"Can I suggest something to you? People who come in suggesting that 'everything is different' [while] marketing investment contracts tend to end up looking rather badly."
Issued by Damon Silvers, director of policy at the American Federation of Labor and Congress of Industrial Organizations, to Adam Ludwin, the CEO of blockchain startup Chain, the pointed comment set off a tense exchange at a meeting of the SEC's Investor Advisory Committee (IAC) last week.
Special counsel at the largest federation of unions in the U.S., Silvers effectively turned what had been billed as an informational meeting into an explosive dialogue, one in which members of the IAC questioned the legality and legitimacy of blockchain-based cryptocurrencies and tokens as investment vehicles.
Created by the 2010 Dodd-Frank Act as a forum to advise the SEC on regulatory priorities, marketplace integrity and investor protection matters, and comprised of state regulators, academics and large institutional investors, the IAC has more recently taken a focus on cryptocurrencies.
But while Ludwin and others from the cryptocurrency industry sought to educate the committee on the unique qualities and capabilities of blockchain-based assets, Silvers and several other IAC members sounded unconvinced, using the opportunity to air a deep skepticism, and at times, open hostility.
"As somebody who's been around financial bubbles a [long time], my 'alarmo-meter' is at DEFCON 5," said Silvers. "My sense is that most of the conversation that goes on around this is essentially designed to obscure. [It] uses big ideas and technical jargon to evade fundamental questions that should be asked in this institution about any investment product."
Yet, the assaults, while pointed, were sometimes difficult to parse.
Owing to their apparent early-stage understanding of the technology, those outside the panels tended to lump cryptocurrencies that power public blockchains, like bitcoin and ether, together with tokens – cryptographic assets issued on top of blockchains, often as part of early-stage startup fundraising.
For instance, CalPERS investment director for sustainability Anne Simpson expressed the idea that a core function of the bitcoin network is to reward the computers (rather than the humans) that solve algorithmic puzzles to mine the cryptocurrency.
"That sounds like Isaac Asimov gone mad," she said, in reference to the late science fiction writer.
In addition to Ludwin, other presenters from the blockchain industry included Jeff Bandman, a former fintech advisor to the Commodity Futures Trading Commission (CFTC); Michael Bodson, president and CEO at the Depository Trust Clearing Corporation; Fredrik Voss, vice president of blockchain innovation at Nasdaq; and Nancy Liao of Yale Law School.
Yet, Silvers and Simpson aside, other attendees had more nuanced appreciations of the technology. Perhaps most surprisingly, however, a more moderate view was put forward by representatives of the government itself.
"These investments are seen as cutting-edge opportunities for individual investors, but these investments may not be suitable for all investors because they carry such significant risk,” said SEC Commissioner Kara Stein.
Stein continued, putting forth her opinion that blockchain technology has the potential to "revolutionize" securities trading and fundraising, but cautioned that clear regulatory oversight was needed to combat growing incidences of fraud.
These worries, plus the asymmetry of knowledge, will likely continue to have an effect on investor confidence in these new technologies.
For instance, Simpson doesn't think cryptocurrency tokens should be considered an asset class, or that their features align with CalPERS' mission as a manager of pension and health benefits – a strong hint that these funds won't be going into cryptocurrencies anytime soon.
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