On May 21, the US Securities and Exchange Commission (SEC) once again postponed its decision on whether to approve the bitcoin ETF sponsored by VanEck/SolidX.
VanEck/SolidX’s ETF was originally filed with the SEC on June 6, 2018. The SEC has since revealed that it received more than 1,300 comments on the ETF application.
The SEC has delayed it’s decision on many occasions through 2018 and into 2019.
On May 20, the SEC requested a 35-day period for gathering more information. It asked for public input on 14 questions:
“The Commission is instituting proceedings to allow for additional analysis of the proposed rule change’s consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,’ and ‘to protect investors and the public interest.’”
On April 3, 2019 the U.S. Securities and Exchange Commission (SEC) FinHub released a new document with additional guidelines for distinguishing if ICO’s are in fact “Investment Contracts”.
This new guidance supplements the SEC’s existing criteria for determining if a Digital Asset is a security or not.
The full text available here and is set out below:
1 Framework for “Investment Contract” Analysis of Digital Assets
If you are considering an Initial Coin Offering, sometimes referred to as an “ICO,” or otherwise engaging in the offer, sale, or distribution of a digital asset,2 you need to consider whether the U.S. federal securities laws apply. A threshold issue is whether the digital asset is a “security” under those laws.3 The term “security” includes an “investment contract,” as well as other instruments such as stocks, bonds, and transferable shares. A digital asset should be analyzed to determine whether it has the characteristics of any product that meets the definition of “security” under the federal securities laws. In this guidance, we provide a framework for analyzing whether a digital asset has the characteristics of one particular type of security – an “investment contract.”4 Both the Commission and the federal courts frequently use the “investment contract” analysis to determine whether unique or novel instruments or arrangements, such as digital assets, are securities subject to the federal securities laws. The U.S. Supreme Court’s Howey case and subsequent case law have found that an “investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.5 The so-called “Howey test” applies to any contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities.6 The focus of the Howey analysis is not only on the form and terms of the instrument itself (in this case, the digital asset) but also on the circumstances surrounding the digital asset and the manner in which it is offered, sold, or resold (which includes secondary market sales). Therefore, issuers and other persons and entities engaged in the marketing, offer, sale, resale, or distribution of any digital asset will need to analyze the relevant transactions to determine if the federal securities laws apply. The federal securities laws require all offers and sales of securities, including those involving a digital asset, to either be registered under its provisions or to qualify for an exemption from registration. The registration provisions require persons to disclose certain information to investors, and that information must be complete and not materially misleading. This requirement for disclosure furthers the federal securities laws’ goal of providing investors with the information necessary to make informed investment decisions. Among the information 2 that must be disclosed is information relating to the essential managerial efforts that affect the success of the enterprise.7 This is true in the case of a corporation, for example, but also may be true for other types of enterprises regardless of their organizational structure or form.8 Absent the disclosures required by law about those efforts and the progress and prospects of the enterprise, significant informational asymmetries may exist between the management and promoters of the enterprise on the one hand, and investors and prospective investors on the other hand. The reduction of these information asymmetries through required disclosures protects investors and is one of the primary purposes of the federal securities laws.
II. Application of Howey to Digital Assets
In this guidance, we provide a framework for analyzing whether a digital asset is an investment contract and whether offers and sales of a digital asset are securities transactions. As noted above, under the Howey test, an “investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. Whether a particular digital asset at the time of its offer or sale satisfies the Howey test depends on the specific facts and circumstances. We address each of the elements of the Howey test below. A. The Investment of Money The first prong of the Howey test is typically satisfied in an offer and sale of a digital asset because the digital asset is purchased or otherwise acquired in exchange for value, whether in the form of real (or fiat) currency, another digital asset, or other type of consideration.9 B. Common Enterprise Courts generally have analyzed a “common enterprise” as a distinct element of an investment contract.10 In evaluating digital assets, we have found that a “common enterprise” typically exists.11 C. Reasonable Expectation of Profits Derived from Efforts of Others Usually, the main issue in analyzing a digital asset under the Howey test is whether a purchaser has a reasonable expectation of profits (or other financial returns) derived from the efforts of others. A purchaser may expect to realize a return through participating in 3 distributions or through other methods of realizing appreciation on the asset, such as selling at a gain in a secondary market. When a promoter, sponsor, or other third party (or affiliated group of third parties) (each, an “Active Participant” or “AP”) provides essential managerial efforts that affect the success of the enterprise, and investors reasonably expect to derive profit from those efforts, then this prong of the test is met. Relevant to this inquiry is the “economic reality”12 of the transaction and “what character the instrument is given in commerce by the terms of the offer, the plan of distribution, and the economic inducements held out to the prospect.”13 The inquiry, therefore, is an objective one, focused on the transaction itself and the manner in which the digital asset is offered and sold. The following characteristics are especially relevant in an analysis of whether the third prong of the Howey test is satisfied. 1. Reliance on the Efforts of Others The inquiry into whether a purchaser is relying on the efforts of others focuses on two key issues: Does the purchaser reasonably expect to rely on the efforts of an AP? Are those efforts “the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise,”14 as opposed to efforts that are more ministerial in nature? Although no one of the following characteristics is necessarily determinative, the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the “efforts of others”: An AP is responsible for the development, improvement (or enhancement), operation, or promotion of the network,15 particularly if purchasers of the digital asset expect an AP to be performing or overseeing tasks that are necessary for the network or digital asset to achieve or retain its intended purpose or functionality.16 o Where the network or the digital asset is still in development and the network or digital asset is not fully functional at the time of the offer or sale, purchasers 4 would reasonably expect an AP to further develop the functionality of the network or digital asset (directly or indirectly). This particularly would be the case where an AP promises further developmental efforts in order for the digital asset to attain or grow in value. There are essential tasks or responsibilities performed and expected to be performed by an AP, rather than an unaffiliated, dispersed community of network users (commonly known as a “decentralized” network). An AP creates or supports a market for,17 or the price of, the digital asset. This can include, for example, an AP that: (1) controls the creation and issuance of the digital asset; or (2) takes other actions to support a market price of the digital asset, such as by limiting supply or ensuring scarcity, through, for example, buybacks, “burning,” or other activities. An AP has a lead or central role in the direction of the ongoing development of the network or the digital asset. In particular, an AP plays a lead or central role in deciding governance issues, code updates, or how third parties participate in the validation of transactions that occur with respect to the digital asset. An AP has a continuing managerial role in making decisions about or exercising judgment concerning the network or the characteristics or rights the digital asset represents including, for example: o Determining whether and how to compensate persons providing services to the network or to the entity or entities charged with oversight of the network. o Determining whether and where the digital asset will trade. For example, purchasers may reasonably rely on an AP for liquidity, such as where the AP has arranged, or promised to arrange for, the trading of the digital asset on a secondary market or platform. o Determining who will receive additional digital assets and under what conditions. o Making or contributing to managerial level business decisions, such as how to deploy funds raised from sales of the digital asset. 