On September 29, 2021, the US Commodity Futures Trading Commission (CFTC) announced that it had filed 14 complaints against various crypto trading platforms. It was the busiest day of action for the country’s leading commodity regulator and a marked departure from its usual course. Between 2015 and the end of June 2020, the watchdog had only initiated 19 separate enforcement actions related to crypto deals.
Despite this seemingly meager amount of research, many participants and observers in the crypto industry viewed the CFTC as the de facto overseer of virtual currencies for years. The roughly 700-strong agency responsible for overseeing hundreds of trillion dollars in derivatives trading first classified Bitcoin as a commodity in 2014.
This comment is part of CoinDesk’s Policy Week, a forum dedicated to discussing how regulators count on crypto (and vice versa). It was first published in The Node newsletter. You can subscribe to the complete newsletter here.
In an industry where there is little positive guidance, where regulators have historically seemed reluctant to comment on the market, the CFTC stepped in to provide some clarity. At the end of 2014, the agency declared in the affirmative that digital currencies fall under the definition of a commodity in the Commodity Exchange Act (CEA) and thus fall within its area of responsibility. In 2018, Bloomberg named the CFTC “the federal digital currency supervisor.”
All of this is largely subject to change. And in fact it already has. The agency that provided us with pro-crypto regulators such as “digital dollar” advocates Chris Giancarlo and Daniel Gorfine, stablecoin defender Brian Quintenz and ETH-positive Heath Tarbert is changing hands. There are currently three of five vacant “Commissioner” -level positions that President Joe Biden intends to fill. Who he appoints will undoubtedly have a significant impact on the next phase of growth in crypto.
The CFTC is already giving up ground. Earlier this year, Republican Commissioner Dawn Stump said its sister agency, the Securities and Exchange Commission (SEC), had a big role to play in regulating crypto markets. This came after SEC chairman Gary Gensler said that cryptocurrencies were, by and large, not currencies or commodities, but securities, and placed them in his domain.
“A grossly imprecise simplification has often been offered to suggest that [crypto assets] are either securities regulated by the Securities and Exchange Commission or commodities regulated by the Commodity Futures Trading Commission, ”Stump said in August. “Even if a digital asset is a commodity, it is not regulated by the CFTC.”
It seems that in the future, the CFTC will limit itself to dealing with crypto derivatives – such as futures and options contracts – and not the coins themselves.
This goes a long way in easing tension between the CFTC and the SEC in what some commentators call a turf war between authorities with overlapping jurisdictions. Crypto poses a unique challenge to legacy frameworks: Pure crypto separates builders and stakeholders from the underlying asset. But in the early stages, before they are widespread or “sufficiently decentralized”, they are more like investment contracts. Then the question arises who is at the center of a smart contract; Gensler wants programmers to take control of their code.
The statements by Stump and Gensler also seem to reduce the importance of the supposed continuum between securities and commodities. For years, developers have worked under the understanding that a crypto issued by a team could eventually “turn” into a commodity that belongs to the world. It did so with Ethereum’s native currency, ETH, which both SEC and CFTC officials specifically stated was a security during the Initial Coin Offering (ICO).
Giancarlo advocated a Hippocratic “do no harm” approach to crypto. Before taking the chair, he jeopardized his views and stated that blockchains “could revolutionize the financial world”. He wanted the Agricultural Product Control Authority, founded in 1974, to become a “regulatory authority of the 21st century”. In 2017 he founded LabCFTC, an in-house digital asset analysis unit headed by Daniel Gorfine.
See also: DeFi is like nothing regulators have seen before. How should you deal with it?
The investigation was limited to fairly clear, identifiable fraudulent schemes; Companies that did not register with the CFTC; illegal over-the-counter transactions; Gatekeepers and price manipulators.
In 2018, Giancarlo conducted the unthinkable and approved Bitcoin futures trading. More specifically, he allowed the CME Group and Cboe Global Markets to “self-certify” these products. In 2019, then chairman Heath Tarbert declared that ETH was a commodity. A year later, ErisX, a platform for cryptocurrency derivatives, launched the first ether futures contract.
“Adequate regulation, carefully tailored to resolve identifiable regulatory risks, is helpful in driving mainstream adoption of new technologies and innovations. However, it’s important to strike the right balance and not prematurely incorporate innovations that are still in the early stages of development, ”Gorfine told CoinDesk via email.
The SEC’s historically limited role in the crypto industry has been positive. It took a back seat and innovators were allowed to innovate. They oversaw certain institutions, just like states oversee the uses of crypto as a money transmitter, but left the market largely in the hands of the CFTC. And actors, from BitMEX to CabbageTech Corp., were still being tried for breaking the rules.
There are still opportunities for the CFTC to ensure its greater role in the marketplace. Last year, former US MP Mike Conaway proposed the Digital Commodity Exchange Act, which would pave the way for commodity regulators to regulate crypto exchanges. The bill died, but Rep. Tom Emmer (R-Minn.) Is still talking about it.
Then there is the possibility that certain cryptos qualify for a “de minimis” exception, which makes them more likely to be foreign currencies.
President Biden’s election as chairman of the CFTC is Rostin Behnam, who is currently vice chairman; Law professor Kristin Johnson and government guard Christy Goldsmith Romero are likely to be appointed commissioners. All of them have experience in dealing with crypto and would be good watch dogs.
“Acting Chairman Behnam is an excellent choice to chair the CFTC. He has a strong understanding of the issues and I believe he will ensure that the CFTC stays forward in its surveillance of the markets, ”said Gorfine.
In 2018, Behnam even discovered how digital currencies could be integrated into “smaller economies”. “These currencies will be outside of traditional moneylenders like governments, banks, investors, ministries or international organizations,” he said.
That was then, this is now. It is unclear how the CFTC of tomorrow will treat the crypto markets. But if comments from the White House, SEC and the Treasury Department are any indication, enforcement will increase and the “do no harm” approach will likely be minimized. But the place of the CFTC in crypto history is still felt.
Yesterday, the SEC finally approved the launch of an exchange-traded fund focused on Bitcoin futures. I asked Giancarlo about it:
“The SEC’s proposed green light for ETFs on Bitcoin futures and not on the spot Bitcoin markets suggests that the SEC remains hesitant about the stability and health of the spot market.
“It is also a declaration of confidence in the quality and effectiveness of the CFTC regulation of the Bitcoin futures markets, which we gave the green light in 2017 under my administration.
“However, our decision in 2017 not to block the introduction of Bitcoin futures was heavily criticized by Wall Street as well as by Washington and international regulators.
“It is remarkable how something that was so controversial four years ago is now being taken as right and safe. It appears that by defying political risk in 2017, the CFTC provided regulatory security that is essential for the rapid institutionalization of the crypto industry. “
So will the new CFTC look like the old one?
UPDATE (October 19, 2021, 8:28 PM UTC): Adds Gorfine quote about Behnam.
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