The CFTC Could Be the Regulator in Charge of Crypto — So What’s Their Stance?
The U.S. Commodity Futures Trading Commission (CFTC) is gearing up to be the major regulator for crypto, according to Rostin Behnam, head of the Commission. In a Senate testimony in September, Behnam noted that he had already directed his agency to prepare for full funding, anticipated in upcoming Senate legislation, that would give the regulator complete jurisdiction over much of the crypto market.
The volatility in the market, and its impact on retail customers — which may only worsen under current macroeconomic conditions — emphasizes the immediate need for regulatory clarity and market protections,” Behnam testified to the Senate Agriculture Committee. Multiple bills are in the pipeline to grant Behnam’s agency to do just that.
Under these bills, the CFTC would police tokens, but the Securities and Exchange Commission (SEC) would retain power to determine which assets meet the definition of SEC-regulated securities. There are two bills that would hand this power over to the CFTC.
Digital Commodities Consumer Protection Act of 2022
Unveiled by Committee Chairwoman Sen. Debbie Stabenow (D-MI) with ranking member Sen. John Boozman (R-AR), the bill would give substantial reach to regulate digital assets and trading to the CFTC.
The legislation would require firms trading digital commodities to register with the CFTC as their primary regulatory — a move strongly supported by industry giants such as FTX and Coinbase.
“Right now, there’s really a patchwork of state regulations and no federal agency to conduct oversight over the cryptocurrencies, and we know that needs to change,” said Stabenow. “The money of American consumers is at risk.”
While the bill doesn’t go into great detail on the definition under which cryptocurrencies are commodities, the bill would allow the CFTC to regulate any crypto asset not deemed a security by the SEC. Behnam, though, has also been vying for new authority to regulate the digital commodity spot markets; the new bill would grant that authority. According to the text of the bill, the CFTC would be given “exclusive jurisdiction over any account, agreement, contract or transaction involving a digital commodity trade.”
Co-sponsor of the bill, Sen. Boozman, believes that the crytpo industry “almost universally” prefers to be regulated by the CFTC. The bill would not extend jurisdiction to crypto transactions for goods and services, such as buying a cup of coffee.
While the bill was met with cautious optimism, it faced backlash from much of the cryptocurrency industry for some of its language. The bill indicated that it could place a de facto ban on all decentralized finance (DeFi), a term defining much of the blockchain-based financial tools that allow users to borrow, trade, and loan crypto assets independent of third-party intermediaries. A recent version of the bill, leaked by crypto attorney Gabriel Shapiro, shows adjusted language relating to DeFi.
“Notably, this version contains a limited exception to the term ‘digital commodity trading facility’ which would exclude persons who solely develop or publish software — this could be a boon to DeFi/crypto,” Shapiro said.
Digital Commodity Exchange Act of 2022
In the House, similar legislation has been introduced to pass crytpo regulatory power to the hands of the CFTC. Introduced by Reps. Ro Khanna (D-CA), Glenn Thompson (R-PA), Tom Emmer (R-MN) and Darren Soto (D-FL), the bill would define digital commodities as “any form or fungible intangible personal property that can be exclusively possessed and transferred person to person without necessarily reliance on an intermediary.”
According to co-sponsor Khanna, “To foster American innovation and tech job growth, Congress must establish a clear process for creating and trading digital commodities that prioritizes consumer protections, transparency, and accountability. This bipartisan bill will create a regulatory framework for these emerging technologies and keep us competitive with the rest of the world.”
The bill would create a reporting regime that allows for regulatory oversight without barring exchanges from operating in the U.S. without registration. But Rep. Thompson noted that the bill’s goal is to “close the regulatory gaps that have created uncertainty in the marketplace and discouraged innovation in the United States.”
The Act would require digital commodity exchanges that offer leveraged trading or list digital commodities for sale to private individuals be registered with CFTC prior to sales. Organizations not offering these products may choose between the CFTC and local state regulators to provide guidelines.
Unlike the bill in the Senate, this legislation protects customers who utilize stablecoins. Because many stablecoin issuers do not hold the backed currency in reserves per token issued, the bill requires stablecoin operators to file registration, reporting, and auditing requirements.
Tension Between Operators
There is a natural tension forming between the SEC and CFTC over who will be the top regulator of the burgeoning crypto ecosystem. Unlike the SEC’s recent regulation-by-enforcement techniques, the CFTC has waited for legislation to grant powers over the market, a move hailed by many in the crytpo space frustrated with Gary Gensler’s seemingly arbitrary moves against crypto organizations.
While the Senate bill would still allow Gensler’s organization to retain its power to define digital assets, the House bill would give the CFTC “exclusive jurisdiction over any agreement, contract, or transaction involving…the sale of a digital commodity.”
Just last week, none other than Rostin Behnam spoke at the Regulating Financial Innovation: The Future of Crypto and Blockchain symposium. His comments stirred up the hot debate over whether certain cryptocurrencies are commodities or securities.
“Ether, I’ve suggested that it’s a commodity,” Behnam said, adding, “Chairman Gensler thinks otherwise — or at least hasn’t certainly declared one or the other.”
This comes on the heels of Ripple winning its claim in court for former-SEC director William Hinman’s speech, given in 2018, declaring Bitcoin and Ethereum as non-securities. Gensler, who has served as the SEC Chair since 2021, suggested in September that Ethereum’s shift to Proof-of-Stake (PoS) could warrant a securities classification.
Behnam argues that CFTC’s perception as the more favorable regulator of the two is misplaced, claiming “Our enforcement record speaks for itself.” But while the SEC has become the villain in crypto, insiders suggest that the CFTC may not survive the honeymoon either.
“If somebody thinks you’re going to get a pass at the CFTC, I think that’s a mistaken belief,” said Gary DeWaal, a former CFTC enforcement lawyer now at Katten Muchin Rosenman. “Any violation is going to be met with enforcement actions by either regulator, and they’re going to be severe.”
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