Cryptocurrency industry executives warn that new regulations are needed to protect investors

WASHINGTON—Cryptocurrency regulators heard testimony Thursday from top executives from a number of companies that serve the booming trade in cryptocurrency.

The Senate Banking Committee held its first and so far only formal hearing on digital currencies and blockchain technology, the underlying ledger that underlies cryptocurrencies.

Sen. David Perdue, R-Ga., the committee’s chairman, hailed the new service and invited blockchain entrepreneurs from the likes of BitPay, Crypto Kitten, Quillium, and blockchain company Clearspace to testify. Perdue also urged consumers to educate themselves about the market.

Commissioners from the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the Commodity Futures Trading Commission separately addressed the regulatory challenges they have faced with cryptocurrencies.

“This is the first time in my memory that we’ve had somebody testifying to a whole bunch of three federal regulatory bodies in the same room at one time,” Perdue said.

“I think this marks a watershed moment,” he added. “We cannot turn our backs on what may be the next wave of innovation.”

Many of the witnesses said that initial coin offerings, or ICOs, used to promote new startups in the blockchain space, were exposing investors to high-risk investments.

The SEC has historically put out orders aimed at stifling the ICO market by issuing statements such as its June statement that companies should only issue tokens that are “consistent with SEC disclosure requirements.”

SEC commissioner Luis Aguilar told the industry representatives that the commission “is serious about enforcing our rules.”

At issue in the Washington hearing was the lack of transparency that some of the companies offer to investors.

Julius Pinson, CEO of BitPay, told lawmakers that his company had safeguards in place to protect investors. He said they are “one of the largest companies to issue bonds,” although the overall value of their ICO offerings far exceeded their expectations.

He pointed to his company’s “functional loyalty” program that incentivizes its customers to buy a company’s token so that they have an incentive to keep using it.

“We’re going to let people buy it once, and maybe it will be useful to them,” Pinson said. “Then if they would like to trade it, we can help them.”

The SEC sent warning letters to several ICO companies, including miner NanoKitties, in May of this year. NanoKitties, which was expected to raise $100 million, told investors it would distribute the money to them “only upon an average selling price of the Nano Kitten token of $50 per Nano Kitten token.”

The company’s activities allowed it to pay $42.52 for each unit of a blockchain token, raising $70 million.

Jamie Selvidge, a representative from the Securities and Exchange Commission, said that blockchain startups were increasingly being challenged by “broker-dealers who are doing things with bitcoin and cryptocurrencies that [exclude] the investment community at large.”

Coinchase, a small company, issued its first token — called Glow — on Sept. 18, 2017.

Greg Novick, chief operating officer for Coinchase, said the company’s goal was to make access to the payment system easier for the public.

“The exchange community has really been slow to adopt the function of cryptocurrencies,” Novick said. “We are trying to really bring more mainstream acceptance to the industry.”

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