5 o Playing a leading role in the validation or confirmation of transactions on the network, or in some other way having responsibility for the ongoing security of the network. o Making other managerial judgements or decisions that will directly or indirectly impact the success of the network or the value of the digital asset generally. Purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset, such as where: o The AP has the ability to realize capital appreciation from the value of the digital asset. This can be demonstrated, for example, if the AP retains a stake or interest in the digital asset. In these instances, purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset. o The AP distributes the digital asset as compensation to management or the AP’s compensation is tied to the price of the digital asset in the secondary market. To the extent these facts are present, the compensated individuals can be expected to take steps to build the value of the digital asset. o The AP owns or controls ownership of intellectual property rights of the network or digital asset, directly or indirectly. o The AP monetizes the value of the digital asset, especially where the digital asset has limited functionality. In evaluating whether a digital asset previously sold as a security should be reevaluated at the time of later offers or sales, there would be additional considerations as they relate to the “efforts of others,” including but not limited to: Whether or not the efforts of an AP, including any successor AP, continue to be important to the value of an investment in the digital asset. Whether the network on which the digital asset is to function operates in such a manner that purchasers would no longer reasonably expect an AP to carry out essential managerial or entrepreneurial efforts. Whether the efforts of an AP are no longer affecting the enterprise’s success. 6 2. Reasonable Expectation of Profits An evaluation of the digital asset should also consider whether there is a reasonable expectation of profits. Profits can be, among other things, capital appreciation resulting from the development of the initial investment or business enterprise or a participation in earnings resulting from the use of purchasers’ funds.18 Price appreciation resulting solely from external market forces (such as general inflationary trends or the economy) impacting the supply and demand for an underlying asset generally is not considered “profit” under the Howey test. The more the following characteristics are present, the more likely it is that there is a reasonable expectation of profit: The digital asset gives the holder rights to share in the enterprise’s income or profits or to realize gain from capital appreciation of the digital asset. o The opportunity may result from appreciation in the value of the digital asset that comes, at least in part, from the operation, promotion, improvement, or other positive developments in the network, particularly if there is a secondary trading market that enables digital asset holders to resell their digital assets and realize gains. o This also can be the case where the digital asset gives the holder rights to dividends or distributions. The digital asset is transferable or traded on or through a secondary market or platform, or is expected to be in the future.19 Purchasers reasonably would expect that an AP’s efforts will result in capital appreciation of the digital asset and therefore be able to earn a return on their purchase. The digital asset is offered broadly to potential purchasers as compared to being targeted to expected users of the goods or services or those who have a need for the functionality of the network. 7 o The digital asset is offered and purchased in quantities indicative of investment intent instead of quantities indicative of a user of the network. For example, it is offered and purchased in quantities significantly greater than any likely user would reasonably need, or so small as to make actual use of the asset in the network impractical. There is little apparent correlation between the purchase/offering price of the digital asset and the market price of the particular goods or services that can be acquired in exchange for the digital asset. There is little apparent correlation between quantities the digital asset typically trades in (or the amounts that purchasers typically purchase) and the amount of the underlying goods or services a typical consumer would purchase for use or consumption. The AP has raised an amount of funds in excess of what may be needed to establish a functional network or digital asset. The AP is able to benefit from its efforts as a result of holding the same class of digital assets as those being distributed to the public. The AP continues to expend funds from proceeds or operations to enhance the functionality or value of the network or digital asset. The digital asset is marketed, directly or indirectly, using any of the following: o The expertise of an AP or its ability to build or grow the value of the network or digital asset. o The digital asset is marketed in terms that indicate it is an investment or that the solicited holders are investors. o The intended use of the proceeds from the sale of the digital asset is to develop the network or digital asset. o The future (and not present) functionality of the network or digital asset, and the prospect that an AP will deliver that functionality. 8 o The promise (implied or explicit) to build a business or operation as opposed to delivering currently available goods or services for use on an existing network. o The ready transferability of the digital asset is a key selling feature. o The potential profitability of the operations of the network, or the potential appreciation in the value of the digital asset, is emphasized in marketing or other promotional materials. o The availability of a market for the trading of the digital asset, particularly where the AP implicitly or explicitly promises to create or otherwise support a trading market for the digital asset. In evaluating whether a digital asset previously sold as a security should be reevaluated at the time of later offers or sales, there would be additional considerations as they relate to the “reasonable expectation of profits,” including but not limited to: Purchasers of the digital asset no longer reasonably expect that continued development efforts of an AP will be a key factor for determining the value of the digital asset. The value of the digital asset has shown a direct and stable correlation to the value of the good or service for which it may be exchanged or redeemed. The trading volume for the digital asset corresponds to the level of demand for the good or service for which it may be exchanged or redeemed. Whether holders are then able to use the digital asset for its intended functionality, such as to acquire goods and services on or through the network or platform. Whether any economic benefit that may be derived from appreciation in the value of the digital asset is incidental to obtaining the right to use it for its intended functionality. No AP has access to material, non-public information or could otherwise be deemed to hold material inside information about the digital asset. 