WEBVTT - SEC Takes a Closer Look at Cryptocurrency Regulation

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<v Speaker 1>Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every

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<v Speaker 1>day we bring you insight and analysis into the most

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<v Speaker 1>important legal news of the day. You can find more

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<v Speaker 1>episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud

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<v Speaker 1>and on Bloomberg dot com slash podcasts. Digital currencies just

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<v Speaker 1>got name checked by an agency many in finance would

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<v Speaker 1>rather avoid. The Securities and Exchange Commission. For the first time,

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<v Speaker 1>the SEC's Office of Compliance, Inspections and Examinations put cryptocurrencies

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<v Speaker 1>and initial coin offerings on a list of priorities that

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<v Speaker 1>inspectors will scrutinize this year at the financial firms and

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<v Speaker 1>advisors the agency overseas. What will the impact be here?

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<v Speaker 1>To tell us that and more is Robert Hockett, a

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<v Speaker 1>professor at Cornell Law School. So, Bob, what does being

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<v Speaker 1>a top examination priority for SEC inspectors mean? Well, it

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<v Speaker 1>basically means that the SEC will join the CFTC now

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<v Speaker 1>in monitoring the markets for cryptocurrencies, watching them very carefully

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<v Speaker 1>with an eye to a couple of things. The first

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<v Speaker 1>is it really kind of contained in that prefixed crypto

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<v Speaker 1>and the word cryptocurrency, so as that prefix would suggest

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<v Speaker 1>cryptocurrencies are terrific vehicles for money laundering, for the financing

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<v Speaker 1>of terrorism, and other sorts of illicit activities. Uh. And

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<v Speaker 1>so there's some concern at least that some of the

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<v Speaker 1>cryptocurrencies are being used for illicit, illicit purposes, and so

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<v Speaker 1>they're going to be viewed with that in mind. The

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<v Speaker 1>other reason, or the other significance here is that cryptocurrencies

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<v Speaker 1>have become a bit like um other fat investments, like

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<v Speaker 1>junk bonds, say in the nineteen eighties, or sub prime

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<v Speaker 1>back mortgage so probably mortgage backed securities in the early

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<v Speaker 1>two thousands. They become the object of a sort of

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<v Speaker 1>fad uh investment craze, and a lot of people have

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<v Speaker 1>been borrowing in order to buy them, and indeed some

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<v Speaker 1>people have even taken out mortgage loans, believe it or not,

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<v Speaker 1>in order to speculate on these things. That of course

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<v Speaker 1>leads to systemic danger of the kind that the subprime

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<v Speaker 1>mortgage boom did, and SEC and other regulators have their

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<v Speaker 1>eye out for that now as well. Bob, The SEC

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<v Speaker 1>says that digital currencies fall under its oversight. Is that

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<v Speaker 1>definitive and what does that mean? As far as SEC

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<v Speaker 1>registration requirements? And the like. Yeah, so I think maybe

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<v Speaker 1>it's best to think of cryptocurrencies as following within, falling

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<v Speaker 1>within a sort of overlap between the jurisdiction of the

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<v Speaker 1>SEC on the one hand and the CFTC on the other.

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<v Speaker 1>And that's because cryptocurrencies are in some ways like a

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<v Speaker 1>kind of commodity like gold or some of the precious

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<v Speaker 1>metal of the sort that the CFTC concerns it with.

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<v Speaker 1>But they're also a bit like securities basically, uh, financial

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<v Speaker 1>claims of the kind that the SEC is concerned with

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<v Speaker 1>either way, right. Either whether it be whether cryptocurrencies be

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<v Speaker 1>thought of as commodities or securities, it all basically comes

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<v Speaker 1>down to the same thing. It basically means that they're

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<v Speaker 1>subject to careful monitoring by financial regulators, be they the

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<v Speaker 1>CFTC or the SEC or both in common. Uh. And

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<v Speaker 1>when the regulators are watching over them, are the markets

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<v Speaker 1>for these things are watching for a couple of things,

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<v Speaker 1>basically the things I mentioned at the top, um the

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<v Speaker 1>possibility of fraud and double dealing that kind of thing

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<v Speaker 1>on the one hand, uh and um, you know, sort

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<v Speaker 1>of systemic danger through hyper investment which can lead to

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<v Speaker 1>a bubble behavior on the other hand. The announcement about

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<v Speaker 1>this new list and it being on the new list

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<v Speaker 1>comes one day after SEC Chairman Jay Clayton identified regulatory

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<v Speaker 1>gaps surrounding cryptocurrencies in a Senate Banking Committee oversight hearing.

