SEC Chairman Clayton says agency won’t change definition of a security

The head of the Securities and Exchange Commission made it clear Wednesday that the agency won’t bend the rules for cryptocurrency when it comes to defining what is or what isn’t a security.

“We are not going to do any violence to the traditional definition of a security that has worked for a long time,” U.S. Securities and Exchange Commission Chairman Jay Clayton told CNBC Wednesday. “We’ve been doing this a long time, there’s no need to change the definition.”

Clayton said the U.S. has built a $19 trillion securities market that’s “the envy of the world” following the current rules.

The agency is not adjusting rules for the fundraising process known as initial coin offerings, or ICOs, either, he said. ICOs have raised $9.1 billion this year alone, according to the latest research from Autonomous Next.

“If you have an ICO or a stock, and you want to sell it in a private placement, follow the private placement rules,” Clayton said “If you want to do any IPO with a token, come see us.”

The SEC is “happy to help you do that public offering” if issuers take the responsibility SEC laws require, he said.

The chairman also addressed a growing debate over which cryptocurrencies should fall under SEC jurisdiction.

“Cryptocurrencies: These are replacements for sovereign currencies, replace the dollar, the euro, the yen with bitcoin,” Clayton said. “That type of currency is not a security.”

A token, or a digital assets used in a fundraising process known as an initial coin offering, or ICO, are securities by Clayton’s definition.

“A token, a digital asset, where I give you my money and you go off and make a venture, and in return for giving you my money I say ‘you can get a return’ that is a security and we regulate that,” Clayton said. “We regulate the offering of that security and regulate the trading of that security.”

Whether an asset is a security right now follows the “Howey Test.” The ruling comes from a 1946 U.S. Supreme Court case that classifies a security as an investment of money in a common enterprise, in which the investor expects profits primarily from others’ efforts.

Clayton made it clear in March that all ICOs constitute securities, and reiterated that Wednesday saying “if it’s a security, we’re regulating it.”

But companies tied to those cryptocurrencies have argued that some should be fall under a different category, in many cases because of their utility.

The financial watchdog has been balancing consumer protection and innovation in what has become multi-billion dollar cryptocurrency market. The market capitalization of bitcoin alone is more than $130 billion, according to CoinMarketCap.

On Tuesday, the SEC picked a new leader for its emerging cryptocurrency division. Valerie Szczepanik, who already worked at the agency, was promoted to a role that didn’t exist until this week: Associate Director of the Division of Corporation Finance and Senior Advisor for Digital Assets and Innovation.

Bitcoin began its price descent in March, falling below $10,000 after the agency said it would require digital asset exchanges to register with the agency.

Prices have struggled to recover since. Bitcoin is down roughly 50 percent in 2018 after climbing more than 1,300 percent last year, according to data from CoinDesk. The cryptocurrency was trading near $7,638 as of 10 a.m. ET Tuesday.

Bitcoin’s three-month performance

Source: CoinDesk

In late April, SEC Commissioner Robert Jackson told CNBC the agency was not looking to ban the fundraising process known as initial coin offerings, or ICOs, and remains open to a legal avenue for crypto investments.

One month later, the SEC created the website to show investors some of the ways a site can look valid when it actually could be a scam. The agency has cracked down on ICOs year: It has continuously warned of pump-and-dump schemes, issued subpoenas and charged multiple coin projects with fraud.

Fundstrat co-founder Tom Lee and other bitcoin pundits have predicted that institutional investors need more guidance from regulators like the SEC until they fully buy into crypto. Lee told CNBC this week that investors are in “purgatory with regard to regulatory clarity.”

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