Apologies for typos and grammatical errors; wanted to get this out as soon as possible for those that weren't able to watch the live stream. Cleaned up formatting to make it more readable.

While this isn't a 100% word-for-word transcript, the overtone of the meeting should have been conveyed. SEC and CFTC want protections for consumers, but don't want to outright ban crypto. I was under the impression that both agencies were well-educated, but understaffed. They both want to introduce protections for customers and investors and go after scam artists, but don't want to impose any restrictions or regulations that would be bad for crypto as a whole (both from a security perspective, and a technological innovation perspective). Overall a huge positive.

Crapo

• Touched on the definition, use, history, all-time-high, market cap, negative news
• Mentioned that the techonology has positives to transform the financial landscape, transfer risk

Brown

• Volatility, 1000% rise, 60% fall, compared to DOW Jones
• touched on scam artists/hackers, undereducated market participants
• mentioned there are regulatory gaps, potentials for abuse
• neither SEC/CFTC has authority to police all aspects
• mentioned some analogies to the dotcom bubble
• may be used to fund illicit activity
• says they need to do more to get ahead of the curve
• "don't forget your day jobs to pursue and punish misconduct", mentioned the 3 big banks being punished recently
• crypto brings us to a new age, but don't overlook the princilpes of going after the bad guys and being tough

Clayton

• estimated highest market cap $700 bn; promising new technology
• great efficiencies, including capital markets; seek to WORK WITH those who seek to bring innovation
• Crypto currencies – replacement for dollars
  • widely known introduced as substitutes
  • make it easier and cheaper ot buy and sell goods
  • verification and fees/costs eliminated
• ICOs – stock offering
  • securities offerings
  • stocks and bonds, under a new label
  • security being offered is a virtual token
  • "if it functions as a security, it IS a security"
  • doesn't mean you are investing in blockchain ventures
  • problems:
    1. market have less oversight than traditional securities
       • if it looks like a stock exchange, don't take comfort
       • no capital and conduct requirements
    2. many ICOs are conducted illegally
       • creators not following securities laws
       • those who try to circumvent the SEC are in their crosshairs
  • do not have control over the regulation of the markets that exchanges exist in
  • sovereign backed
• "do not view this as a request for increased SEC jurisdiction"
• "I believe every ICO I have seen is a security"
• we are working with the DOJ to enforce laws

Giancarlo

• story about how his kids recently showed an interest in Bitcoin
• "we must foster their interest, but crack down hard on those that abuse"
• response should have several elements:
  1. learn as much as we can – Lab CFTC to engage with innovators
  2. put things in perspective – as of this morning, Bitcoin 113 bn market cap. less than the market cap of McDonald's. sometimes compared to gold; value of gold dwarfs Bitcoin at 8 trillion market cap
  3. educate consumers – podcasts, webinars, visits to libraries, outreach to seniors
  4. regulation –
  5. legal authority – "The CFTC does not regulate the dozens of cryptocurrencies"; through their authority, they have enforcement over spot coin markets; analyze manipulation
  6. tough enforcement – they have already launched civil actions, more will follow overall take: wants to work to foster education but introduce protections

Crapo

• Suggesting that perhaps one or both of SEC/CFTC may or should have full control

Clayton

• we should all come together and have a coordinated plan for dealing with the virtual currency market
• far from how the stock market is addressed
• asked by Crapo if there needs to be additional measures, responded "we may"

Giancarlo

• FINCEN has been active with AML/KYC
• there isn't a comprehensive structure to deal with this

Crapo

• cross-border and international concerns; what challenges?

Clayton

• international nature means patchwork is not sufficient
• FINCEN reports that these currencies are used for
• encourages FINCEN to continue pursuing this

Giancarlo

• Markets have been global
• Challenge working with overseas and bringing regulations
• Challenge requires a lot of new thinking

Crapo

• Encourage to work together to decide how the regulation should look

Brown

• ICOs raised $4bn globally
• SEC focused to protect investors

Clayton

• not clear how much was raised in the U.S., due to unregulated basis; "significant portion"

Brown

• cooperation between SEC and CFTC regulating Bitcoin but doesn't mention consumer protection bureau CFPB

Clayton

• we're in the enforcement perspective, i can check on that

Brown

• market manipulation
• report that "SEC has stopped enforcement actions against wall street firms"

Clayton

• "I saw that report"; found it annoying; gestation period is 22-24 months, latency period
• we've put out a comprehensive report; i'm happy with that
• we're pursuing our securities laws vigorously

Brown

• troubled by a statement "SEC might lose 100 of its enforcement staff by not hiring those who leave"
• how are you going to stay on top of everything else we've talked about as well as virtual currencies

Clayton

• personnel is my biggest challenge at the moment
• we have a hiring freeze – natural cost, trouble finding people, etc
• would receive the "greatest return for additional bodies"

Brown

• is that the message that you're not the cop it should be?

