By Michelle Price and Pete Schroeder
WASHINGTON (Reuters) - Digital currencies such as bitcoin demand increased oversight and may require a new federal regulatory framework, the top U.S. markets regulators will tell lawmakers at a congressional hearing on Tuesday.
Christopher Giancarlo, chairman of the Commodity Futures Trading Commission (CFTC), and Jay Clayton, chairman of the Securities and Exchange Commission (SEC), will provide testimony to the Senate Banking Committee amid growing global concerns over the risks virtual currencies pose to investors and the financial system.
Giancarlo and Clayton will say a patchwork of rules for cryptocurrency exchanges may need to be reviewed in favor of a rationalized federal framework, according to prepared testimony published on Monday.
Bitcoin, the world's most widely traded digital currency, has slumped more than 50 percent to around $8,000 since December, while prominent bitcoin exchanges have suffered hacking attacks and outages in recent weeks.
Congressional sources told Reuters the hearing will largely be a fact-finding exercise focusing on the powers of the SEC and CFTC to oversee cryptocurrency exchanges, how the watchdogs can protect investors from volatility and fraud, and the risks posed by cyber criminals intent on stealing digital tokens.
Giancarlo and Clayton will use the hearing to showcase the efforts their agencies' have made to police the market and to highlight limitations in the regulatory structure.
There is no single federal U.S. watchdog of virtual currencies, with trading and investing in the emerging asset class falling into a jurisdictional gray area between the SEC, CFTC, the Treasury Department and state regulators which license virtual trading platforms as money transmitters.
"Virtual currencies ... likely require more attentive regulatory oversight in key areas, especially to the extent that retail investors are attracted to this space," Giancarlo said in his testimony.
STRIKING A BALANCE
The CFTC believes it has had oversight of virtual currency derivatives since 2015 when it declared virtual currencies to be commodities, but it approved the first ever bitcoin futures in December. It has explicitly said it does not have the power to directly regulate the underlying bitcoin cash market.
The SEC has said public offerings comprising digital tokens, known as initial coin offerings, are securities and subject to the same investor protection rules as equity market offerings. It has hinted it may look to regulate bitcoin exchanges too.
Both regulators have cracked down aggressively on bad digital currency actors, including outfits that have fraudulently solicited funds from investors claiming to invest the cash in virtual currencies or initial coin offerings.
But the question of who is best placed to oversee the underlying cryptocurrency cash market remains unclear.
"We are open to exploring with Congress, as well as with out federal and state colleagues, whether increased federal regulation of cryptocurrency trading platforms is necessary or appropriate," Clayton writes in his prepared testimony.
In his testimony, Giancarlo says a federal licensing regime for the cash market would help address gaps in the current system, and could include capital requirements and measures to prevent fraud, manipulation and money laundering.
Lawmakers are also likely to focus on cyber concerns after hackers stole $530 million of digital currency from Japanese exchange Coincheck and others saw lengthy outages, according to a person familiar with the Senate panel's thinking.
At the same time, they will be wary of suffocating innovation in the underlying distributed ledger technology and are likely to explore how regulators can strike a balance between investor protection and innovation, this person said.