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Orichal Partners is a trusted partner for professional investors, wealth managers, family offices, investment managers and institutions in navigating blockchain technology and digital assets. Orichal Partners develop a full spectrum of strategies to guide our clients into the world digital assets. The founding team had extensive experience working on both sell side and buy side. Orichal Partners brings traditional financial expertise and utilize cutting edge technology to this new asset class. Through the platform we hope to provide valuable analysis and commentary on crypto-related topics on an academic research bases .
Nothing makes a better topic than discussing the Senate Banking Committee Hearing happened earlier last week. Here are some key take-aways:
1. While both the testimonies of SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo were cautiously optimistic on the future of cryptocurrency/blockchain technology, Clayton was more solemn towards ICO in the hearing while Giancarlo was more aligned with the tone on his testimony by showing genuine interest in the emerging asset class.
“We owe it to this new generation to respect their enthusiasm for virtual currencies, with a thoughtful and balance response, and not a dismissive one,” Giancarlo said.
2. They are working in concerted effort with parties such as Consumer Financial Protection Bureau (CFPB) to form an inter-agency working group. However, they are still in discussion on the adequate authority power they should have in this new era.
Currently neither SEC nor CFTC or any other agency have complete authority over cryptocurrency. For SEC, they can only have legislative power over cryptocurrency that is deemed to be a security. For CFTC, they have authority over the derivatives market of cryptocurrency (regardless of the token nature) and this incurs authority over the spot market in the case of fraud and market manipulation.
In view of the surging popularity of crypto, a law revision on Federal level could probably be more efficient. The existing state-level money remittance license (and BitLicense) may not work that well in crypto space. The hearing is a start to regulation but it may take years to be finalized as the crypto space is also growing drastically. It is not unforeseeable that there will be more and more grey area when the technology advances, for example, should the same mechanism be applied to Initial Miner Offering (originated from China), or Forks?
3. “Every ICO I’ve seen is a security”, Clayton said. It is a loose sentence as there is no official record on the cases that SEC reviewed. The statement showed more of a stance than substance. The crypto and especially ICO space could get better if SEC can formalize a procedure for ICO founders to take part in.
4. Both SEC and CFTC Chairmen expressed the need for more budget in order to hire the sufficient work force to handle the workload with respect to the surging interest in the cryptocurrency and ICO space. Apart from the resources issue, there is also a problem of talent scarcity. In the future we expect to see more and more demand on human resources with blockchain development and cryptography background.
5. Jurisdiction arbitrage or difference (put it in a nice way) is something observable due to the global nature of cryptocurrency. Clayton mentioned there could be tax loss due to a lack of recordkeeping and transactions being hard to trace. We believe that with an appropriate AML/KYC framework built, the distributed ledger nature is indeed providing a better way to do computerized tracking and analysis. For the case of stolen NEM in the Coincheck hack, the NEM foundation was actually able to trace the transaction flow and requested crypto-exchanges to blacklist the hacker’s address.
6. “Market participants should treat payments and other transactions made in cryptocurrency as if cash were being handed from one party to the other”, Clayton said. This provides indirect acknowledgement and further indication that cryptocurrency is an emerging asset class.
All in all, the hearing was a positive milestone in the crypto space as it acted as a starting point and showed the legitimization of crypto assets, which is key for institutional investors to participate. With more countries laying down the regulatory foundation, we hope to see more high quality crypto-asset ideas in the future to realize the real potential of distributed ledger technology.
If you would like to understand more, please refer to the hearing and their testimonies at https://www.banking.senate.gov/public/index.cfm/2018/2/virtual-currencies-the-oversight-role-of-the-u-s-securities-and-exchange-commission-and-the-u-s-commodity-futures-trading-commission.
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