Clayton

• not at all

Brown

• I hope you will ask for money and flexibility

Clayton

• I've been very straight about money and value that can be added

Sen. Shelby

• Federal reserve is the biggest bank regulator we have
• how are you going to put together a task force to deal with crypto currencies before this gets out of control

Clayton

• treasury secretary has brought us together to talk about this
• "the funny thing is, they only work for their purported purpose if they're integrated with the financial service"

Giancarlo

• we are going to be coordinating responses; needs to be clear as to what we're doing

Sen. Shelby

• do you need additional legislation

Clayton

• we may be back to ask for that

Sen. Shelby

• virtual; go to a virtual doctor, virtual currency, etc
• "i started out with pencil and paper in school"
• Lack intrinsic value, lack liquidity
• gained money going up, lost money going down
• don't know where the floor is

Giancarlo

• relation between Bitcoin value and the cost of mining
• charts plotting the correlation
• the floor isn't zero, because there is some cost

Clayton

• "think there is something to the value of the crypto exchange"
• "I'm not seeing the benefits manifesting themselves in the market yet"
• "I'm interested in protecting the main street investors; they should see that"
• in the securities world, there are rules that dictate how much you have to tell someone about what they're investing in

Sen. Shelby

• we will give you every tool you need to do your job and to hire every person you need to execute that

Sen Reed

• (essentially) do you have any cryptologists?

Clayton

• emerging area; could always use more horsepower

Giancarlo

• hired the industry's first "chief innovation officer"
• started Lab CFTC
• formed virtual currency task force
  • brought 3 cases against bitcoin fraudsters
• used bypass authority for additional resources (13% over budget)

Sen Reed

• Bitcoin isn't the only one; there are seemingly new ones every day
  1. are you tracking them all?
  2. is someone looking at the long-term systemic effects
• eerily similar to late-90s derivatives

Giancarlo

• Bitcoin is one of many; important to know that many are fraudulent
• "MyBigCoin" which became known as "MyBigCon" – Ponzi scheme; we went after them
• relatively small market, but we have to watch it

Clayton

• we have had to watch it because they're integrated with the markets we do oversee
• on systemic – agrees with Giancarlo
• if people are getting ripped off, that is an issue

Sen Reed

• forced arbitration

Rounds

• "I used a pen and pencil as well"
• fascinating to see how things are moving
• we keep coming back to dollars and cents
• new type of exchange; bartering
• could avoid determination of the value of the dollar and cents
• how do you tax? how do you recognize income?
• seems that have to be filled, but basics that a lot of us don't understand
• how do you respond to ICOs?

Clayton

• definition of a security is broad
• "when you're offering me something and i give you money and the purpose of me giving you money is to profit from your actions going forward"

Rounds

• is Bitcoin a commodity or a security or is it both?

Giancarlo

• has characteristics of both
• is a "medium of exchange, store of value, or a means of account"
• we hear a lot of people holding – "HODL – hold on for dear life"
• 30 year old niece bought some years ago, is holding on
• in this regard, it's a commodity
• we are looking for fraud and manipulation so that people like his niece are protected

Ms. Warren

• Jan 26th Bloomberg "SEC weighs a big gift […] blocking class action lawsuits"
• wants to get a straight yes/no – "do you support this enormous change in SEC policy"

Clayton

• bottom line – "I can't dictate whether or not this issue comes to us, but I'm not anxious to see a change in this area"

Ms. Warren

• change can't happen without your approval

Clayton

• I'm only 1 of 5 votes

Ms. Warren

• I'd guess there will be at lest 2 votes against it

Clayton

• It would take a long time

Ms. Warren

• I'll let you get away with that
• SEC's mission is to protect; not throw under bus
• advisers that put fees, kickbacks for recommending product ahead of interest of clients
• I want to know that you will not weaken the protections for retirement savers

Clayton

• that's what I'm trying to do – the relation between a broker and their client is regulated by no less than 5 people (the SEC)

Ms. Warren

• want to make sure you're not jeopardizing investors

Clayton

• insufficient standard, lack of clarity, "the standard is only as good as the remedy available"
• what dollars do you actually collect when someone does you harm?