9 3. Other Relevant Considerations When assessing whether there is a reasonable expectation of profit derived from the efforts of others, federal courts look to the economic reality of the transaction.20 In doing so, the courts also have considered whether the instrument is offered and sold for use or consumption by purchasers.21 Although no one of the following characteristics of use or consumption is necessarily determinative, the stronger their presence, the less likely the Howey test is met: • The distributed ledger network and digital asset are fully developed and operational. Holders of the digital asset are immediately able to use it for its intended functionality on the network, particularly where there are built-in incentives to encourage such use. The digital assets’ creation and structure is designed and implemented to meet the needs of its users, rather than to feed speculation as to its value or development of its network. For example, the digital asset can only be used on the network and generally can be held or transferred only in amounts that correspond to a purchaser’s expected use. Prospects for appreciation in the value of the digital asset are limited. For example, the design of the digital asset provides that its value will remain constant or even degrade over time, and, therefore, a reasonable purchaser would not be expected to hold the digital asset for extended periods as an investment. With respect to a digital asset referred to as a virtual currency, it can immediately be used to make payments in a wide variety of contexts, or acts as a substitute for real (or fiat) currency. o This means that it is possible to pay for goods or services with the digital asset without first having to convert it to another digital asset or real currency. o If it is characterized as a virtual currency, the digital asset actually operates as a store of value that can be saved, retrieved, and exchanged for something of value at a later time. 10 With respect to a digital asset that represents rights to a good or service, it currently can be redeemed within a developed network or platform to acquire or otherwise use those goods or services. Relevant factors may include: o There is a correlation between the purchase price of the digital asset and a market price of the particular good or service for which it may be redeemed or exchanged. o The digital asset is available in increments that correlate with a consumptive intent versus an investment or speculative purpose. o An intent to consume the digital asset may also be more evident if the good or service underlying the digital asset can only be acquired, or more efficiently acquired, through the use of the digital asset on the network. Any economic benefit that may be derived from appreciation in the value of the digital asset is incidental to obtaining the right to use it for its intended functionality. The digital asset is marketed in a manner that emphasizes the functionality of the digital asset, and not the potential for the increase in market value of the digital asset. Potential purchasers have the ability to use the network and use (or have used) the digital asset for its intended functionality. Restrictions on the transferability of the digital asset are consistent with the asset’s use and not facilitating a speculative market. If the AP facilitates the creation of a secondary market, transfers of the digital asset may only be made by and among users of the platform. Digital assets with these types of use or consumption characteristics are less likely to be investment contracts. For example, take the case of an online retailer with a fully-developed operating business. The retailer creates a digital asset to be used by consumers to purchase products only on the retailer’s network, offers the digital asset for sale in exchange for real currency, and the digital asset is redeemable for products commensurately priced in that real currency. The retailer continues to market its products to its existing customer base, advertises 11 its digital asset payment method as part of those efforts, and may “reward” customers with digital assets based on product purchases. Upon receipt of the digital asset, consumers immediately are able to purchase products on the network using the digital asset. The digital assets are not transferable; rather, consumers can only use them to purchase products from the retailer or sell them back to the retailer at a discount to the original purchase price. Under these facts, the digital asset would not be an investment contract. Even in cases where a digital asset can be used to purchase goods or services on a network, where that network’s or digital asset’s functionality is being developed or improved, there may be securities transactions if, among other factors, the following is present: the digital asset is offered or sold to purchasers at a discount to the value of the goods or services; the digital asset is offered or sold to purchasers in quantities that exceed reasonable use; and/or there are limited or no restrictions on reselling those digital assets, particularly where an AP is continuing in its efforts to increase the value of the digital assets or has facilitated a secondary market.
The discussion above identifies some of the factors market participants should consider in assessing whether a digital asset is offered or sold as an investment contract and, therefore, is a security. It also identifies some of the factors to be considered in determining whether and when a digital asset may no longer be a security. These factors are not intended to be exhaustive in evaluating whether a digital asset is an investment contract or any other type of security, and no single factor is determinative; rather, we are providing them to assist those engaging in the offer, sale, or distribution of a digital asset, and their counsel, as they consider these issues. We encourage market participants to seek the advice of securities counsel and engage with the Staff through www.sec.gov/finhub. 1 This framework represents the views of the Strategic Hub for Innovation and Financial Technology (“FinHub,” the “Staff,” or “we”) of the Securities and Exchange Commission (the “Commission”). It is not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved its content. Further, this framework does not replace or supersede existing case law, legal requirements, or statements or guidance from the 12 Commission or Staff. Rather, the framework provides additional guidance in the areas that the Commission or Staff has previously addressed. See, e.g., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (Exchange Act Rel. No. 81207) (July 25, 2017) (“The DAO Report”); William Hinman, Digital Asset Transactions: When Howey Met Gary (Plastic), Remarks at the Yahoo Finance All Markets Summit: Crypto (June 14, 2018), available at https://www.sec.gov/news/speech/speech-hinman-061418. 2 The term “digital asset,” as used in this framework, refers to an asset that is issued and transferred using distributed ledger or blockchain technology, including, but not limited to, so-called “virtual currencies,” “coins,” and “tokens.” 3 The term “security” is defined in Section 2(a)(1) of the Securities Act of 1933 (the “Securities Act”), Section 3(a)(10) of the Securities Exchange Act of 1934, Section 2(a)(36) of the Investment Company Act of 1940, and Section 202(a)(18) of the Investment Advisers Act of 1940. 4 This framework is intended to be instructive and is based on the Staff’s experiences to date and relevant law and legal precedent. It is not an exhaustive treatment of the legal and regulatory issues relevant to conducting an analysis of whether a product is a security, including an investment contract analysis with respect to digital assets generally. We expect that analysis concerning digital assets as securities may evolve over time as the digital asset market matures. Also, no one factor is necessarily dispositive as to whether or not an investment contract exists. 5 SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (“Howey”). See also United Housing Found., Inc. v. Forman, 421 U.S. 837 (1975) (“Forman”); Tcherepnin v. Knight, 389 U.S. 332 (1967) (“Tcherepnin”); SEC v. C. M. Joiner Leasing Corp., 320 U.S. 344 (1943) (“Joiner”). 6 Whether a contract, scheme, or transaction is an investment contract is a matter of federal, not state, law and does not turn on whether there is a formal contract between parties. Rather, under the Howey test, “form [is] disregarded for substance and the emphasis [is] on economic reality.” Howey, 328 U.S. at 298. The Supreme Court has further explained that that the term security “embodies a flexible rather than a static principle” in order to meet the “variable schemes devised by those who seek the use of the money of others on the promise of profits.” Id. at 299. 