In the aftermath of the global financial crisis, Satoshi Nakamoto — a digital nom de currency — published a white paper laying out his or her vision for an electronic, peer-to-peer currency that could provide an alternative to the failures of Wall Street, the regulatory structure, and the rest of the financial system as it stood.
Ten years later, the digital currency industry wants something from those same entities that might have been unthinkable to Bitcoin’s early libertarian and anarchist evangelists: Acceptance.
For example, the Winklevoss twins (of Facebook fame) are trying to form a self-regulatory organization for cryptocurrency exchanges, similar to those that exist for investment brokers and municipal bonds. Major cryptocurrency exchange and investment companies have formed a new trade association to advocate on their behalf in Washington.
And, most important, firms want the Securities and Exchange Commission to approve an investment fund in Bitcoin that would be able to issue shares on a stock exchange. Such a designation would clear the path for billions in investment from Wall Street.
SEC Commissioner Hester Peirce told the Washington Examiner that cryptocurrencies could succeed both in the form of a regulated product and as a disruptive innovation. “I think there’s room for both pieces of that community,” she said.
Peirce, one of the commission’s three Republicans, earned adulation and the nickname “CryptoMom” from the cryptocurrency community in August when she dissented to the commission staff’s rejection of a Bitcoin exchange-traded fund.
The SEC has cited several reasons for rejecting Bitcoin ETFs, including the fear that prices could be manipulated, that much of the market infrastructure for cryptocurrencies has yet to be built, and that it’s an entirely new type of asset. Just like everyone else, the SEC has struggled to understand what the cryptocurrencies can and can’t do.
After the latest ETF rejection, Peirce essentially forced the issue, setting up a vote for the commission on whether or not to approve what’s likely the first ETF whose underlying assets are entirely digital. The vote will take place this year, though the exact timing is unclear.
“I would like to [approve an ETF] because I think it would be helpful,” said Peirce, who added, “If you want to start an ETF … then you’re going to have to interact with our securities laws.”
Having an approved Bitcoin ETF could give regulators more insight into how the Bitcoin market works, and which parts of it might be vulnerable to fraud and manipulation.
But, despite rampant market speculation otherwise, Peirce’s fellow commissioners don’t appear to share her enthusiasm.
“I have no idea,” said Robert Jackson, one of Peirce’s Democratic colleagues on the commission. “And anybody who does is just guessing.”
Jackson said that, on the question of a Bitcoin ETC, he and the other commissioners would likely follow the guidance of Bill Hinman, the director of the SEC’s division of corporation finance, and Valerie Szczepanik, the senior adviser for digital assets and innovation.
“At the end of the day, I don’t want to speak for my colleagues, [but] I think we’re going to take staff’s advice on this,” said Jackson.
In a public appearance at a Washington think tank last month, SEC Chairman Jay Clayton declined to comment on the possibility of a Bitcoin ETF, but reiterated that he is concerned about market manipulation. The Trump appointee has made main street investor protection his top stated mission at the SEC, which could leave him cautious about signing off on a product related to the wild asset class of cryptocurrencies.
“I’ve also been on record that these are markets that, while they appear to look like our regulated and well-understood markets, they do not function in the same way that our regulated and well-understood markets do,” said Clayton. “And investors should be very cautious that a quote of a price in these markets does not carry with it the same level of confidence and scrutiny that a quote on the New York Stock Exchange or the NASDAQ or some other market does.”
Over the past few years, the SEC has had its hands full policing Bitcoin imitators. Many ventures raised funds using so-called initial coin offerings, or ICOs, which were not registered as securities offerings. Issuers argued that, rather than providing an investment opportunity, they were offering a decentralized computing function, a bit similar to the concept behind Napster or other peer-to-peer file-sharing services, except used to maintain a digital ledger shared across computers.
The SEC has taken a skeptical view of the argument that ICOs should be allowed to skirt securities laws, which mandate certain investor disclosures and establish certain investor rights. Earlier this year, Clayton told Congress he’d yet to see an ICO-issued token that didn’t meet the definition of a security, and said his agency had no plans to change the definition of a security to accommodate companies that raised tens to hundreds of millions of dollars off their own private digital currencies.
But that’s not to say the SEC has shut the door completely on the technology those ICOs sought to fund. In a speech over the summer, Hinman, the agency’s lead staffer on capital formation and markets, said that it’s possible for digital tokens to evolve into currencies rather than securities over time, as they gain in popularity for their functional use, rather than being traded like a financial asset. Then, the question becomes when a token crosses the threshold from security to currency. On Monday, speaking at a financial technology conference hosted by Georgetown Law School, Hinman promised plain English guidance from the SEC to help clarify.
In the meantime, Rep. Warren Davidson R-Ohio, a conservative member of the House Financial Services Committee who recently convened a cryptocurrency conference in the Library of Congress’ ornate Jefferson Building, wants to push his own solution.
A spokesman for Davidson confirmed that the Ohio Republican plans to introduce a bill that would allow ICOs to sidestep securities law, including at the state level, and eliminate the SEC’s jurisdiction over the industry by treating the currencies as products, rather than securities.
The bill faces a steep climb to become law. Davidson has yet to name cosponsors, and though he hopes to make his bill a bipartisan effort, the incoming Democratic majority is unlikely to significantly limit regulation of the space. The Trump administration has also threatened to upstage House action. Craig Phillips, senior adviser to Treasury Secretary Steven Mnuchin, said in public remarks on Monday that the department would release its own ideas for cryptocurrency policy soon.
To an extent, cryptocurrency startups have begun to move past the problem Davidson’s bill seeks to solve, simply by using traditional venture capital funding instead of raising money through private currency or tokens.
Either way, cryptocurrencies have come a long way from the early days of Bitcoin, when its early adopters hoped to supplant the traditional financial and political systems.
“The fact that this is a challenge is a testament that we have overcome so many challenges when it comes to Bitcoin and cryptocurrency,” said Jerry Brito, executive director of the D.C.-based cryptocurrency policy nonprofit Coin Center. “There’s a chance that the SEC will approve an ETF!”