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<v Speaker 1>Are those gaps serious? Well, they would be serious if

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<v Speaker 1>the regulators weren't looking at them right, weren't watching them. Um.

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<v Speaker 1>But as it happens, they're not serious now that the

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<v Speaker 1>regulators are kind of keeping an eye on them. Because

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<v Speaker 1>the regulators have all of the jurisdiction they need to

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<v Speaker 1>act right. That's largely thanks to Dodd Frank. Arguably they

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<v Speaker 1>would have had that jurisdiction even before Dodd Frank, but

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<v Speaker 1>there's no doubt about it now that they have the jurisdiction,

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<v Speaker 1>and furthermore that they have concurrent jurisdiction right, the regulators

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<v Speaker 1>tend to work together now thank to the f sock

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<v Speaker 1>arrangement that we find in Dodd Frank, in a way

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<v Speaker 1>that they didn't do as well before. So um. In effect,

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<v Speaker 1>what Clayton has said is that, well, there would be

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<v Speaker 1>a gap if we weren't exercising oversight, and the fact

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<v Speaker 1>that he's expressing an intention to exercise oversight effectively closes

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<v Speaker 1>what gap there would have been at that here in

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<v Speaker 1>Clayton and CFTC Chairman Christopher gene Carlo call for greater

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<v Speaker 1>oversight of cryptocurrencies, but they didn't propose measures to sharply

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<v Speaker 1>curve the industry, and that led to a sort of

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<v Speaker 1>sigh of relief from traders and gains for bitcoin. Should

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<v Speaker 1>they have been tougher, um, I don't know that it's

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<v Speaker 1>necessary to be tougher thus far. I mean, at the moment,

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<v Speaker 1>what they're doing is signaling that they've got an eye

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<v Speaker 1>on things and that they're actually going to be intervening

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<v Speaker 1>as necessary. At present. I think what we're seeing is

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<v Speaker 1>the potential for significant danger, but we're not seeing the

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<v Speaker 1>actual manifestation in a big way of that danger as

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<v Speaker 1>of yet. In particular right the thing that was most

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<v Speaker 1>resome for me at least, and I suspect for a

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<v Speaker 1>lot of other sort of macropudentially oriented finance regulatory ups

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<v Speaker 1>um was the news that came out in back in

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<v Speaker 1>November in December to the effect that people actually, we're

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<v Speaker 1>taking out mortgage loans in order to speculate on these things.

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<v Speaker 1>And that's that's the kind of thing that leads to

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<v Speaker 1>systemic risk, systemic problems that basically endanger the entirety of

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<v Speaker 1>the financial system and indeed even the broader middle class economy.

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<v Speaker 1>Until you get into that, the dangers are much more

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<v Speaker 1>sort of restricted to just those people who engage in

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<v Speaker 1>idiotic trading behavior, and we're not really as concerned, um,

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<v Speaker 1>you know, to sort of protect people against their own

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<v Speaker 1>idiocy as we are to protect innocent parties who can

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<v Speaker 1>be damaged when idiotic behavior spills over, which of course

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<v Speaker 1>it does when you've got a lot of borrowing going

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<v Speaker 1>on in order to speculatively purchased things. So, speaking of that,

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<v Speaker 1>America's biggest banks have moved to ban their customers from

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<v Speaker 1>using credit cards to buy bitcoin or other cryptocurrencies. What

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<v Speaker 1>are their concerns? In about a minute, it's it's the

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<v Speaker 1>same kind of concern basically doing. What you really worry

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<v Speaker 1>about is any time anybody can use credit to speculate

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<v Speaker 1>on the prices of any kind of exotic new investment vehicle,

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<v Speaker 1>especially some some some such vehicle that's the object of

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<v Speaker 1>a fad, that's when you worry, because, of course, then

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<v Speaker 1>if the asset in question suddenly plummets in price, as

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<v Speaker 1>bitcoin has done. You've got a lot of people who

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<v Speaker 1>owe more than they own because the debts don't go

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<v Speaker 1>down with the assets themselves. When you get people in

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<v Speaker 1>debt in that way, people underwater, you get debt deflation.

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<v Speaker 1>That's essentially what we went through after the two eight crash,

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<v Speaker 1>and neither banks nor regulators want to see that happen again.

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<v Speaker 1>Thank you for your insights as always, Bob. That's Professor

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<v Speaker 1>Robert Hockett of Cornell Law School. Thanks for listening to

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<v Speaker 1>the Bloomberg Law Podcast. You can subscribe and listen to

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<v Speaker 1>the show on Apple Podcasts, SoundCloud, and on Bloomberg dot

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<v Speaker 1>com slash podcast. I'm June bralso this is Bloomberg