7 Issuers of digital assets, like all issuers, must provide full and fair disclosure of material information consistent with the requirements of the federal securities laws. Issuers of digital assets should be guided by the regulatory framework and concepts of materiality. What is material depends upon the nature and structure of the issuer’s particular network and circumstances. See TSC Industries v. Northway, 426 U.S. 438, 449 (1976) (a fact is material “if there is a substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision or if it “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available” to the shareholder). 8 See The DAO Report. 9 The lack of monetary consideration for digital assets, such as those distributed via a so-called “bounty program” does not mean that the investment of money prong is not satisfied. As the Commission explained in The DAO Report, “[i]n determining whether an investment contract exists, the investment of ‘money’ need not take the form of cash” and “in spite of Howey’s reference to an ‘investment of money,’ it is well established that cash is not the only form of contribution or investment that will create an investment contract.” The DAO Report at 11 (citation omitted). See In re Tomahawk Exploration LLC, Securities Act Rel. 10530 (Aug. 14, 2018) (issuance of tokens under a so-called “bounty program” constituted an offer and sale of securities because the issuer provided tokens to investors in exchange for services designed to advance the issuer’s economic interests and foster a trading market for its securities). Further, the lack of monetary consideration for digital assets, such as those distributed via a socalled “air drop,” does not mean that the investment of money prong is not satisfied; therefore, an airdrop may constitute a sale or distribution of securities. In a so-called “airdrop,” a digital asset is distributed to holders of another digital asset, typically to promote its circulation. 13 10 In order to satisfy the “common enterprise” aspect of the Howey test, federal courts require that there be either “horizontal commonality” or “vertical commonality.” See Revak v. SEC Realty Corp., 18 F.3d. 81, 87-88 (2d Cir. 1994) (discussing horizontal commonality as “the tying of each individual investor’s fortunes to the fortunes of the other investors by the pooling of assets, usually combined with the pro-rata distribution of profits” and two variants of vertical commonality, which focus “on the relationship between the promoter and the body of investors”). The Commission, on the other hand, does not require vertical or horizontal commonality per se, nor does it view a “common enterprise” as a distinct element of the term “investment contract.” In re Barkate, 57 S.E.C. 488, 496 n.13 (Apr. 8, 2004); see also the Commission’s Supplemental Brief at 14 in SEC v. Edwards, 540 U.S. 389 (2004) (on remand to the 11th Circuit). 11 Based on our experiences to date, investments in digital assets have constituted investments in a common enterprise because the fortunes of digital asset purchasers have been linked to each other or to the success of the promoter’s efforts. See SEC v. Int’l Loan Network, Inc., 968 F.2d 1304, 1307 (D.C. Cir. 1992). 12 Howey, 328 U.S. at 298. See also Tcherepnin, 389 U.S. at 336 (“in searching for the meaning and scope of the word ‘security’ in the [Acts], form should be disregarded for substance and the emphasis should be on economic reality.”) 13 Joiner, 320 U.S. at 352-53. 14 SEC v. Glenn W. Turner Enter., Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 U.S. 821, 94 S. Ct. 117, 38 L. Ed. 2d 53 (1973) (“Turner”). 15 In this guidance, we are using the term “network” broadly to encompass the various elements that comprise a digital asset’s network, enterprise, platform, or application. 16 We recognize that holders of digital assets may put forth some effort in the operations of the network, but those efforts do not negate the fact that the holders of digital assets are relying on the efforts of the AP. That a scheme assigns “nominal or limited responsibilities to the [investor] does not negate the existence of an investment contract.” SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 483 n.15 (5th Cir. 1974) (citation and quotation marks omitted). If the AP provides efforts that are “the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise,” and the AP is not merely performing ministerial or routine tasks, then there likely is an investment contract. See Turner, 474 U.S. at 482; see also The DAO Report (although DAO token holders had certain voting rights, they nonetheless reasonably relied on the managerial efforts of others). Managerial and entrepreneurial efforts typically are characterized as involving expertise and decision-making that impacts the success of the business or enterprise through the application of skill and judgment. 17 See, e.g., Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce Fenner & Smith, 756 F.2d 230 (2d Cir. 1985). 18 See Forman, 421 U.S. at 852. 19 Situations where the digital asset is exchangeable or redeemable solely for goods or services within the network or on a platform, and may not otherwise be transferred or sold, may more likely be a payment for a good or service in which the purchaser is motivated to use or consume the digital asset. See discussion of “Other Relevant Considerations.” 20 As noted above, under Howey, courts conduct an objective inquiry focused on the transaction itself and the manner in which it is offered. 21 See Forman, 421 U.S. at 852-53 (where a purchaser is not “’attracted solely by the prospects of a return’ on his investment . . . [but] is motivated by a desire to use or consume the item purchased . . . the securities laws do not apply.”).
This afternoon during the December FMOC meeting, Janet Yellen, Chair of the Federal Reserve was asked by Steve Liesman of CNBC (a popular crypto currency news channel) if the Fed was worried about the stock market going up by triple digits every day. More importantly, Yellen was asked what is, with the ever increasing price and visibility of the most-popular cryptocurrency, the Fed’s policy on Bitcoin.
You can watch her answer below.
Why is this important? It’s just another brick in the wall solidifying the Bitcoin base. And adding layers to Bitcoin’s growing credibility.
Remember, this isn’t the first time that Bitcoin has popped-up at one of the Janet Yellen’s appearances. Back in July, someone held up a ‘buy bitcoin’ sign during Yellen’s testimony to Congress.
If you followed that person’s advice, congratulations. At the time Bitcoin was trading at around $2,400. It’s currently nearer $17,000.
Here’s the full transcript of Janet Yellen’s thoughts on Bitcoin:
You asked about Bitcoin and there I would simply say that Bitcoin at this time plays a very small role in the payment system. It is not a stable source of store of value and it doesn’t constitute legal tender it is a highly speculative asset and the Fed doesn’t really play any, role any regulatory role with respect to Bitcoin other than assuring that banking organizations that we do supervise are attentive. That they’re appropriately managing any interactions they have with participants in that market and appropriately monitoring anti-money laundering Bank Secrecy Act responsibilities that they have. I don’t believe there’s been anything specific about that.
Just generally banks have Bank Secrecy Act anti-money laundering responsibilities and this applies to Bitcoin as it does in if every other realm.
It was a very busy day for the SEC.
Hot on the heels of last week’s news that the SEC had seized the assets of ICO operator PlexCoin, today, California company Munchee refunded the $15 million tokens it sold during its ICO following a cease and desist order from the SEC. The SEC had argued that the “MUN” tokens constituted securities on the basis that “they were investment contracts.” This was regardless of their alleged “utility” when the sale took place.
Not finished there, SEC Chairman Jay Clayton then released a detailed statement on Cryptocurrencies and Initial Coin Offerings.
This is a major development in the crypto-sphere where one of the hottest topics of debate has been how and to what extent US Regulators would police the booming crypto industry.
Clayton’s statement was balanced and fair and showed that the SEC is taking a pragmatic approach to regulation. And it led to this tweet by prominent blockchain lawyer, Marco Santori:
I confess, I doubted I’d see a definitive statement from SEC clarifying that a great swath of potential token sales would not be securities… even giving examples! What a day. ETH has a clear, legal use case.
