advent of wireless cellphones.

Both chairmen admitted that the potential of decentralized blockchain technology was at least “significant,” in Clayton’s words, but that they couldn’t predict when it would become advanced enough to benefit the public. When prompted, Giancarlo brought up a recent case of a cargo of US soybeans that were shipped to China in a trade conducted through blockchain technology.

Still, the questions and answers from today’s hearing indicate that both the senators and the commission chairmen are just getting adjusted to talking about cryptocurrencies, let alone deciding policy. Senator Richard Shelby (R-AL) remarked, “We live in a virtual world ... it’s not my world, we started out in pencil and paper.”

Clayton and Giancarlo described current US policy on cryptocurrencies to be a patchwork of regulations put out by different government agencies and sometimes state government rules. Their remarks generally emphasized working together to make the policy more organized and comprehensive.

Both Clayton and Giancarlo admitted there were several cryptocurrency-related phenomena that fell out of their jurisdiction, including international affairs such as when countries like North Korea avoid sanctions by dealing in cryptocurrency, or when users’ cryptocurrency accounts are accessed by hackers and drained.

“When you engage in investing online with an offshore entity, the chances that we can do anything practical to get your money back are very, very low,” said Clayton. Instead, the SEC has released several statements warning investors to take precautions so that they don’t become victims of theft or fraud.