5 Takeaways From Interview With SEC Chair Jay Clayton at Consensus: Invest 2018

Earlier today, at the Consensus: Invest 2018 conference in New York City, Glenn Hutchins (a Class B Director to New York Fed Board of Directors) interviewed U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton.

Here are the five key takeaways from this interview:

Bitcoin Is Not a Security

“Bitcoin is decentralized… It is designed to be a payment system replacement for sovereign currencies. We’ve determined that doesn’t have the attributes of a security…. A far as I am concerned, that’s designed to be akin to the dollar, the yen, the euro… and operates that way… People who purchase it expect it to operate that way. And it’s not centrally created or distributed. Glenn Hutchins does not own the right to produce more bitcoin.”

“In the public offering space, the drafters of the 1933 Act” were very careful not to have a very narrow definition of a security because they understand that if they did so, people would easily be able to find loop-holes.
“So, what is that definition of security? One aspect of that definition, people refer to it as an investment contract, but it’s when I as investor give you my money with an expectation of a return based on your efforts and the efforts of your affiliates… and a return that I either get through your efforts and distribution… or I get because I trade in the secondary market. Which brings me to the second aspect of securities laws. When we have open public trading and it’s done through a matching of buys and sells, and the person/entity doing that matching of buys and sells has to register as an exchange or also find an exemption from registration as an exchange. So, you can have private exchanges but they have to stay within our well-known exemptions for that type of activity. If you’re going to have a public broad exchange of securities, you have to register as an exchange.”
“When a story of value becomes truly decentralized, that means not one person or group of people controlling its supply or controlling its trading.”
As an aide, it is worth noting that every new security must be either registered with the SEC or be exempt under Regulation D or Regulation S.

“If what you are doing is starting a venture and you are funding that venture by issuing tokens, you should start with the assumption that you are conducting a securities offering. I think that’s a better way to look at it. Start with that assumption, and say ‘Am I conducting a private placement or am I going to do a public offering?’ I have to understand that comes with significant obligations.”
“Let’s be realistic. Look at it from the investor’s perspective. What is in it for the person purchasing the token? Are they doing this in the same way that they would invest in a new company that was issuing stock or are they doing it as somebody who purely wants to use it?”
No comment from Chairman Clayton on whether or not XRP is a security, except: “I think I’ll go back to what I said [earlier]. We are open to people coming in to see us, engage with us, discuss their particular situation, and work through it with us… Some of these questions, you know, require a lot of information in order to get to a definitive position… Many are very obvious. I am selling you my token, I’m going to go off, produce a venture, hopefully you’ll get a return for having purchased that token.”

On the subject of the recent enforcement actions against Paragon and Airfox: “What was clear from these actions was that these offerings were conducted in a way that was not compliant with the registration requirements. They were securities offerings… they were being sold in a way that was not consistent with the private placement exemptions… they were public offerings, and they were not registered with us, and you know, when that happens, we have the right to bring actions, which we did, and investors have remedies… One of those remedies is the obligation of the offeror to buy back the securities at the price they were sold… otherwise known as recision, and these settlements embody that concept.”
“But people should understand that this was the remedy in this particular case, but remedies in future cases may be different… get your act together!”

“What investors expect is that the trading in that commodity that is underlying the ETF is trading that makes sense, is free from the risk or significant risk of manipulation. Another thing they really care about, [that] we really care about, is that the assets underlying that ETF… that you have good custody of it, that it’s not going to disappear, that the risk in the ETF is truly the risk in the value of the underlying asset, it’s not the risk of theft or disappearance. Those two issues are important to me to get comfort on before we would allow an ETF with a digital currency underlying it to go forward.”

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