A growing call from the industry and consumer advocates alike for clearer cryptocurrency regulation is heightening the debate over who gets jurisdiction, as digital assets don’t fit neatly under a single agency’s rules.
Some say that dynamic is setting the stage for a turf war between two financial regulators.
Rostin Behnam, the Commodity Futures Trading Commission acting chair, has said almost 60 percent of the digital asset market meets the definition of commodities under his agency’s supervision. Likewise, Gary Gensler, who chairs the Securities and Exchange Commission, has said many crypto ventures meet the definition of securities and would fall under its rules.
The CFTC has a very different attitude toward cryptocurrency than does its sister regulator, said David Yermack, a finance professor at New York University. The commodity regulator has been fairly welcoming toward crypto, he said.
The SEC has been using its enforcement power against ventures the agency says have overstepped their bounds.
The CFTC in 2017 allowed the launch of bitcoin futures products, derivatives that allow investors to bet on the cryptocurrency’s price up to a year in advance. Meanwhile, the SEC has delayed or rejected any attempt to launch a bitcoin-based fund for ordinary investors. The SEC only recently allowed funds based on the CFTC-approved bitcoin futures.
“You’re seeing the shadows of what looks to me like a regulatory turf war,” Yermack said in an interview. “But at this point, the SEC is kind of drafting along on an action that was taken back in 2017 by the CFTC. They are never going to admit that the CFTC was right and they were wrong, but actions speak louder than words in this case.”
At stake is the size of the budget, staff and influence of each agency, Yermack said in an email. A regulator that is handed the lion’s share of powers over digital assets would need more money to take on that responsibility.
Behnam is President Joe Biden’s pick to lead the CFTC on a more permanent basis. Sen. John Thune, R-S.D., asked him during a confirmation hearing to compare his agency’s role with the SEC and how he would coordinate on virtual currencies. Behnam replied that the agencies have a “rich history of working together.”
The SEC didn’t respond to a request to comment.
Not everyone agrees that regulators will be at odds. CFTC Commissioner Dawn Stump has said the view that her agency oversees cryptocurrency is an oversimplification because it doesn’t regulate the “spot” market for commodities, only their derivatives.
But others note the different focus of each agency when approaching crypto ventures. The SEC’s mandate is to protect investors, said Bartlett Naylor, financial policy advocate at Public Citizen, a nonprofit consumer advocacy organization. While the CFTC monitors digital assets for fraud and market manipulation, its focus is on commodity producers and purchasers, as well as highly sophisticated investors.
Still, Naylor dismisses the turf war idea. Behnam will be sympathetic to investor protection principles, he said. And Gensler understands well the mission of the CFTC — he was its chairman from 2009 to 2014.
The SEC and CFTC operate under different statutes, noted Michael Piwowar, a former Republican SEC commissioner. The CFTC oversees institutional markets, while the SEC oversees both institutional and ordinary investors.
“The key distinction in terms of who gets jurisdiction is whether or not [a cryptocurrency] is a security,” Piwowar said in an interview.
The agencies traditionally work out who has jurisdiction in a collaborative way, said Jill Sommers, a former CFTC commissioner, in an email. Sommers is a senior adviser at Patomak Global Partners.
“Just like with any other financial products, there are products that are clearly defined as derivatives and products that are clearly defined as securities,” Sommers said. “Then there are some that are in this gray area, and traditionally the agencies work out who has jurisdiction.”
The CFTC went in a direction that the SEC hasn’t caught up with, Alan Konevsky, chief legal officer of tZero, a blockchain company, said in an interview. If crypto futures had not been listed, bitcoin futures funds would have needed a longer path to approval, he said.
More than anything, people want clarity, he said.
Vivian Fang, an associate professor of accounting at the University of Minnesota, said it’s not clear who has authority over cryptocurrency. The bitcoin futures funds approved by the SEC disadvantage retail investors, she said, and the agency should make that better known.
Fang, who teaches a cryptocurrency course at the university’s Carlson School of Management, said she wouldn’t recommend bitcoin futures funds approved by the SEC to friends or family. They carry a higher pricing risk than investing directly in bitcoin, she said. That’s because futures contracts expire, so contracts that aren’t executed are rolled to the next month, which carries a premium.
“Some of the retail investors do not understand that,” she said.
Republican SEC Commissioner Hester Peirce said in an interview with “The Layah Heilpern Show,” a podcast, that the coming year will be an important one for crypto regulation because of the increasing attention it is generating. Peirce expects Congress to get involved, adding that if legislation is enacted, that would be monumental.
The House in April passed a bill by Rep. Patrick T. McHenry, R-N.C., that would require the SEC and CFTC to jointly convene a working group to provide clarity and expand dialogue between the agencies.
Regulators are also “planting their flags,” Peirce said, by bringing enforcement actions.
The SEC within the past year sued Ripple Labs Inc., a cryptocurrency exchange, saying the company violated securities laws when it raised funds selling the digital token XRP. The SEC said the token should have been registered as a security.
The CFTC has also gone after crypto companies, including BitMEX, one of the largest convertible virtual currency derivatives exchanges. The agency charged the exchange with illegally operating a crypto trading platform and knowingly violating anti-money laundering rules. The exchange settled without admitting wrongdoing in August.
“There’s a lot of jockeying for positions now,” Peirce said. “I think we’re going to see that continue in the coming years.”