The scene was straight out of the era of Bitcoin mania: a man on an Amtrak train to New York speaking loudly into his mobile phone, discussing a digital token he was promoting and bragging about how he planned to pump up the price.
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But unknown to the crypto entrepreneur, sitting a few seats away was Securities and Exchange Commission Chairman Jay Clayton, the U.S.'s top market cop. Mr. Clayton had been growing increasingly concerned that many initial coin offerings — a twist on an IPO where investors get tokens instead of stock — were scams. He listened for a while, his anger building, and then stood up.
"I didn't tell him who I was,'' Mr. Clayton recalled. "I just said, 'You don't want to talk about this in front of me."'
The 2018 encounter, which Mr. Clayton likes to call his Acela moment on ICOs, helped frame his view that virtual coin investments, once largely the province of tech geeks and anti-government crusaders, had gone mainstream and needed to be aggressively policed under the securities laws. Now, that stance is setting him up for a potential clash with one of the most high-profile companies in the world, Facebook Inc.
The social media giant's June announcement that it was creating its own token, called Libra, has intensified a global debate about oversight of cryptocurrencies. In the U.S., Mr. Clayton's SEC is seen as a logical regulator by some lawmakers and Trump administration officials, who've been forced to confront the legal and economic consequences of Facebook's 2 billion users embracing a payment system that's outside of the government's control.
Facebook, however, is eager to avoid SEC oversight.
Over two days of contentious congressional testimony last month, Facebook executive David Marcus argued that Libra wouldn't fall under the agency's jurisdiction because it is more like cash than a security held by investors. Behind the scenes, those directing the company's lobbying campaign in Washington have aggressively made the same argument, according to people familiar with the matter.
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In one sign of Facebook's hesitance to engage with the SEC chief, no one from the company met with Mr. Clayton amid the roll out the Libra proposal. Though, Facebook representatives did discuss the company's plans with SEC staff members.
The stakes are high for Facebook, whose plans have already drawn the ire of President Donald J. Trump and his Treasury Secretary Steven Mnuchin.
If the SEC gained oversight, the token's launch would likely be delayed significantly because it might need to undergo a lengthy and cumbersome approval process. It would also be subject to investor protection regulations and ongoing scrutiny. Such supervision flies in the face of the Silicon Valley tendency to innovate first and ask questions later, an ethos typified by the old Facebook slogan, "move fast and break things."
"We know that the journey to launching Libra will be a long one and that we cannot do this alone," the company said in an emailed statement. "Engaging with regulators, policy makers and experts is critical to Libra's success. We will take time to get this right."
In two interviews in his 10th floor office suite at the SEC's Washington headquarters, Mr. Clayton talked about his views on the crypto universe — one that he was largely unfamiliar with before taking the helm at the watchdog in May 2017. To the chagrin of token enthusiasts and a number of Republicans, the agency has taken a more pro-regulatory tone than many expected under an administration that has rolled back numerous financial rules.
Mr. Clayton, a political independent appointed by Trump, acknowledges the grumbling. Still, he said there's no reason why the 85-year-old securities laws, which were set up to protect stock and bond investors, shouldn't apply to the high-tech world of ICOs and tokens.
"Just to be clear, I am not looking to expand the securities laws to capture things,'' said Mr. Clayton, a lawyer whose clients before joining the SEC were venerable Wall Street firms like Goldman Sachs Group Inc. "I am generally not in the law-expansion business. But I am not in the head-sticking-in-the-sand business either.''
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On the Libra proposal, a number of observers have said it resembles an exchange traded fund, an investment product that requires SEC approval. One similarity: the Facebook coin would maintain a stable value by being backstopped with a basket of currencies managed by investment professionals.
Though Mr. Clayton avoided commenting directly on Libra, he noted that if something looks like an ETF and operates like an ETF, the law says it should be regulated like an ETF. That holds true no matter what it's called, Mr. Clayton added.
