Recent turmoil in the cryptocurrency industry has fueled an ongoing debate over which agency should be the primary federal crypto regulator going forward: the Commodity Futures Trading Commission or the Securities and Exchange Commission.
The answer: Both agencies should continue to exercise their regulatory authority over crypto assets and activities under existing law, and any new legislation should grant exclusive authority to the CFTC over spot market crypto assets, those that are exchanged for immediate delivery.
Unfortunately, US crypto regulation today involves many regulators, including the CFTC and SEC, as well as the Treasury Department’s Financial Crimes Network and many states. It is likely that this complex web, along with web shortcomings, contributed to not only the recent collapse of FTX, but many other crypto players as well, including Celsius, BlockFi, and Voyager.
US regulation of traditional securities, such as stocks and debt securities, as well as investment contracts, is under the supervision of the SEC. The CFTC, on the other hand, has full jurisdiction over derivatives – such as futures or swaps – involving commodities, except to the extent that those commodities constitute securities.
The CFTC also has the power to prosecute people who commit fraud in commodity trading, even when it doesn’t involve derivatives.
The CFTC, backed by the courts, asserted that the crypto making up virtual currencies is just another commodity — like wheat, gold, and some financial products — and that CFTC rules also apply to derivative transactions in this crypto.
The SEC, also backed by the courts, asserted that investment contracts involving crypto fall within its jurisdiction and that persons trading in such products must comply with applicable securities laws and SEC rules. , just as they must comply if they were transacting non-securities of investment contracts.
FinCEN and states often regulate who transacts with the public in spot virtual currencies, or buys and sells bitcoins.
The lines between regulators, however, are sometimes blurred. As a result, for example, four crypto assets were recently listed as digital asset securities on an SEC-regulated alternative trading system, while the same crypto assets are trading simultaneously on multiple regulated trading platforms. of the state as virtual currencies.
The SEC has a high-profile lawsuit pending against Ripple and its founders over a crypto asset XRP, which it calls a security, while in 2015 the Department of Justice settled a lawsuit with the same company, claiming that the same XRP was a virtual currency and never qualify the security crypto asset.
Even earlier this year, the SEC filed a lawsuit against three people claiming they had benefited from 25 illegally newly-listed top crypto assets on a trading platform, of which it labeled at least nine crypto assets as securities. . The SEC did not suggest in its complaint what the other 16 crypto assets might be.
There are many examples of the same crypto asset receiving different regulatory treatment from different US regulators.
The CFTC should lead
Fortunately, three bipartisan-sponsored bills are pending in Congress that allow the CFTC to be the primary federal regulator in the spot crypto space, as long as the relevant crypto transactions are virtual currencies and n do not involve securities.
Some have argued that the SEC is a tougher regulator when it comes to customer protection and enforcement and should be the primary regulator of any new legislation. Even before SEC staff drafted the agency’s first interpretation of any kind involving crypto assets in 2017.
However, the CFTC had previously filed three lawsuits against individuals it believed violated applicable laws and its rules regarding transactions in crypto assets.
Since then, the CFTC has further demonstrated its aggressiveness in the crypto arena by taking legal action against many household names among crypto firms for various alleged violations, including Coinbase, Gemini, Bitfinex/Tether, BitMEX, and Kraken.
Additionally, the practice of crypto trading platforms globally is to combine spot trading of crypto assets with derivatives on those assets. Since the CFTC already has full jurisdiction over derivatives trading involving virtual currencies, it is more efficient to add authority to the CFTC over spot trading as well.
Finally, the crypto industry has evolved rapidly since the publication of Satoshi Nakamoto’s white paper in 2008, in which the author exposed the concept of bitcoin. There is no doubt that it will continue to evolve rapidly as new use cases for blockchain technology are developed. As a principles-based regulator, the CFTC is well positioned to respond as quickly as possible to changes in technology and practices to ensure maximum customer protection.
Both the CFTC and the SEC are strong regulators. However, given the history of the CFTC, it seems preferable that the CFTC be given additional authority over spot virtual currency activities in any new proposed legislation.
This article does not necessarily reflect the views of Bloomberg Industry Group, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Gary De Waal Ispecial counsel for Katten Muchin Rosenman.
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