Ms. Warren

• if you want to strengthen it, i'm with you

Perdue

• regulatory arbitrage
• who pays for frivolous lawsuits?

Clayton

• shareholders do
• regulatory arbitrage, hard to trace
• South Korea, China
• was a largely unregulated space
• each country is now taking regulatory measures
• there's a lot happening beyond the understanding of your average investor

Perdue

• what do we need to do to combat this?

Giancarlo

• regulatory arbitrage, price arbitrage
• "Kimchi arbitrage"
• different regional and international market
• regulation – i think some time ago there was a perception Bitcoin was off the regulatory grid
• enforcement / ICOs – we're using our full authority
• we will go after misconduct

Perdue

• pump and dump

Clayton

• unregulated exchange, ability for price manipulation

Giancarlo

• we've taken 3 cases in the last few weeks, more to come
• digging deep, learning a lot, seeing a lot
• we are working the beat hard

Donnelly

• what about retail investors?

Giancarlo

• formed partnership with CFPB (Consumer Financial Protection Bureau)
• libraries
  • Bitcoin is one of the most frequently searched term on library computers
  • enhancing outreach to educate people coming to the library
• podcast

Clayton

• getting the word out – financial intermediaries

Donnelly

• are you protecting retirement investments

Giancarlo

• seniors seem to be the prey of choice – not just for Bitcoin
• we seek to prosecute these predators

Donnelly

• article from Kentucky "Bitcoin is my potential pension"
• what would you do to protect them?

Giancarlo

• troubling, which is why we're putting out so much material
• "if it sounds too good to be true, it is"
• "if you're giving them money, you'd better be prepared to lose it"

Clayton

• disruptive technologies, but you shouldn't bank on it
• pumping all of your money into a disruptive technology has a very high probability of not working out
• "there will be winners, but there will be many losers"

Donnelly

• want to ensure it's not used against terrorist groups and countries like N Korea

Giancarlo

• working with FBI; will require cooperation among multiple organizations

Clayton

• also has a dark web working group

Sen. Kennedy

• when was the last time you bought a fund?

Giancarlo

• a year or two ago, index funds

Sen Kennedy

• did you read the fine print?

Giancarlo

• not cover to cover

Sen Kennedy

• so what's the point of all this over-disclosure if nobody's reading it?
• why do we want to do the same for Bitcoin?

Giancarlo

• adequacy of full disclosure

Sen Kennedy

• "I don't think the disclosure we have right now works"
• good for lawyers / financial advisers, but right now, we over-disclose
• how far should we go to protect people from themselves?
• how far do you think we ought to go here? should we just go after the shysters and fully disclose?

Clayton

• what is the right way to deal with this new technology?
• we want to deal with ICOs; don't want to go too far
• our securities laws work pretty well, but disclosure can be improved

Sen Kennedy

• we have to have disclosure that works, and helps the helpless people

Warner

• if we see the same continued growth, we may see the market cap at 20 trillion dollars by 2020
• we may see the same transformation take place
• we are going to have to wrap our hands around this
• not sure what the right answer is, but this could systemically rise to an FSOC-level event

Clayton

• if this does keep going, is this a systemic issue?
• want to go back to separating these two things
• should regulate ICOs like securities

Giancarlo

• false disclosure is fraud, period
• so much more to be done

Warner

• Ethereum – creating "file sharing or extra computer time"
• are these in your realm?

Clayton

• if it's an ICO that promises to deliver server time, it's a security

Warner

• worried that we need a much more coordinated effort
• could be as transformational as wireless technology

Giancarlo

• it is important; we are all working to understand our authorities
• bitcoin futures are different; fully transparent and regulated, compared to Bitcoin that's opaque and unregulated

Clayton

• ICOs should be taken under our regime

Cotton

• Putting aside Bitcoin and other distributed ledger, what do you think the value is?

