The “Million-Dollar Question”: CFTC Leads on Crypto Regulation Along with SEC

“It’s a pretty cynical view to suggest that two agencies can’t figure it out and work together,” he told an audience of lawyers and industry executives.

With crypto legislation stalled in Congress and unlikely to pass with elections looming, regulators have sparred in a series of public conversations and enforcement actions about where authority lies. In particular, the issue of which cryptocurrencies are commodities, and subject to CFTC oversight, as opposed to securities, and subject to SEC oversight, has created a perception of division between the two key agencies.

Behnam reiterated his belief that the two largest cryptocurrencies – Bitcoin and Ether – are commodities. SEC Chairman Gary Gensler has raised questions about whether Ether should fall under SEC jurisdiction due to the move to a proof-of-stake consensus mechanism.

“I have proposed [Ether] is a commodity, and Chairman Gensler thinks otherwise,” Behnam said.

However, he denied the common industry sentiment that the CFTC would be the more favorable regulator. “Our enforcement record speaks for itself,” he said.

He also said the Digital Commodities Consumer Protection Act — legislation introduced by Sens. Debbie Stabenow (D-MI) and John Boozman (R-AR) of the Senate Agriculture Committee believed to be the crypto legislation with the best chance of passing. —would not give the CFTC full authority to categorize cryptocurrencies.

Instead, he argued that the CFTC and SEC would continue to work together, pointing to the two agencies’ track record of cooperation, such as with the development and evolution of security futures. He said the existing self-certification process, where platforms come to the CFTC to register, should be sufficient for crypto participants, including when the issue of commodity versus exchange is in question.

“This is the million-dollar question,” he said. “How do we communicate with the SEC when a product is in the gray area?”

The answer, he argued, would be the two agencies working together on the legal and policy issues to come up with a solution—an outcome that many in the industry find insufficient, especially considering that neither proposed bill provides clarity on the categorization of crypto assets.

Behnam said legislation is needed to create both a regulatory framework and to provide resources for the agency. The CFTC recently released its enforcement summary for fiscal year 2022, in which more than 20% of its 82 actions were related to crypto. Among those — and the 62 crypto-related cases since 2014 — he said each one has been the result of a whistleblower, tip or complaint, as opposed to traditional monitoring mechanisms. He attributed this to being “handcuffed” due to the lack of tools the agency normally has in traditionally regulated markets.

“The underlying fear and concern is that we’re not doing enough,” he said. “If we had more resources, we could bring more fraud and manipulation to light.”

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