The regulatory implications of blockchain technology and cryptocurrency were debated this morning at a meeting of the SEC Investor Advisory Committee. The Committee was established by the Dodd-Frank Act to advise the Commission on issues affecting investors and the securities market, and is empowered to make findings and recommendations to the Commission concerning regulatory priorities. This morning’s meeting included a panel on distributed ledger technology (“DLT”), including cryptocurrencies and blockchain technology. Panelists included Michael Bodson, President and CEO of DTCC; Fredrik Voss, VP of Blockchain Innovation at Nasdaq; Jeff Bandman of Bandman Advisors; Nancy Liao of Yale University; and Adam Ludwin, CEO of Chain Inc.
Panelists presented an overview of DLT, providing opinions on the impact the technology is likely to have on the market, along with thoughts on the limitations of the technology. For example, Bodson noted that while blockchain technology held tremendous promise, the implementation of blockchain across financial systems will require institutions to undertake enormous costs to ensure the technology is capable, scalable, and governable, and that the technology needs to be proven before it can be adopted widely. He noted that ensuring consistent standards across industry will be important, and that industry should play a large role in ensuring proper governance. Given the market-wide implications of potential coding errors, Bodson stated that it would be important to have an effective watchdog ready at the kill switch to ensure that such errors could not jeopardize entire markets.
Panelists agreed that a significant benefit to widespread adoption of blockchain will be the increased ability for regulators and others to have real-time insight into market activity. Regulators will be able to monitor transactions as they occur, and will be able to view the effect of such transactions across multiple markets simultaneously. The ability to view multiple markets simultaneously in real-time will make efforts such as anti-money laundering, stress testing, and market risk monitoring more effective.
Although most of the panel presentations concerned DLT generally, the questions from the Committee focused largely on cryptocurrency. Committee members questioned whether cryptocurrencies could be categorized as securities, a new asset class, or something different. Several Committee members expressed skepticism of cryptocurrencies, voicing concern about their underlying value, the applicability of the ’33 Act and ’34 Act to the issuance and trading of cryptocurrencies, and the rapid increases in valuations seen across several recent issuances. One critical question was whether participation in a distributed ledger to engage in cryptocurrency transactions constituted an investment contract with the other ledger participants, with one Committee member noting that the conversation around cryptocurrency seemed to be an attempt to use technical and marketing jargon to evade legal requirements in the context of a bubble market. Panelists noted that while there were many benefits to the cryptographic aspect of cryptocurrencies, the ability to participate in the market anonymously created an obstacle to regulation under existing law.