Libra Sounds Like a Security: SEC Chairman Jay Clayton

In a Congressional testimony to the House Financial Services Committee yesterday, SEC chairman Jay Clayton indicated that Facebook’s cryptocurrency Libra might be a security token. “If what you are doing is raising capital for a project with the idea that you are going to give a return as a result of investing in that (token), then Libra sounds like a security,” he said.

Clayton prefaced his assessment by saying that his remarks did not constitute a decision regarding Libra’s status. According to him, the cryptocurrency’s status is dependent on its functioning within the proposed ecosystem. Under Clayton, the SEC has increasingly cracked down on suspect offerings and securities that masquerade as utility tokens.

Facebook has previously held talks with regulators in the United States, including the CFTC, but it has not revealed much public detail about its cryptocurrency’s functioning.

The Libra whitepaper states that the coin will have “low volatility”. That volatility could possibly allow investors in the coin, who comprise an impressive mix of card processors, venture capital firms, and ride sharing platforms among others, to profit from its price movements. Some experts have also posited that Libra’s design is similar to that of an ETF because it promises sustained returns to investors over a period of time.  

Commissioner Hester Pierce, dubbed “Crypto Mom” by the cryptocurrency community, held out hope for coins like Libra. She said the agency needed to be a “little more forward-thinking” in its treatment of cryptoassets and added that certain token offerings needed a “safe harbor” to be conducted. She also said that the SEC is working to create a regulatory framework for utility tokens.

A Speeding Up of Regulations for Crypto?

Clayton’s comments were part of a wide-ranging testimony that was attended by all five SEC commissioners. While a majority of the questions dealt with existing financial products and topics, representatives across both aisles wanted to know more about the agency’s efforts in learning more about Libra and cryptocurrencies.

Rep. Maxine Waters (D-CA), chairwoman of the committee, asked Clayton whether he had a team looking into the development of new technologies like blockchain and cryptocurrency, even as she repeated her concerns about a private company like Facebook releasing its own money.

Others wanted to know more about the speed of developing regulation for cryptoassets. This has become an important topic for crypto-businesses as other jurisdiction steal a march over the United States in embracing and developing regulatory frameworks for digital assets.

Rep. Anthony Gonzalez (R-OH) asked the federal agency’s team to “go faster” in developing regulations for cryptocurrencies.

“What I’ve heard (from regulators) is “we are not going to know if it is a security till we see it operate” and what I am hearing from companies is “we are not going to operate until we know whether we will be dinged for a security or not,” he said, referring to current regulatory deadlock pertaining to cryptocurrencies.

Congressman Warren Davidson (R-OH), who introduced the Token Taxonomy Act earlier this year, also had a similar comment. “With respect to digital assets, it is time for deeds, not words,” he said.

But crypto enthusiasts should not expect a radical overhaul of existing laws. “We’ve developed an ecosystem of financial regulation over the years; securities, commodities, payment systems that deal with risk to investors and market risk. To the extent that cryptoassets will be used to evade these regulations, I have a real problem with it,” said SEC Chair Clayton during the hearing.

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