SEC, CFTC’s Crypto Aspirations To Be Tested by Courts, Lawmakers


Supervision of cryptographic assets is a hot regulatory issue in the United States

Regulators and lawmakers are trying to design a new legal framework that provides more clarity to businesses and investors. The Securities and Exchange Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) appear to be the most active agencies in regulating this space either with some regulatory proposals or through enforcement actions. However, its jurisdictional limits on overseeing cryptographic assets are unclear. Agencies seem to be confident that they have broad regulatory mandates for cryptography, but Congress and some courts may set limits.

Jurisdiction SEC

SEC President Gary Gensler stated that “cryptographic products are subject to securities laws and must operate within our securities regime.” This 2021 statement is likely to be old now, and even Mr. Gensler admitted in Congress that bitcoin is likely to be a commodity, and other cryptocurrencies like ether may also be a commodity.

However, the definition of “securities” for the agency has not changed: it refers to “investment contracts”, based on the Howey test. This position was first adopted by former SEC President Jay Clayton in 2018. The SEC has not changed its position that many cryptocurrencies represent investment contracts in which issuers try to raise money from investors and are therefore securities , regardless of shape or form. technology used. The SEC focuses on the “nature” of transactions rather than the item being sold.

Gensler urged lawmakers to grant the SEC more authority to oversee cryptography. He stated: “It does not matter whether it is a stock token, a stable value token backed by securities or any other virtual product that provides synthetic exposure to the underlying securities. These products are subject to securities laws and must operate within our regime. values.

As the SEC continues to rely on this broad definition, the agency may seek to receive a broad mandate from Congress to oversee many cryptocurrency assets, which could include stable currencies. As it stands now, if a stable currency is considered a “currency” or a commodity (defined as a commodity exchanged in a market for uniform quality and value), the SEC has no jurisdiction over these assets, but Congress always can change. the status quo.

In addition, the agency is involved in several lawsuits in which the courts could shed light on the qualification of some cryptographic assets as securities or commodities.

Read more: The SEC president intensifies the cryptographic crusade and sends message to CFTC

CFTC Jurisdiction

The CFTC also wants to expand its jurisdiction over cryptographic assets. In 2019, the former CFTC chairman expressed his view that ether was a commodity, just years after the agency determined that bitcoin was a commodity. In 2021, a Southern New York district court found that the tokens of bitcoin, ether, litecoin, and tether, along with other digital assets, are included in the definition of “merchandise.”

When new CFTC President Rostin Behman took office in late 2021, he told the Senate that his agency was willing to take on more responsibilities in overseeing cryptocurrencies. “I look forward to working with this Committee to review and, if necessary, expand the CFTC’s authority to ensure that both the benefits and the promise of the emerging digital asset market and the underlying technology can be reaped.”

However, the CFTC’s jurisdiction over some cryptographic assets may not be exclusive. The same court, which held that many cryptocurrencies were commodities, also stressed that “the CFTC’s jurisdictional authority to regulate virtual currencies as commodities does not prevent other agencies from exercising their regulatory power when virtual currencies operate differently from derivatives.” This could suggest that some cryptographic assets may vary over time or have different characteristics that would make them subject to different regulatory agencies.

Read more: CFTC President points out more application and oversight of cryptography

New proposals

The soon-to-be-announced cryptocurrency bill by U.S. Senators Lummis and Gillibrand may continue, at least in part, along the same lines set by regulators as it increases the role of the CFTC. According to senators, the bill could be supported by the CFTC as the main regulator of spot and futures markets while leaving the SEC as the crypto supervisor, which can be defined as securities according to the Howey test. This is an asset that “is offered to finance a business in the same way that shares are offered to finance businesses,” Senator Gillibrand said.

Interestingly, on Thursday, May 26, SEC and CFTC commissioners Hester Peirce and Caroline Pham wrote a joint opinion piece in The Hill in which they advocated greater collaboration between regulators. “Jurisdictional avenues are not always clear,” the Commissioners said. They proposed holding joint roundtables with experts, investors, customers and other regulators to assess whether new regulations are needed. As an example of this collaboration, the commissioners mentioned a 2020 meeting at which both regulators held a meeting to vote on a shared rule.

“If we act now, it could lead to our two agencies working better together. Doing so would benefit the capital markets, not just the cryptocurrency markets.”

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