This Is How the SEC and CFTC Should Regulate the Crypto Markets

Recent turmoil in the crypto industry has revived an ongoing debate over which agency should be the federal regulator of crypto moving forward: the Commodity Futures Trading Commission or the Securities and Exchange Commission.

Answer: Both agencies should continue to exercise their regulatory authority over crypto assets and activities as provided by existing laws, and any new laws should address spot market crypto assets that require immediate delivery. give the CFTC exclusive authority over transactions.

Integrated Web

Unfortunately, crypto regulation in the United States today involves multiple regulators including the CFTC and SEC, as well as the Treasury Department’s Financial Crimes Enforcement Network and several states. It is likely that this tangled web, as well as gaps in the web, contributed not only to the recent collapse of FTX, but also of many other crypto players, including Celsius, BlockFi, and Voyager.

US regulation of traditional securities – such as equity and debt instruments, as well as investment contracts – is overseen by the SEC. On the other hand, the CFTC has full jurisdiction over derivatives—such as futures or exchanges—that include commodities, except to the extent that such commodities constitute securities.

The CFTC also has the authority to bring enforcement action against those who commit fraud in connection with commodity transactions even when they are not related to derivatives.

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The CFTC, as supported by the courts, has argued that cryptocurrencies that make up virtual currencies are just another commodity – like wheat, gold, and some financial products – and that the CFTC’s rules apply equally to derivatives transactions in this type of cryptocurrencies. pass

The SEC, as supported by the courts, has argued that investment contracts involving cryptocurrencies are not subject to its jurisdiction, and that persons dealing in these products must comply with applicable securities laws and regulations. Comply with the SEC as they would in a non-exchange transaction. investment contract securities.

FinCEN and the state generally regulate people who are in the business of trading with the public in different virtual currencies, or buying and selling bitcoins.

However, the rules between institutions are sometimes unclear. As a result, for example, four crypto-assets were recently listed as digital asset securities on an alternative trading system regulated by the SEC, while the same crypto-assets were simultaneously traded on multiple trading platforms. which are listed as exchangeable virtual currencies under state regulation.

The SEC has an open-ended lawsuit against Ripple and its founders related to a crypto asset XRP, which it describes as a security, while a 2015 Department of Justice action against the same company solved the implementation, claiming that the same XRP was virtual. currency and never refer to crypto asset as a security.

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Also earlier this year, the SEC filed a lawsuit against three individuals alleging that they profited from 25 illegal crypto-assets newly listed on a trading platform, including at least nine crypto-assets as securities. mentioned 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 jurisdictions.

The CFTC Must Run

Fortunately, three bills with bipartisan support are pending in Congress that provide a path for the CFTC to become the primary federal regulator in the crypto space — as far as crypto-related transactions are concerned with virtual currencies and security. not

Some have argued that the SEC is a stricter regulator when it comes to consumer protection and enforcement and should be the lead regulator in any new legislation. Even before the SEC staff in 2017 wrote the agency’s first interpretation of any kind involving crypto assets.

However, the CFTC had already taken three enforcement actions against individuals it alleged were violating applicable laws and regulations regarding transactions in cryptocurrencies.

Since then, the CFTC has become more aggressive in the crypto space by bringing enforcement actions against several household names in crypto companies for various alleged wrongdoings, including Coinbase, Gemini, Bitfinex/Tether, BitMEX, and Kraken.

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In addition, the practice of crypto trading platforms globally is to compare the trading of different crypto assets with derivatives on these assets. As the CFTC already has full jurisdiction over derivatives trading involving virtual currencies, it makes more sense to add authority to the CFTC over spot trading as well.

Finally, the crypto industry has grown rapidly since the publication of Satoshi Nakamoto’s white paper in 2008, in which the author defined the concept of bitcoin. There is little 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 to changes in technology and practices to maximize consumer protection.

Both the CFTC and the SEC are tough regulators. However, given the CFTC’s history, it seems best for the CFTC to be given more authority over local virtual currency activities in any new proposed legislation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Gary DeWaal i amSpecial counsel to Katten Muchin Rosenman.


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