On October 12, 2017, the United States Securities and Exchange Commission’s Investor Advisory Committee met to discuss Blockchain technology and its impact on the securities industry. While Blockchain is best known as the decentralized accounting system that make transactions in Bitcoin and other cryptocurrencies possible, the panel of industry professionals and academics emphasized its potential to transform “mainstream” financial recordkeeping in a way that makes executing and recording all financial transactions more secure and efficient.
SEC Chairman Jay Clayton, who oversaw the proceedings, explained that the Commission seeks to explore the ways in which Blockchain can promote robust and competitive markets, while ensuring that investors are protected and federal securities laws are applied to transactions in cryptocurrencies made possible by the technology.
SEC Enforcement Related to Blockchain and Cryptocurrencies
In 2017, The SEC has been increasingly active with respect to Blockchain and cryptocurrencies, and Thursday’s Investor Advisory Committee meeting is just the latest example. Our Derivatives Group covered an SEC forum on Blockchain early this year, and on July 25, 2017, the Commission issued a Report of Investigation announcing that offerings of virtual currencies, known as “Token Sales” or “Initial Coin Offerings” (“ICOs”) using Blockchain are subject to federal securities laws if they meet the Supreme Court’s Howey Test for determining whether a transaction qualifies as an “investment contract.” (See our recent Blog post for analysis of the Report.) Last month, the SEC launched a Cyber Unit to target cyber-related misconduct including fraudulent ICOs. And on September 29, 2017, the Commission announced charges in connection with a pair of ICOs for violations of anti-fraud and registration provisions of the federal securities laws.
A Transformational Opportunity
Panelists Jeff Bandman, a former FinTech Advisor to the Chairman of the CFTC, Adam Ludwin, a developer of the technology, and Nancy Liao, a researcher at Yale Law School, explained that Blockchain is a “transformational” recordkeeping technology that has a wide application beyond cryptocurrency trading. Blockchain links together encrypted ledger entries called “blocks” into a chronological “chain,” and then stores identical copies of the ever-expanding chain on millions of computers in the network. The result is a highly secure and accurate ledger that doesn’t need a central authority to maintain.
The panelists explained that as the technology continues to develop, it will provide a powerful platform to improve financial markets in the following ways:
- Data security: Blockchain uses decentralized record keeping and advances in cryptography to safeguard data and protect against cyberattacks.
- Investor Autonomy: End-users will be able to control who receives and has permission to access their financial data, investment and transaction history.
- Efficiency: Blockchain speeds up transactions by eliminating the need for a centralized authority to act as a clearinghouse for financial transactions. It can also reduce transaction costs by replacing clunky accounting and payment networks.
- Real-Time Regulation: Regulators will be able to detect and counteract predatory and deceptive practices at a much earlier stage because transaction data becomes available on the Blockchain ledger instantaneously.
The panel additionally discussed impediments to the SEC’s ability to adopt and regulate cutting-edge technologies like Blockchain. Bandman cautioned that ethical and procurement rules that are designed to prevent the government from distorting markets by favoring particular companies sometimes impede regulators from consulting with tech start-ups and accessing the latest technology. He suggested that Congress adopt a “Sandbox for Regulators,” which would permit regulators to explore new financial technologies while complying with ethical and procurement requirements.
On July 21, 2017, Delaware—the state of incorporation of almost two-thirds of all U.S. publicly traded companies—passed an amendment to its General Corporation Law authorizing Delaware corporations to use Blockchain to create and maintain corporate records, including the corporation’s stock ledger. In-house and outside counsel should be aware of the significant cost-saving and data security advantages that Blockchain may offer their clients wholly apart from its application to cryptocurrencies, as well as developments in federal and state regulation. As the technology continues to develop over the next few years, these advantages will make it an increasingly attractive option for companies in a variety of industries.