SEC Chairman on Cryptocurrencies and Initial Coin Offerings

May 31, 2018

U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton spoke at Princeton University on April 5th at the invitation of the JRCPPF Undergraduate Associates. Clayton, the country's top securities market regulator, discussed the SEC's evolving views on whether digital coins should be classified as securities and the need for government oversight in the context of rapid technological innovation.

According to the regulator, many initial coin offerings (ICOs) that have labeled their products as utility tokens, may actually be securities. Clayton referred to laundromat tokens to explain the difference between a utility token and a security token, noting that the SEC will regulate the latter but not the former.

"If I have a laundry token for washing my clothes, that's not a security. But if I have a set of 10 laundry tokens and the laundromats are to be developed and those are offered to me as something I can use for the future and I'm buying them because I can sell them to next year's incoming class, that's a security," he said. "What we find in the regulatory world is that the use of a laundry token evolves over time. The use can evolve toward or away from a security."

Investors may not understand all the risks inherent in cryptocurrencies, Clayton added. The steps the SEC is taking now to prevent fraud in ICOs will help consumers and industry growth in the long run.

"Is the approach taken in Washington by the SEC adversely affecting distributed ledger technology in other areas? My hope is that it’s actually helping, because this technology is being used for fraud,” Clayton said. “And to the extent that it’s being used for fraud, history shows that government comes down harshly on that technology later.”

Responding to a question from a student as to whether all ICOs are fraudulent, Clayton replied that the SEC does not believe that all initial coin offerings are fraudulent. “Absolutely not,” Clayton said when asked if the SEC’s recent crackdowns on ICOs signals such a stance.

He added: “If we don’t stop the fraudsters, there is a serious risk that the regulatory pendulum will swing; the [later] regulatory actions will be so severe that they will restrict the capacity of this new security.”

Jay Clayton photo by Mahishan Gnanaseharan courtesy of CoinDesk.

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