"If we have a way to reduce the cost of payments internationally, through technology, I am all for it,'' he said. "But you can't sacrifice basic principles of securities law, and other law, to allow it to happen.''
Long before Facebook's foray into cryptocurrencies, Mr. Clayton was working with the Treasury Department's Financial Stability Oversight Council to get a handle on the industry. He has also spent time talking to central banks, law enforcement agencies and regulators across the world about the potential risks.
Mr. Clayton's efforts and the team he has put together at the agency make it "the right place to put parameters around what should or should not be allowed in this space,'' said Craig Phillips, a former Treasury Department official who worked closely with the SEC chairman on the issue.
The SEC brain trust includes ex-Silicon Valley lawyer William Hinman, the head of the division of corporation finance, and Valerie Szczepanik, a long-time enforcement attorney who's been tasked as the agency's crypto czar.
In the digital money industry, Mr. Clayton's positions on virtual coins have triggered concern and frustration. Many of the complaints center on the SEC's cautious approach, which has left companies in limbo as they wait for the commission to lay out the rules. The agency has sat on applications requesting approval for Bitcoin ETFs and slow-walked guidelines for brokers who want to sell cryptocurrency investments.
The SEC has "asserted a very authoritative position and a very conservative one, which I think doesn't mesh with the technical reality of what's happening in this space,'' said Jeremy Allaire, chief executive officer of Circle Internet Financial, which operates a cryptocurrency exchange.
Even one of Mr. Clayton's fellow commissioners, Republican Hester Peirce, has said the agency is on the wrong track. While the SEC has "good intentions,'' it often operates "without sufficient concern for the way its regulatory blades roil the markets'' and "frustrate innovation,'' she said in a speech last year.
Mr. Clayton said he isn't standing in the way of progress.
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"I think a lot of people got excited that somehow we would change the rules to accommodate the technology and they invested their time and effort thinking that would happen,'' he said. "I have been pretty clear from the start, that ain't happening.''
Mr. Clayton hardly anticipated that cryptocurrencies would be a main focus of his SEC tenure. The topic didn't even come up at his Senate confirmation hearing. But after a few months on the job, the price of Bitcoin was exploding and more than $1 billion had been raised via ICOs. Clayton began to read law review articles and even do his own internet research.
Especially disturbing, he said, were "white papers'' issued by firms trying to raise money. Many used exactly the same language, and they were peppered with the types of phrases that always alarm regulators: "time is running out'' or "get in early and you get four times as much value,'' he noted.
Still, Mr. Clayton had a problem. Under his predecessor Mary Jo White, the SEC's staff had decided that Bitcoin wasn't a security. Though the determination wasn't legally binding, it gave the industry leverage to argue that the SEC shouldn't have jurisdiction over any cryptocurrency.
Mr. Clayton has reiterated that the agency doesn't consider Bitcoin a security. But he and the SEC staff have concluded that many ICOs fall under the agency's purview.
As the ICO boom took off, they quickly moved to assert their authority. In late 2017 and early 2018, the SEC's enforcement arm sent out subpoenas to a swath of firms and individuals. It also brought down the hammer, filing high-profile cases against celebrities like boxer Floyd Mayweather Jr. and music producer DJ Khaled for promoting tokens without disclosing that they were getting paid.
The effort seems to have paid off. ICO issuance has dropped precipitously since reaching an apex around the summer of 2018. Most deals are now done outside of the U.S. where promoters are likely to escape the SEC's enforcement jurisdiction.
The SEC chairman doesn't plan to let up, especially now that Facebook's proposal has helped spur another rally in cryptocurrency investments. The agency is likely to remain an epicenter as the U.S. debates oversight of digital assets, largely because Congress has failed to pass legislation that would clarify how virtual coins are regulated.
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The intense interest in Facebook's plans is a positive, Mr. Clayton noted, because it has forced governments and central banks to look more closely at whether laws and rules need to be updated.
"It's been an effective focal point for domestic and international regulators,'' he said.
