The latest developments in the cryptocurrency market have led to a discussion about which government body should be in charge of federal oversight of the sector. Should it be the Commodity Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC)?
The answer is both. Any new legislative measures should grant the CFTC full authority over spot markets for crypto assets, which are those that are only traded for immediate delivery.
A Complex Landscape
Currently, crypto regulation in the US involves multiple regulatory bodies, such as the CFTC, SEC, and the Treasury Department’s Financial Crimes Network, as well as individual states. This intricate network of agencies, and the breaches in it, likely played a role in the recent crash at FTX and other crypto players, including Celsius, BlockFi, and Voyager.
The SEC is responsible for regulating traditional securities such as stocks, bonds, and investments contracts. On the other hand, the CFTC has jurisdiction over derivatives such as futures and swaps related to commodities, unless those commodities are securities.
The CFTC has the authority to take action against fraud related to any commodity transaction, even if they don’t involve derivatives.
The CFTC argued that cryptocurrencies that make up virtual currencies are similar to other commodities such as wheat and gold, and that their rules apply to derivatives transactions of these cryptocurrencies.
The SEC has also been backed by the courts, which maintain that investment contracts involving cryptocurrency fall within its purview. This means that anyone transacting such products must comply with applicable securities laws and SEC regulations, as well as those who are involved in other non-securities investment contracts.
At the same time, FinCEN often regulates parties that transact in spot virtual currencies or buy and sell bitcoin.
Sometimes the line between regulators can become blurred. An example of this is when four crypto assets were recently labeled as digital asset securities by an SEC-regulated alternative trading platform. However, the same crypto assets can be traded on multiple trading platforms subject to state regulation, as virtual currencies.
The SEC is currently embroiled in a well-publicized lawsuit against Ripple, whose founders were connected to XRP, a crypto asset that it deems a security. However, the same company was subject to an enforcement action by the Department of Justice in 2015, which alleged that XRP itself was a virtual security.
Moreover, the SEC has charged three individuals with profiting from illegal crypto assets that were traded on a trading platform. The SEC identified at least nine securities but did not suggest to the court what the other 16 crypto assets might look like.
As such, there are many cases where the same crypto assets receive different regulatory treatment from US regulators.
CFTC Should Take the Lead
Fortunately, there are three bipartisan-sponsored bills currently before Congress, which gives the CFTC the chance to act as the primary federal regulator for spot crypto, provided that the crypto transactions do not involve securities.
Some argue that the SEC should be the paramount regulator for any new legislation. Even before 2017, the SEC staff had already provided the first interpretation of crypto assets by any agency.
However, the CFTC proved itself to be more assertive in the crypto space by initiating enforcement actions against several well-known names in the crypto industry, such as Coinbase, Gemini, Bitfinex/Tether, BitMEX, and Kraken, for various alleged violations.
In addition, many cryptocurrency trading platforms allow traders to invest in both spot crypto assets and derivatives. The CFTC already has full authority over derivatives involving virtual currency, so it would make sense to give it additional authority over spot trading.
Since Satoshi Nakamoto’s white paper was published in 2008, which explained the concept of Bitcoin, there is no doubt that blockchain technology will continue to evolve rapidly as new applications are created. As a responsible regulator, the CFTC can respond quickly to technological changes and practices in order to protect customers.
The CFTC and the SEC are both stringent regulators. However, given the CFTC’s track record, it would be more suitable for it to have additional authority over spot currency activities in any new legislation.
This article may not reflect the views expressed by Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owner or heirs.
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Gary Dewaal, special counsel at Katten Muchin Rosenman.