Giancarlo

• Without Bitcoin, there would be nothing. everything grew out of it.
• applications range from financial services and banking, to charity dollars are spent, refugee, access to banking for those who don't have it
• 66 million tons of soybeans were traded using Bitcoin
• allow regulators to do really close market surveillance with precision
• challenges, but the potential is significant

Clayton

• agree the potential is significant
• hope people pursue it vigorously

Cotton

• DOW Jones fell 4.6%; dollar seen 2% inflation or less; Bitcoin seems to be very volatile in comparison

Giancarlo

• we have seen volatility but in our world, we're used to it
• emergence of futures to provide those who are exposed to it

Clayton

• don't really know what's driving the volatility
• not related to foreign currencies
• must be something different
• lot of volatility compared to what they're supposed to be a substitute for

Cotton

• (essentially) so how does that bode to its claim?

Clayton

• it would not be a very effective means of exchange
• with the volatility and delays, there's a significant risk

Cotton

• (quick shout out to) rogue nations, hackers, etc

Menendez

• under what circumstances do the SEC and CFTC have a role in regulating this?

Giancarlo

• fraud and manipulation – will not hesitate to take authority

Menendez

• what about manipulating to avoid U.S. sanctions?

Giancarlo

• I'll have to look into that

Menendez

• are there gaps that could create vulnerabilities?

Giancarlo

• part of a virtual currency task force; includes the fed and FINCEN
• meeting with FINCEN this week to get some discussion of cooperation started

Menendez

• seen increase in ICOs; investors using digital tokens
• grew from $96mil in 2016 to $4bil in 2017
• celebrity promotion – Floyd Mayweather, Kardashian, et al
• investors may not understand true risk when they see a product promoted by celebrities

Clayton

• we put out an alert that if you promote a security, you are taking on securities law liability

Menendez

• can you walk us through why the SEC is not comfortable with approving ETFs with crypto currencies?

Clayton

• we've made it clear that there are some issues – price discovery, custody, volatility
• don't want to approve an ETF product with a cryptocurrency underlier without working out these issues

Moran

• don't ETFs mitigate those concerns? are crypto currencies different?
• MGT act – modernizing government technologies
• create a fund for federal agencies to rid themselves of legacy technology
• allows access to dollars; move to cloud
• i would be delighted that there isn't a SEC/CFTC hack in the papers soon; advise strengthening cyber security

Ms. Masto

• Kodak and Burger King investments
• companies are using block chain as an opportunity to pump up stock prices
• Long Island Ice Tea – Long Blockchain

Clayton

• nobody should think it's okay to chain your name to something that contains block chain when you have no idea what you're doing
• any time there's something new that can raise the value of their stock without the underlying goods being there, it's not good

Giancarlo

• ICOs misrepresenting their affiliation where there are wild claims
• "Our big task is bringing in enforcement cases and letting people see that"

Ms. Masto

• 3bn Bitcoin have been hacked, $500bn hack weeks ago, MtGox
• what can buyers do to get their money back?

Clayton

• when you engage in investing online with an offshore entity, the chances that we can do anything to get your money back are very low

Giancarlo

• for the underlying spot markets, we don't have the authority to enforce safeguards and protections; this is a problem

Ms. Masto

• "It's the old axiom "buyer beware"."

Sen Shelby

• (in regards to the stock market) "Is this perhaps more than ordinary correction?"

Clayton

• I asked my staff and the federal government the same question
• nothing to indicate any of our systems didn't indicate properly
• largest volume since 2016
• Neither single stock nor circuit breakers triggered
• Nothing that came out of this are concerning

Sen Shelby

• Is it profit taking? Is it a spook?
• Interest rates? Fed has info we don't have?
• Economy high, unemployment low?
• Combination? Can we really say?

Clayton

• I can't really say. Lots of opinions.
• Our job is to look at the systemic risks.
• I've not seen anything.

Giancarlo

• "Markets up? More people bought than sold. Market down? More people sold than bought."
• Markets are very complex. Fundamentals are sound. Doesn't appear to be any significant breeches.

Ms. Warren

• Some ICOs are legitimate, some are just Ponzi schemes
• "It's now so bad that Facebook recently banned all ads for virtual currencies"
• How do we make ICOs safer?
• Companies raised more than $4bil
• How many companies registered with SEC?

Clayton

• Not one.

Ms. Warren

• Can you say just a word as to why that's so?

Clayton

• the gatekeepers haven't done their job. we've made it clear what the law is.
• there are thousands of private placements. we want them to raise capital. but we want them to do it right.
• folks somehow got comfortable that this was new and it's okay.

Ms. Warren

• so it's a violation of the law?

Clayton

• yes.

Crapo

• (hearing adjourned)