Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every
Speaker 1: day we bring you insight and analysis into the most
Speaker 1: important legal news of the day. You can find more
Speaker 1: episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud
Speaker 1: and on Bloomberg dot com slash podcasts. Digital currencies just
Speaker 1: got name checked by an agency many in finance would
Speaker 1: rather avoid. The Securities and Exchange Commission. For the first time,
Speaker 1: the SEC's Office of Compliance, Inspections and Examinations put cryptocurrencies
Speaker 1: and initial coin offerings on a list of priorities that
Speaker 1: inspectors will scrutinize this year at the financial firms and
Speaker 1: advisors the agency overseas. What will the impact be here?
Speaker 1: To tell us that and more is Robert Hockett, a
Speaker 1: professor at Cornell Law School. So, Bob, what does being
Speaker 1: a top examination priority for SEC inspectors mean? Well, it
Speaker 1: basically means that the SEC will join the CFTC now
Speaker 1: in monitoring the markets for cryptocurrencies, watching them very carefully
Speaker 1: with an eye to a couple of things. The first
Speaker 1: is it really kind of contained in that prefixed crypto
Speaker 1: and the word cryptocurrency, so as that prefix would suggest
Speaker 1: cryptocurrencies are terrific vehicles for money laundering, for the financing
Speaker 1: of terrorism, and other sorts of illicit activities. Uh. And
Speaker 1: so there's some concern at least that some of the
Speaker 1: cryptocurrencies are being used for illicit, illicit purposes, and so
Speaker 1: they're going to be viewed with that in mind. The
Speaker 1: other reason, or the other significance here is that cryptocurrencies
Speaker 1: have become a bit like um other fat investments, like
Speaker 1: junk bonds, say in the nineteen eighties, or sub prime
Speaker 1: back mortgage so probably mortgage backed securities in the early
Speaker 1: two thousands. They become the object of a sort of
Speaker 1: fad uh investment craze, and a lot of people have
Speaker 1: been borrowing in order to buy them, and indeed some
Speaker 1: people have even taken out mortgage loans, believe it or not,
Speaker 1: in order to speculate on these things. That of course
Speaker 1: leads to systemic danger of the kind that the subprime
Speaker 1: mortgage boom did, and SEC and other regulators have their
Speaker 1: eye out for that now as well. Bob, The SEC
Speaker 1: says that digital currencies fall under its oversight. Is that
Speaker 1: definitive and what does that mean? As far as SEC
Speaker 1: registration requirements? And the like. Yeah, so I think maybe
Speaker 1: it's best to think of cryptocurrencies as following within, falling
Speaker 1: within a sort of overlap between the jurisdiction of the
Speaker 1: SEC on the one hand and the CFTC on the other.
Speaker 1: And that's because cryptocurrencies are in some ways like a
Speaker 1: kind of commodity like gold or some of the precious
Speaker 1: metal of the sort that the CFTC concerns it with.
Speaker 1: But they're also a bit like securities basically, uh, financial
Speaker 1: claims of the kind that the SEC is concerned with
Speaker 1: either way, right. Either whether it be whether cryptocurrencies be
Speaker 1: thought of as commodities or securities, it all basically comes
Speaker 1: down to the same thing. It basically means that they're
Speaker 1: subject to careful monitoring by financial regulators, be they the
Speaker 1: CFTC or the SEC or both in common. Uh. And
Speaker 1: when the regulators are watching over them, are the markets
Speaker 1: for these things are watching for a couple of things,
Speaker 1: basically the things I mentioned at the top, um the
Speaker 1: possibility of fraud and double dealing that kind of thing
Speaker 1: on the one hand, uh and um, you know, sort
Speaker 1: of systemic danger through hyper investment which can lead to
Speaker 1: a bubble behavior on the other hand. The announcement about
Speaker 1: this new list and it being on the new list
Speaker 1: comes one day after SEC Chairman Jay Clayton identified regulatory
Speaker 1: gaps surrounding cryptocurrencies in a Senate Banking Committee oversight hearing.
Speaker 1: Are those gaps serious? Well, they would be serious if
Speaker 1: the regulators weren't looking at them right, weren't watching them. Um.
