THE AFRICA BAZAAR magazine
September 9, 2019
Global efforts to combat offshore corruption must include greater enforcement of the Foreign Corrupt Practices Act by countries and a regulated cryptocurrency exchange markets that protect investors against fraud and markets manipulation, U.S. Securities and Exchange Commission Chairman Jay Clayton said.
Speaking with reporters in New York Monday shortly after giving a speech at an Economic Club of New York’s event, Mr. Clayton told the Africa Bazaar magazine when asked about his views on cryptocurrencies that the unfairly regulated crypto-exchange markets pose major problems to investors and the global markets in general.
“It’s a hard problem,” said Mr. Clayton. “It’s a problem that more people [in the financial industry and governments] need to know about and I hope we find a way to address it.”
He added that he would like to see a set of comprehensive rules put in place that is designed to enhance transparency in crypto-exchange tradings as well as protect investors’ interests.
“One of the concerns, and it has been a concern for a while, is that is the trading we see in cryptocurrencies anywhere close to the same protections we have in our equity and bond markets? [The answer] so far, it is difficult to say it is,” the SEC’s Chairman said. “Many of these exchanges are unregulated. Most people don’t understand that the rules we have around trading in our exchanges are fairly sophisticated and are designed to prevent any conditions and those same rules–manipulations or taking advantage of front running–those rules do not apply as far as I can tell in many of the crypto-exchanges.”
Mr. Clayton’s statements echoes other global financial regulators and government leaders and officials, who have expressed growing concerns that the unregulated digital currency exchange markets doesn’t have enough protection similar to traditional securities markets to protect investors from fraud and market prices manipulation. Another concern is that the crypto-exchange platforms could become a safe haven for money launderers and other illicit financing schemes such as financing terrorists.
Moreover, financial regulators and government officials say absence of standard rules assigned to digital currency exchanges not only restrict power of choice, competition, and clear, investor-oriented rules in investment services, it limits the effectiveness of enforcing the Foreign Corrupt Practices Act, a global initiative designed to combat offshore corruption in government and businesses around the world.
The buzz about cryptocurrencies in the financial markets in recent years have led to rapid interests from market participants looking to buy digital currencies or invest in Initial Coin Offerings. Cryptocurrencies or digital currencies is part of a range of new innovative financial technology products, including bitcoin, commonly known as FinTech, that are used for digital payment services known as distributed ledger technology. FinTech, which has taken off exponentially in African and Asian countries, is seen by many as the dominant pilot of economic productivity in the next industrial revolution. However, there are growing concerns among people in the industry and governments that the exchanges also pose significant risks to global financial markets, in general, if left unfairly regulated.
Unlike traditional assets such as stocks, bonds or commodities which are required by law to be stored, held with qualified, or specialize firms, digital currency is not held to the same secure standards. Instead, ownership of digital currency such as cryptocurrency, and bitcoin is identified by public or private codes or keys assigned to the individual assets. Anyone with access to the code can initiate transaction, which makes digital currency very attractive to thieves. In addition, in contrast to other financial transactions that are subjects to certain rules and offer investors a stamp of legitimacy, it is difficult to verify the legitimacy or validity of the cryptocurrencies.
FinTech start-ups and exchange platforms like New York Stock Exchange, Anchorage Trust, BitGo, Gemini, Paxos are trying to come up with solutions that will address some of these concerns. The NYSE is developing a bitcoin futures platform and in April acquired Digital Asset Custody Co.
Underscoring how the absence of standard markets regulations or limited enforcement of those regulations can have significant negative impacts on countries, and population, Mr. Clayton noted in his speech that unequal global enforcement of anti-corruption rules have led to poverty, exploitation and conflicts in many countries around the world.
“Corruption is corrosive. We see examples where corruption leads to poverty, exploitation and conflict. Yet, we must face the fact that, in many areas of the world, our work may not be having the desired effect. Why? In significant part, because many other countries, including those that have long had similar offshore anti-corruption laws on their books, do not enforce those law,” said Mr. Clayton. “This is not a new observation. Speaking generally, the response to this observation has long been to acknowledge the need for greater international cooperation.”
Even with this acknowledgement, Mr. Clayton said some “countries are incentivized to play, and some are in fact playing, strategies that take advantage” of the FCPA enforcement approach of the SEC efforts, including the FCPA-driven withdrawal of U.S. and U.S.-listed firms from certain jurisdictions, which “illustrates that globally-oriented laws, with no, limited or asymmetric enforcement, can produce individually unfair and collectively suboptimal results.”
He urged for greater international cooperation on regulating cryptocurrencies and FCPA enforcement and securities law-based regulation to enforce matters where common, cooperative enforcement strategies are essential, including the recent calls for greater securities law-based regulation of environmental and social issues.