Bitcoin, Ethereum regulation likely to end up under CFTC

The Commodities Futures Trading Commission appears to be gaining the upper hand in its battle to regulate US cryptocurrency transactions, potentially overwhelming the agency’s staff and budget

A bipartisan bill sponsored by the leaders of the Senate Agriculture Committee and introduced in July gives the CFTC the lead role in spot trading of bitcoin and ethereum, which dominate the crypto market by value. Previously introduced Senate legislation also emphasizes the CFTC’s role.

The Securities and Exchange Commission has sought a voice, at least over the smaller coins, many of which are considered securities rather than commodities. This could mean that crypto exchanges are forced to register with the SEC as broker-dealers, although the CFTC gets the bulk of the responsibility.

Coinbase, a leading cryptocurrency exchange, told the SEC in July that the agency’s existing registration rules would be burdensome for digital assets. A letter to the commission said: “For those digital assets that are securities, registration under current rules is, for many market participants, either not possible or not economically viable given the associated and unnecessary compliance burdens.”

The crypto industry appears to prefer the CFTC, whose oversight of established commodity markets is less concerned with protecting retail investors than the SEC’s regulations for securities such as stocks.

Since late last year, CFTC Chairman Rostin Behnman has been fighting for authority to regulate digital commodity spot markets, which are where assets directly change hands without an intermediary.

Behnman may be biting off more than he can chew.

“They are understaffed and would be completely overwhelmed without a significant allocation of new funding from Congress,” said Carol Van Cleef, who leads the blockchain and crypto practice at the Bradley law firm in Washington.

The CFTC employs approximately 700 people and has a current budget of about $1.47 billion a year, while the SEC has nearly 5,000 employees and receives $2.65 billion in funding. Still, all of the current funding for both agencies is already spoken for, so additional money must be found.

“The SEC could be three times the size of the CFTC. But you know, everything they’re doing is already coming out of the budget that they’ve been given, they’ve got three times the amount of work to do,” said CFTC Commissioner Chris Giancarlo.

If Congress gives the CFTC official authority in an entirely separate piece of legislation, it would have to give it additional funding. And the same applies to the SEC, says Giancarlo.

The additional funds, or appropriations, needed to regulate crypto may not be an easy question from either agency due to the large sums that may be required to regulate the industry.

However, some of the lawmakers are pushing for regulators to charge fees to regulate cryptocurrency as opposed to seeking budget appropriations.

The first of the two Senate bills, sponsored by Kirsten Gillibrand (D-NY), a member of the Senate Agriculture Committee, and Cynthia Lummis (R-WY) who is on the Banking Committee “creates opportunities for industry to submit directly to agencies that CFTC and SEC, but also allows those agencies to set up their own fee structure to achieve regulation, said a source familiar with the legislation.

It remains to be seen how market participants will react to being required to pay for their regulation.