Speaker 1: But as it happens, they're not serious now that the
Speaker 1: regulators are kind of keeping an eye on them. Because
Speaker 1: the regulators have all of the jurisdiction they need to
Speaker 1: act right. That's largely thanks to Dodd Frank. Arguably they
Speaker 1: would have had that jurisdiction even before Dodd Frank, but
Speaker 1: there's no doubt about it now that they have the jurisdiction,
Speaker 1: and furthermore that they have concurrent jurisdiction right, the regulators
Speaker 1: tend to work together now thank to the f sock
Speaker 1: arrangement that we find in Dodd Frank, in a way
Speaker 1: that they didn't do as well before. So um. In effect,
Speaker 1: what Clayton has said is that, well, there would be
Speaker 1: a gap if we weren't exercising oversight, and the fact
Speaker 1: that he's expressing an intention to exercise oversight effectively closes
Speaker 1: what gap there would have been at that here in
Speaker 1: Clayton and CFTC Chairman Christopher gene Carlo call for greater
Speaker 1: oversight of cryptocurrencies, but they didn't propose measures to sharply
Speaker 1: curve the industry, and that led to a sort of
Speaker 1: sigh of relief from traders and gains for bitcoin. Should
Speaker 1: they have been tougher, um, I don't know that it's
Speaker 1: necessary to be tougher thus far. I mean, at the moment,
Speaker 1: what they're doing is signaling that they've got an eye
Speaker 1: on things and that they're actually going to be intervening
Speaker 1: as necessary. At present. I think what we're seeing is
Speaker 1: the potential for significant danger, but we're not seeing the
Speaker 1: actual manifestation in a big way of that danger as
Speaker 1: of yet. In particular right the thing that was most
Speaker 1: resome for me at least, and I suspect for a
Speaker 1: lot of other sort of macropudentially oriented finance regulatory ups
Speaker 1: um was the news that came out in back in
Speaker 1: November in December to the effect that people actually, we're
Speaker 1: taking out mortgage loans in order to speculate on these things.
Speaker 1: And that's that's the kind of thing that leads to
Speaker 1: systemic risk, systemic problems that basically endanger the entirety of
Speaker 1: the financial system and indeed even the broader middle class economy.
Speaker 1: Until you get into that, the dangers are much more
Speaker 1: sort of restricted to just those people who engage in
Speaker 1: idiotic trading behavior, and we're not really as concerned, um,
Speaker 1: you know, to sort of protect people against their own
Speaker 1: idiocy as we are to protect innocent parties who can
Speaker 1: be damaged when idiotic behavior spills over, which of course
Speaker 1: it does when you've got a lot of borrowing going
Speaker 1: on in order to speculatively purchased things. So, speaking of that,
Speaker 1: America's biggest banks have moved to ban their customers from
Speaker 1: using credit cards to buy bitcoin or other cryptocurrencies. What
Speaker 1: are their concerns? In about a minute, it's it's the
Speaker 1: same kind of concern basically doing. What you really worry
Speaker 1: about is any time anybody can use credit to speculate
Speaker 1: on the prices of any kind of exotic new investment vehicle,
Speaker 1: especially some some some such vehicle that's the object of
Speaker 1: a fad, that's when you worry, because, of course, then
Speaker 1: if the asset in question suddenly plummets in price, as
Speaker 1: bitcoin has done. You've got a lot of people who
Speaker 1: owe more than they own because the debts don't go
Speaker 1: down with the assets themselves. When you get people in
Speaker 1: debt in that way, people underwater, you get debt deflation.
Speaker 1: That's essentially what we went through after the two eight crash,
Speaker 1: and neither banks nor regulators want to see that happen again.
Speaker 1: Thank you for your insights as always, Bob. That's Professor
Speaker 1: Robert Hockett of Cornell Law School. Thanks for listening to
Speaker 1: the Bloomberg Law Podcast. You can subscribe and listen to
Speaker 1: the show on Apple Podcasts, SoundCloud, and on Bloomberg dot
Speaker 1: com slash podcast. I'm June bralso this is Bloomberg