Forbes Exclusive: Former SEC Chairman Jay Clayton talks about stablecoins, Defi and Bitcoin ETFs

Forbes Exclusive: Former SEC Chairman Jay Clayton talks about stablecoins, Defi and Bitcoin ETFs

Former U.S. Securities and Exchange Commission (SEC) chairman Jay Clayton took over as the regulator in May 2017. ICO was in full swing at the time, and Clayton planned to supervise the industry from the beginning. In this interview, he observed that most people tried to circumvent supervision and expressed surprise. In his view, digital asset tokens or coins are obviously securities.

However, many readers may be surprised that Clayton is bullish on the industry. He expects that blockchain will play a key role in capital market infrastructure. Recently, he joined Fireblocks, a multi-billion dollar cryptocurrency custodian, as an advisor.

In this interview, we also discussed why Clayton believes his successor Gary Gensler prefers futures Bitcoin ETFs rather than spot market offerings, why the Howey test is not the only way to determine whether a token is a security, and all these pairs What does the future of DeFi and stablecoins mean?

This interview is taken from Forbes CryptoAsset and blockchain consultants.

Forbes: Could you please explain why the SEC cares about cryptocurrencies?

Clayton: The SEC cares about securities. As long as the issuance or transaction of cryptocurrency and securities overlaps, then the SEC will care about it.

Now we return to the topic of ICO (Initial Coin Offering). Few people doubt that most ICO products are securities within the purview of the SEC. Therefore, this is a clear historical example that shows that the US Securities and Exchange Commission’s participation in cryptocurrency is absolutely appropriate, necessary, and for the benefit of the public.

Forbes: What do you think is the first major cryptocurrency problem you encountered? What do you remember?

Clayton:  The first major cryptocurrency issue that caught my attention was the ICO boom.

I remember some rumors about raising a lot of money in an apparently public securities offering, but I was actually surprised. I am surprised that some people would think that because you call it a coin or token, not a security, it does not fall within the purview of the SEC to some extent. I am also very surprised that the professionals, lawyers and others surrounding these issuances think that it is somewhat different from securities issuance and is essentially the same.

Forbes:  Many ICO projects hire lawyers to draft opinions and letters to demonstrate why a certain project is not a security. I think you have also seen some of these legal opinions. What are your thoughts?

Clayton:  The drafters of “Act 33” made it very clear that the definition of securities is very broad. The investment contract, which is the focus of Howey’s test, is only one of dozens of elements that make up a security. When you observe these elements, what you see is a principle. The principle is that when a person or group of people organizes in a company or other form to raise funds for a company, they have information about the company, they have management rights over the company, and they raise funds from the public, there is serious The information is asymmetry. What they have to do is, in this case, must provide enough information to the public to judge whether the investment is suitable for the public, and whether the protection of this information is true in all major aspects. This is the broad concept of our securities law. Now, if you raise funds privately, the standard will be relatively low, but once you get to the public, this is the standard you must follow.

What surprises me is that people think that through labels or other mechanisms, you can raise funds from the public without being restricted by the status of securities.

Forbes:  Nowadays, decentralized finance (DeFi) has become very popular, and there is also a big discussion about whether stablecoins should be considered securities. What is your opinion on these issues?

Clayton:  My point is that if you look at the features provided by the product and compare it with the existing space, you can have a good grasp of applicable or possibly applicable regulations.

Stable coins are a good example. A stablecoin backed by cash that promises to exchange $1 for your stablecoin is a project. This kind of coin backed by commercial paper, whether it is 30 days, 60 days or 90 days, is definitely like a money market mutual fund to me. So the second item really looks like a security. We have decided that your collective instrument of commercial paper for daily liquidity is a money market mutual fund, which should be regulated as a money market mutual fund.

Forbes:  When the current SEC Chairman Gary Gensler testified before the Banking Committee, I guess it was two or three weeks ago when Senator PatToomey (R-PA) asked him how stablecoins could be a security if there is no profit expectation. It sounds like the Howey test is not the only test applicable to this situation.

Clayton:  Like I said, the definition of securities is much broader than investment contracts. The Howey test applies to investment contracts. If you have a stablecoin that essentially operates like a money market mutual fund, and it is not treated in the same way, it will be abnormal.

Forbes: When it comes to DeFi, there are many governance tokens that claim to be basically a decentralized loan and exchange protocol. What is your opinion on their supervision status?

Clayton: This is an area that you can map to existing functions in some cases. In some areas, this may be new. In our supervision system, we tend to supervise what I call a hub because it is more efficient. For example, we supervise the transfer of funds by supervising financial institutions that facilitate transfers. DeFi may cancel some of these hubs, so we must consider whether new regulations are needed.