— Marco Santori (@msantoriESQ) December 11, 2017
The Statement shows that the SEC isn’t being fooled by any attempts to dress up securities as “tokens”. If it wasn’t clear before that you couldn’t just slap a “Utility Token” nametag on your ICO, it is now:
Following the issuance of the 21(a) Report, certain market professionals have attempted to highlight utility characteristics of their proposed initial coin offerings in an effort to claim that their proposed tokens or coins are not securities. Many of these assertions appear to elevate form over substance. Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security. Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law.
Chairman Clayton didn’t want to let trading exchanges feel left out. There was a special mention for them:
Similarly, I also caution those who operate systems and platforms that effect or facilitate transactions in these products that they may be operating unregistered exchanges or broker-dealers that are in violation of the Securities Exchange Act of 1934.
It was not all bad news. There was a clear sign that the SEC is taking a very pragmatic approach to their securities-analysis:
We at the SEC are committed to promoting capital formation. The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing. I am confident that developments in fintech will help facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike.
As has been widely reported since the SEC published their guidance report in Summer 2017, Clayton emphasized that each case must be judged on its own facts, rather than a one-size-fits-all approach:
It has been asserted that cryptocurrencies are not securities and that the offer and sale of cryptocurrencies are beyond the SEC’s jurisdiction. Whether that assertion proves correct with respect to any digital asset that is labeled as a cryptocurrency will depend on the characteristics and use of that particular asset. “Is the coin or token a security?” As securities law practitioners know well, the answer depends on the facts.
Finally, came the warning that demonstrates the SEC is taking an ‘investor protection first’ approach:
By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved. I have asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws.
Chairman Clayton’s statement demonstrates that, while the SEC isn’t launching itself into a regulatory blitzkreig, it sees what is developing and is wise to attempts by bad actors to circumvent existing regulation in attempts to defraud the public. The recent examples of PlexCoin and Munchee are surely just the tip of the enforcement iceberg. Act accordingly.
The world’s social media platforms and financial markets are abuzz about cryptocurrencies and “initial coin offerings” (ICOs). There are tales of fortunes made and dreamed to be made. We are hearing the familiar refrain, “this time is different.”
The cryptocurrency and ICO markets have grown rapidly. These markets are local, national and international and include an ever-broadening range of products and participants. They also present investors and other market participants with many questions, some new and some old (but in a new form), including, to list just a few:
The answers to these and other important questions often require an in-depth analysis, and the answers will differ depending on many factors. This statement provides my general views on the cryptocurrency and ICO markets and is directed principally to two groups:
Considerations for Main Street Investors
A number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.
Investors should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies. If any person today tells you otherwise, be especially wary.
We have issued investor alerts, bulletins and statements on initial coin offerings and cryptocurrency-related investments, including with respect to the marketing of certain offerings and investments by celebrities and others. Please take a moment to read them. If you choose to invest in these products, please ask questions and demand clear answers. A list of sample questions that may be helpful is attached.
As with any other type of potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost.
Please also recognize that these markets span national borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge. As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds.
To learn more about these markets and their regulation, please read the “Additional Discussion of Cryptocurrencies, ICOs and Securities Regulation” section below.
Considerations for Market Professionals
I believe that initial coin offerings – whether they represent offerings of securities or not – can be effective ways for entrepreneurs and others to raise funding, including for innovative projects. However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require. A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed. Said another way, replacing a traditional corporate interest recorded in a central ledger with an enterprise interest recorded through a blockchain entry on a distributed ledger may change the form of the transaction, but it does not change the substance.
I urge market professionals, including securities lawyers, accountants and consultants, to read closely the investigative report we released earlier this year (the “21(a) Report”) and review our subsequent enforcement actions. In the 21(a) Report, the Commission applied longstanding securities law principles to demonstrate that a particular token constituted an investment contract and therefore was a security under our federal securities laws. Specifically, we concluded that the token offering represented an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
Following the issuance of the 21(a) Report, certain market professionals have attempted to highlight utility characteristics of their proposed initial coin offerings in an effort to claim that their proposed tokens or coins are not securities. Many of these assertions appear to elevate form over substance. Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security. Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under U.S. law. On this and other points where the application of expertise and judgment is expected, I believe that gatekeepers and others, including securities lawyers, accountants and consultants, need to focus on their responsibilities. I urge you to be guided by the principal motivation for our registration, offering process and disclosure requirements: investor protection and, in particular, the protection of our Main Street investors.
I also caution market participants against promoting or touting the offer and sale of coins without first determining whether the securities laws apply to those actions. Selling securities generally requires a license, and experience shows that excessive touting in thinly traded and volatile markets can be an indicator of “scalping,” “pump and dump” and other manipulations and frauds. Similarly, I also caution those who operate systems and platforms that effect or facilitate transactions in these products that they may be operating unregistered exchanges or broker-dealers that are in violation of the Securities Exchange Act of 1934.
On cryptocurrencies, I want to emphasize two points. First, while there are cryptocurrencies that do not appear to be securities, simply calling something a “currency” or a currency-based product does not mean that it is not a security. Before launching a cryptocurrency or a product with its value tied to one or more cryptocurrencies, its promoters must either (1) be able to demonstrate that the currency or product is not a security or (2) comply with applicable registration and other requirements under our securities laws. Second, brokers, dealers and other market participants that allow for payments in cryptocurrencies, allow customers to purchase cryptocurrencies on margin, or otherwise use cryptocurrencies to facilitate securities transactions should exercise particular caution, including ensuring that their cryptocurrency activities are not undermining their anti-money laundering and know-your-customer obligations. As I have stated previously, these market participants should treat payments and other transactions made in cryptocurrency as if cash were being handed from one party to the other.
Additional Discussion of Cryptocurrencies, ICOs and Securities Regulation
Cryptocurrencies. Speaking broadly, cryptocurrencies purport to be items of inherent value (similar, for instance, to cash or gold) that are designed to enable purchases, sales and other financial transactions. They are intended to provide many of the same functions as long-established currencies such as the U.S. dollar, euro or Japanese yen but do not have the backing of a government or other body. Although the design and maintenance of cryptocurrencies differ, proponents of cryptocurrencies highlight various potential benefits and features of them, including (1) the ability to make transfers without an intermediary and without geographic limitation, (2) finality of settlement, (3) lower transaction costs compared to other forms of payment and (4) the ability to publicly verify transactions. Other often-touted features of cryptocurrencies include personal anonymity and the absence of government regulation or oversight. Critics of cryptocurrencies note that these features may facilitate illicit trading and financial transactions, and that some of the purported beneficial features may not prove to be available in practice.