Forbes: What types of powers or regulations does the SEC need to regulate DeFi to regulate things similar to the governance tokens used to operate decentralized exchanges (DEX)?

Clayton: Let me talk about it. What does the stock exchange do? It gives buyers and sellers who do not know each other an entity to set rules and provide recourse and stability. In some cases, the question is what provides this kind of rule setting, stability and recourse? This is where I want to start the investigation. But you are right, these are very interesting questions. If there is no way of recourse, I think we have to doubt whether it really works in the way people expect.

Forbes:  I believe you are well aware that SEC Commissioner Hester Peirce is regarded as a friendly person to the industry. People have many hopes and expectations for the safe harbor agreement she proposed. They think that maybe some tokens and products will be decentralized for a certain period of time before they are completely subject to securities rules. I believe this was raised when you were the chairman, although the safe harbor agreement did not go very far. I am curious if you have any ideas, and whether it has a future in the future?

Clayton:  This is proposed for the next, that is, the current committee, not for my current session. I appreciate Hester’s open mind and extensive knowledge of existing securities laws.

If certain tokens or products hinder development, of course, this is just a hypothesis. One way to solve this problem is through a safe harbor. One of my questions is, should people strive to comply with securities laws? Registered with the SEC, using the safe harbor, we have raised billions of dollars in funds in this country in accordance with the securities laws. A good question is, why is it so difficult in the field of cryptocurrency? If this is the case, then perhaps a safe harbor is appropriate, but this will be a threshold issue for the investigation regarding the addition of a safe harbor agreement.

Forbes:  I now want to ask a few questions about ETFs. First of all, why do you think there is no approval yet?

Clayton:  I think the SEC has always been very clear about market integrity. Gensler has always been clear that in this field, market integrity and supervision are the key thresholds for ETF approval. I think this is appropriate.

Forbes: Gensler recently expressed its preference for derivatives-based ETFs rather than ETFs based on the spot market. From your point of view, it does not refer to any specific application, or even the proposed cryptocurrency ETF. Compared with spot or derivative-based ETFs, are there any major differences in composition or governance?

Clayton:  I don’t want to speak for the chairman of the SEC, but I think what Gensler said is that in this case, the derivatives market is supervised and governed by the CFTC, while the spot cash market is global. The degree of surveillance is different, and it is not within the jurisdiction of US regulatory agencies.

Forbes: Coinbase is the first cryptocurrency native company registered and listed on the SEC. From your point of view, what big step do you think this is?

Clayton:  I don’t want to talk about the regulatory factors, but from the perspective of public interest, the public’s acceptance of blockchain technology, tokenization and digitization shows that everyone has a broad interest in investing in the ecosystem.

Forbes:  There is an expectation that we will see more cryptocurrency companies follow the example of Coinbase’s listing. Some companies such as Circle or eToro have negotiated SPAC transactions, while other companies such as Kraken or BlockFi may take a more traditional approach. What does the SEC look at when approving a company’s listing? Are there any special considerations when evaluating a cryptocurrency company?

Clayton:  Regarding the various questions you raised, that is, in addition to complying with financial statements and other general disclosure requirements, what else does the SEC value? Do investors understand the opportunities and risks that exist in the company and the market in which it operates? In terms of the regulatory risk you are asking about, this is the peculiarity of the type of functionality provided by that particular company. A company that uses distributed ledger technology to facilitate existing transactions may have a very different regulatory profile than a company that provides security services, especially a company that directly provides security services to retail investors.

Forbes: If Coinbase eventually had to register with the SEC, as Gary Gensler suggested in his recent testimony, what would it look like? Will it eventually have to more or less delist all tokens that might be considered securities?

Clayton:  I am not going to comment on specific companies. However, if someone provides securities trading services, they will need to take any appropriate measures to comply with automated trading systems or exchange rules or other rules in order to allow you to provide these services.

Forbes: The  last few questions. After you left office, NFT picked up in stages. I am interested in whether any NFT-related project cases appeared in front of you during your tenure at the SEC.

Clayton:  There is a wide range of products offered under the NFT label. Some may come along and are quite similar to ICOs, while others are different. But the NFT label and basic assets largely appeared after I left office.

Forbes:  Is there anything else you would like to share?

Clayton: I would like to see the United States in a leading position in the research and development of this technology. Whether in the cash market, Treasury bond market, stock market, fixed income market or new market. I think we should be open to the research and transformation of this technology, provided that in addition to increasing efficiency, from the perspective of our regulatory goals, it is at least as good or even better.

Forbes:  Thank you for your precious time.

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