It has been asserted that cryptocurrencies are not securities and that the offer and sale of cryptocurrencies are beyond the SEC’s jurisdiction. Whether that assertion proves correct with respect to any digital asset that is labeled as a cryptocurrency will depend on the characteristics and use of that particular asset. In any event, it is clear that, just as the SEC has a sharp focus on how U.S. dollar, euro and Japanese yen transactions affect our securities markets, we have the same interests and responsibilities with respect to cryptocurrencies. This extends, for example, to securities firms and other market participants that allow payments to be made in cryptocurrencies, set up structures to invest in or hold cryptocurrencies, or extend credit to customers to purchase or hold cryptocurrencies.
Initial Coin Offerings. Coinciding with the substantial growth in cryptocurrencies, companies and individuals increasingly have been using initial coin offerings to raise capital for their businesses and projects. Typically these offerings involve the opportunity for individual investors to exchange currency such as U.S. dollars or cryptocurrencies in return for a digital asset labeled as a coin or token.
These offerings can take many different forms, and the rights and interests a coin is purported to provide the holder can vary widely. A key question for all ICO market participants: “Is the coin or token a security?” As securities law practitioners know well, the answer depends on the facts. For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders. In contrast, many token offerings appear to have gone beyond this construct and are more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come. It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens. Prospective purchasers are being sold on the potential for tokens to increase in value – with the ability to lock in those increases by reselling the tokens on a secondary market – or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering.
By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws. Generally speaking, these laws provide that investors deserve to know what they are investing in and the relevant risks involved.
I have asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws.
We at the SEC are committed to promoting capital formation. The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing. I am confident that developments in fintech will help facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike.
I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so. When advising clients, designing products and engaging in transactions, market participants and their advisers should thoughtfully consider our laws, regulations and guidance, as well as our principles-based securities law framework, which has served us well in the face of new developments for more than 80 years. I also encourage market participants and their advisers to engage with the SEC staff to aid in their analysis under the securities laws. Staff providing assistance on these matters remain available at [email protected] .
Sample Questions for Investors Considering a Cryptocurrency or ICO
 This statement is my own and does not reflect the views of any other Commissioner or the Commission. This statement is not, and should not be taken as, a definitive discussion of applicable law, all the relevant risks with respect to these products, or a statement of my position on any particular product. Additionally, this statement is not a comment on any particular submission, in the form of a proposed rule change or otherwise, pending before the Commission.
 The CFTC has designated bitcoin as a commodity. Fraud and manipulation involving bitcoin traded in interstate commerce are appropriately within the purview of the CFTC, as is the regulation of commodity futures tied directly to bitcoin. That said, products linked to the value of underlying digital assets, including bitcoin and other cryptocurrencies, may be structured as securities products subject to registration under the Securities Act of 1933 or the Investment Company Act of 1940.
 Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others (Nov. 1, 2017), available at https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos; Investor Alert: Public Companies Making ICO-Related Claims (Aug. 28, 2017), available at https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims; Investor Bulletin: Initial Coin Offerings (July 25, 2017), available athttps://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings; Investor Alert: Bitcoin and Other Virtual Currency-Related Investments (May 7, 2014), available athttps://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-bitcoin-other-virtual-currency; Investor Alert: Ponzi Schemes Using Virtual Currencies (July 23, 2013), available at https://www.sec.gov/investor/alerts/ia_virtualcurrencies.pdf.
 It is possible to conduct an ICO without triggering the SEC’s registration requirements. For example, just as with a Regulation D exempt offering to raise capital for the manufacturing of a physical product, an initial coin offering that is a security can be structured so that it qualifies for an applicable exemption from the registration requirements.
 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (July 25, 2017), available at https://www.sec.gov/litigation/investreport/34-81207.pdf.
 Press Release, Company Halts ICO After SEC Raises Registration Concerns (Dec. 11, 2017), available at https://www.sec.gov/news/press-release/2017-227; Press Release, SEC Emergency Action Halts ICO Scam (Dec. 4, 2017), available at https://www.sec.gov/news/press-release/2017-219; Press Release, SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds (Sept. 29, 2017), available at https://www.sec.gov/news/press-release/2017-185-0.
 I am particularly concerned about market participants who extend to customers credit in U.S. dollars – a relatively stable asset – to enable the purchase of cryptocurrencies, which, in recent experience, have proven to be a more volatile asset.
 This is not intended to represent an exhaustive list. Please also see the SEC investor bulletins, alerts and statements referenced in note 3 of this statement.
Today the US SEC announced that it halted a proposed ICO and froze it’s assets.
The proposed PlexCoin ICO had raised $15 million since its launch in August. The SEC was correctly alarmed by promises that PlexCorps made regarding a 13x profit in 30 days.
ICO scammers take note – the SEC is onto and is coming for your ill-gotten gains.
Remember, back in August, the SEC’s Office of Investor Education and Advocacy issued an Investor Alert warning investors about scams of companies claiming to be engaging in initial coin offerings.
You can read the full Press Release on the SEC website.
Washington D.C., Dec. 4, 2017 —
The Securities and Exchange Commission today announced it obtained an emergency asset freeze to halt a fast-moving Initial Coin Offering (ICO) fraud that raised up to $15 million from thousands of investors since August by falsely promising a 13-fold profit in less than a month.
The SEC filed charges against a recidivist Quebec securities law violator, Dominic Lacroix, and his company, PlexCorps. The Commission’s complaint, filed in federal court in Brooklyn, New York, alleges that Lacroix and PlexCorps marketed and sold securities called PlexCoin on the internet to investors in the U.S. and elsewhere, claiming that investments in PlexCoin would yield a 1,354 percent profit in less than 29 days. The SEC also charged Lacroix’s partner, Sabrina Paradis-Royer, in connection with the scheme.
Today’s charges are the first filed by the SEC’s new Cyber Unit. The unit was created in September to focus the Enforcement Division’s cyber-related expertise on misconduct involving distributed ledger technology and initial coin offerings, the spread of false information through electronic and social media, hacking and threats to trading platforms.
“This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing,” said Robert Cohen, Chief of the Cyber Unit. “We acted quickly to protect retail investors from this initial coin offering’s false promises.”
Based on its filing, the SEC obtained an emergency court order to freeze the assets of PlexCorps, Lacroix, and Paradis-Royer.
The SEC’s complaint charges Lacroix, Paradis-Royer and PlexCorps with violating the anti-fraud provisions, and Lacroix and PlexCorps with violating the registration provision, of the U.S. federal securities laws. The complaint seeks permanent injunctions, disgorgement plus interest and penalties. For Lacroix, the SEC also seeks an officer-and-director bar and a bar from offering digital securities against Lacroix and Paradis-Royer.
The Commission’s investigation was conducted by Daphna A. Waxman, David H. Tutor, and Jorge G. Tenreiro of the New York Regional Office and the Cyber Unit, with assistance from the agency’s Office of International Affairs. The case is being supervised by Valerie A. Szczepanik and Mr. Cohen. The Commission appreciates the assistance of Quebec’s Autorité Des Marchés Financiers.
September 29, 2017
Governor, Distinguished Guests, Ladies and Gentlemen—Good morning!
Thank you, Mark [Carney], for that kind introduction, and thank you to the Bank of England for inviting me to this wonderful event.
This is a moment to celebrate 20 years of independence during which the Bank of England has been a stabilizing force for the U.K. economy, inspiring others in the world of central banking—not least because of your guidance, Mark.
This is also a moment to learn from our experiences, build on the progress made so far, and look into the future—to the next 20 years—as our journey continues.
This morning, I came up Fleet Street, which always feels like a journey through history. In the Middle Ages, that street was an important center of commerce, much of which has now moved online. By the 19thcentury, the street was home to ticker machines and reporters racing each other to make the evening papers. That world, too, has largely moved online.
And much has changed for the bankers and policymakers here in the City of London. But that is only the beginning. Let us spin the hands ofBig Ben forward to 2040 to catch a glimpse of their world. We might see that:
· Cars have disappeared, because people are moving about in hovering drones, or “pods,” which elegantly avoid each other in the morning rush hour.
· One of those pods carries the central bank governor, who recently started her second term. As part of her morning routine, she swipes through a hologram of news videos curated by a digital assistant, before arriving at Threadneedle Street.
· The governor disembarks, walks up to the columned façade, opens the door and…
Who will she encounter inside the building? Are there economists sitting at desks, debating policy choices around a table? Or is there an intelligent machine making decisions, setting rates, and issuing money?
In other words, how will fintech change central banking over the next generation?That is the focus of my remarks today.
I would like to consider the possible impact of three innovations—virtual currencies,new models of financial intermediation, and artificial intelligence.
Some of these innovations have already found their way into our wallets, smartphones, and financial systems. But that is only the beginning.
Are you ready to jump on my pod and explore the future together? As one of your fellow Londoners—Mary Poppins—might have said: bring along a pinch of imagination!
1. Virtual currencies
Let us start with virtual currencies. To be clear, this is not about digital payments in existing currencies—through Paypal and other “e-money” providers such as Alipay in China, or M-Pesa in Kenya.
Virtual currencies are in a different category, because they provide their own unit of account and payment systems. These systems allow for peer-to-peer transactions without central clearinghouses, without central banks.
For now, virtual currencies such as Bitcoin pose little or no challenge to the existing order of fiat currencies and central banks. Why? Because they are too volatile, too risky, too energy intensive, and because the underlying technologies are not yet scalable. Many are too opaque for regulators; and some have been hacked.
But many of these are technologicalchallenges that could be addressed over time. Not so long ago, some experts argued that personal computers would never be adopted, and that tablets would only be used as expensive coffee trays. So I think it may not be wise to dismiss virtual currencies.
Better value for money?
For instance, think of countries with weak institutions and unstable national currencies. Instead of adopting the currency of another country—such as the U.S. dollar—some of these economies might see a growing use of virtual currencies. Call it dollarization 2.0.
IMF experience shows that there is a tipping point beyond which coordination around a new currency is exponential. In the Seychelles, for example, dollarization jumped from 20 percent in 2006 to 60 percent in 2008.
And yet, why might citizens hold virtual currencies rather than physical dollars, euros, or sterling? Because it may one day be easier and safer than obtaining paper bills, especially in remote regions. And because virtual currencies could actually become more stable.
For instance, they could be issued one-for-one for dollars, or a stable basket of currencies. Issuance could be fully transparent, governed by a credible, pre-defined rule, an algorithm that can be monitored…or even a “smart rule” that might reflect changing macroeconomic circumstances.
So in many ways, virtual currencies might just give existing currencies and monetary policy a run for their money. The best response by central bankers is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.
Better payment services?
For example, consider the growing demand for new payment services in countries where the shared, decentralized service economy is taking off.
This is an economy rooted in peer-to-peer transactions, in frequent, small-value payments, often across borders.
Four dollars for gardening tips from a lady in New Zealand, three euros for an expert translation of a Japanese poem, and 80 pence for a virtual rendering of historic Fleet Street: these payments can be made with credit cards and other forms of e-money. But the charges are relatively high for small-value transactions, especially across borders.
Instead, citizens may one day prefer virtual currencies, since they potentially offer the same cost and convenience as cash—no settlement risks, no clearing delays, no central registration, no intermediary to check accounts and identities. If privately issued virtual currencies remain risky and unstable, citizens may even call on central banks to provide digital forms of legal tender.
So, when the new service economy comes knocking on the Bank of England’s door, will you welcome it inside? Offer it tea—and financial liquidity?
2. New models of financial intermediation
This brings us to the second leg of our pod journey—new models of financial intermediation.
One possibility is the break-up, or unbundling, of banking services. In the future, we might keep minimal balances for payment services on electronic wallets.
The remaining balances may be kept in mutual funds, or invested in peer-to-peer lending platforms with an edge in big data and artificial intelligence for automatic credit scoring.
This is a world of six-month product development cycles and constant updates, primarily of software, with a huge premium on simple user-interfaces and trusted security. A world where data is king. A world of many new players without imposing branch offices.
Some would argue that this puts a question mark on the fractional banking model we know today, if there are fewer bank deposits and money flows into the economy through new channels.
How would monetary policy be set in this context?
Today’s central banks typically affect asset prices through primary dealers, or big banks, to which they provide liquidity at fixed prices—so-called open-market operations. But if these banks were to become less relevant in the new financial world, and demand for central bank balances were to diminish, could monetary policy transmission remain as effective?
If anything, central banks may well have to increase the number of counterparties to their operations. The Bank of England is already leading the way by including large broker-dealers and central counterparty clearing houses.
All this, of course, has regulatory implications. More counterparties imply more firms falling under the central bank’s regulatory umbrella—which is the price to pay for liquidity on a rainy day. Whether the future holds more or less rain is an open question. Still, better regulating shadow banks looks all the more pressing. The FSB has already made progress in this area under your leadership, Mark.
The remit of central banks will grow, and with it, perhaps, public scrutiny and political pressures. Independence—at least to set monetary policy—will need further defenses and require even clearer communication.
We may also see a shift in regulatory practices. Traditionally, regulators have focused on overseeing well-defined entities. But as new service providers come on stream in new shapes and forms, fitting these into buckets may not be so easy. Think of a social media company that is offering payments services without managing an active balance sheet. What label should we stick on that?
All this is good for lawyers, but not so good for regulators. The regulators will likely have to further expand their focus, from financialentities to financial activities—while possibly also becoming experts in assessing the soundness and security of algorithms. Easier said than done.
Cooperation is key
To make things smoother—at least a bit—we need dialogue. Between experienced regulators and those regulators that are just beginning to tackle fintech. Between policymakers, investors, and financial services firms. And between countries.
Reaching across borders will be critical as the focus of regulation widens—from national entities to borderless activities, from your local bank branch to quantum-encrypted global transactions.
Because of our global membership of 189 countries, the IMF is an ideal platform for these discussions. Technology knows no borders: what is home, what is host? How can we avoid regulatory arbitrage and a race to the bottom? This is about the IMF’s mandate for economic and financial stability, and the safety of our global payments and financial infrastructure.
The stakes—and gains—from cooperation are high. We want no holes in the global financial safety net, however much it gets stretched and reshaped.
I am convinced that the IMF has a strong role to play in this respect. But the Fund will also have to be open to change, from bringing new parties to the table, to considering a role for a digital version of the SDR.
In other words, the IMF is in for the pod-ride.
3. Artificial intelligence
Which brings us to the third and final leg—the transformative effect of artificial intelligence.
Will our governor in 2040 walk into the Bank to polish a monetary policy-setting machine? Will your prediction, Andy [Haldane], of 15 million jobs being automated in the U.K., affect the Bank and its world-class staff?
One thing is clear: we always have more data. Some estimates suggest that 90 percent of the data available today was generated in the past two years.  This is not just information on output, unemployment and prices, but also behavioral data on the quirks and irrationalities of the homo economicus.
Thanks to smartphones and the internet, this data is now abundant, ubiquitous, and increasingly valuable as we pair it with artificial intelligence.
Artificial intelligence is taking immense strides. Over the past year, some of the world’s best players of Go, the ancient board game, have lost to a self-learning computer. For many, that day of reckoning was supposed to be decades away. The machine learned tactics, recognized patterns, and optimized its game—better than we could.
Clearly, the economy is vastly more complex than a game of Go. But over the next generation, machines will almost certainly play a larger role—in assisting policy-makers, offering real-time forecasts, spotting bubbles, and uncovering complex macro-financial links.
But let me reassure you, humans will still be needed.
For one, there is immense uncertainty about the economy. Changes in basic economic relationships need to be spotted, and risks evaluated. Judgment and constant questioning by peers, diversity of opinions, and even a few maverick spirits, will remain essential to good policy. But what if the machine could do that too?
Next is the question of communication. Good monetary policy, as we know, is about story telling. Policy is effective if it can be explained clearly so the public can form expectations about future policy. Could machines really explain their decisions in plain English?
Even if that hurdle could be overcome, a last one remains. Even with the best algorithms and machines, targets will be missed, crises will occur, mistakes will be made. But can machines really be held accountable—to the young couple unable to buy a house, to the working mother finding herself unemployed?
Accountability is key. Without it, we cannot have independence; how else to bestow so much power in a technocratic organization? And without independence, policy is bound to go astray, as this conference reminds us loud and clear.
So no, I do not see machines taking over monetary policy. In 2040, the governor walking into the Bank will be of flesh and bones, and behind the front door she will find people, at least a few.
So there will always be an Old Lady living in Threadneedle Street.  And I hope you agree that it is often enlightening to speak to a lady of a certain age!
As our pod journey comes to an end, some of you may wonder about my upbeat tone. For many, this new world of central banking is less Mary Poppins, and more Aldous Huxley: a “brave new world,” much like the one described in Huxley’s famous novel.
I believe that we—as individuals and communities—have the capacity to shape a technological and economic future that works for all. We have a responsibility to make this work.
That is why I prefer Shakespeare’s evocation of the brave new world in The Tempest: “ O wonder! How many goodly creatures are there here! How beauteous mankind is! O brave new world .”
Floyd is back!
As we reported back in August, Floyd Mayweather is fast becoming the (well paid, we assume) voice of ICOs.
Hot on the heels of his Stox and Hubii promotions, Floyd is now endorsing the Centra ICO.
On a side note: this comes just days after the FTC apparently sent warning letters to Instagram influencers reminding them to disclose business relationships for products they promote.
What is Centra?
We have no idea to be honest.
Looking at their site they are apparently “a Crypto debit card for Bitcoin, Ethereum & more.” Their Debit Card “enables users to spend their cryptocurrency in real time with a 0% exchange, spend, & withdraw fees”.
That’s all well and good. But we’re left here wondering:
Is there an ICO that Floyd Mayweather doesn’t promote?
In our post last week, we saw two countries pressing ahead with crytpocurrency plans. Estonia is planning to hold it’s own Initial Coin Offering while Russia announced it’s goal of a digital currency on the blockchain platform.
But not all countries are jumping on the ICO bandwagon.
According to financial magazine Caixin, Chinese regulators are working on new regulations to govern coin offerings and may issue an outright ban on them until the new regulations are finalized.
This more closely tracks the approach that Singapore regulators and the US Securities and Exchange Commission has taken. In July the SEC concluded that certain tokens would constitute securities and therefore be subject to the onerous securities laws requirements.
The battle lines are being drawn. With so much at stake it will fascinating to see how this struggle develop
On July 24, 2017 the US Commodity Futures Trading Commission granted LedgerX the first license to clear and settle derivative contracts for digital currencies.
New York based LedgerX becomes the first regulated bitcoin options exchange and is permitted to clear fully collateralized digital currency swaps. This follows the exchange’s recent authorization by the CFTC as a swap execution facility.
This is big news for digital currency traders who will now be able to hedge the often volatile price movements in the underlying assets.
It also represents the next step in the journey towards regulatory acceptance of digital currencies.
LedgerX’s chief executive, Paul Chou, described it as “an important milestone” for the wider digital currency market. We agree.