‘Crypto’ Law Enforcement: A Crossroads for Digital Asset Enforcement and US Regulators

Digital asset enforcement faces a crossroads. As the agencies that govern the area jostle for authority and ask for more power to act, their objectivity is called into question as they bleed top officials of the industry they are charged with overseeing.

Enforcement tug-of-war

Two US regulators have set a requirement regarding the regulation of digital assets. On one side is the Securities and Exchange Commission (SEC), which is responsible for securities, and while there is disagreement about exactly what qualifies as a security, digital assets like BTC and ETH are increasingly being thought of as such. On the other hand is the Commodity Futures Trading Commission (CFTC), which primarily has the authority to regulate commodity-based futures and derivatives markets (as opposed to spot markets). The CFTC has said that it views BTC and many other digital assets as commodities, and as a result it is seeking regulatory authority over the trading of these assets.

As a result, digital assets are jointly regulated by two agencies. The boundaries between the authority of each are unclear, but will typically turn on whether an asset is better described as a commodity or a security. This separation of responsibilities makes sense in principle if the assets and commodities remain clearly distinguishable, but inevitably leaves room for a regulatory free-for-all when there is ambiguity – Ethereum’s transition from commodity to security is an example.

More clarity is needed. A number of bills currently before the US Congress seek to expand the Commodity Futures Trading Commission’s (CFTC) authority over the cryptocurrency industry, most notably the Digital Commodities Consumer Protection Act (DCCPA) of 2022, which would give the CFTC exclusive jurisdiction over digital commodity trading. including spot markets and including, crucially, BTC and ETH.

The DCCPA has bipartisan support, and should it pass, it would prove a blow to the CFTC’s main rival for enforcement authority over the industry, the SEC.

SEC Chairman Gary Genseler has been vocal on his belief that many digital tokens qualify as securities and thus fall under his agency’s purview, and the sowing of further ground in this jurisdictional tug-of-war thanks to the DCCPA would be a tough pill to swallow.

The SEC has a reputation for being more aggressively “anti-crypto,” so some erosion of authority in the industry may be welcomed by exchanges and crypto advocates in the US and abroad. But at a symposium hosted by Rutgers Law School and Lowenstein Sandler LLP, CFTC Chairman Rostin Behnam suggested that one of the main obstacles the CFTC faces to more proactive enforcement has been that his agency lacks the oversight and monitoring authority that the SEC has. . This has meant that the CFTC has had to rely on complaints and whistleblowers. The lack of these tools, Behnam lamented, “prevents and handcuffs us from doing real, deep analysis about trading patterns and disruptive trading.”

The DCCPA will go some way to freeing up the CFTC by giving it a broader scope, giving the regulator, as Behnam said, “a much bigger look at what this ecosystem looks like, what are the patterns that we’re seeing, and what rules are we could implement to prevent these patterns from continuing.”

One side effect of the CFTC’s increased mandate could be handing the reins to the SEC, but Behnam continues to dispute the “cynical view” that the agencies can’t work together in space, insisting the bill would simply clarify regulatory “grey areas.”

If new legislation can prevent regulators from stepping on each other’s toes and in the process prevent potentially ambiguous cases from slipping through the cracks, then this can only be seen as a positive step for honest players in the digital currency space. Yet, just as this back-and-forth may be nearing some kind of resolution, another existential threat to the authorities is raising questions in the capital.

The statutory revolving door

Around the same time CFTC Chairman Rostin Behnam argued for fewer restrictions on enforcement power and more harmony with the SEC, Sen. Elizabeth Warren and four of her Democratic colleagues in Washington sent out letters to both agencies, as well as five other regulators, questioning ” the revolving door” of top officials and former employees leaving federal employment to lobby on behalf of the digital asset industry.

Ironically, the regulators seem to have bled senior officials and top talent into the very people they are supposed to keep in check. All of the agencies that received the letter, including the CFTC and SEC, have seen employees leave in recent years to work for the crypto industry as advisors, board members, legal counsel or in-house managers.

Notable cases include former SEC Chairman Jay Clayton, who has advised crypto companies since re-entering the private sector, and former CFTC Chairman J. Christopher Giancarlo, who was named by the American Crypto Association among the top 10 crypto lawyers in his practice. 2020 ranking.

Of equal concern to Senator Warren and her colleagues was the number of public servants who came from the other direction and took government jobs after spending time in the “crypto industry”.

According to a February report by the Tech Transparency Project, 235 White House, congressional and federal agency staff have moved to or from the crypto industry in recent years, allowing the industry to “fend off regulation” and “blunt new rules.”

In the letter to regulators, the lawmakers expressed their concerns that this excessive cross-contamination between the public sphere and the crypto industry, “risks corrupting policymaking and undermining public trust in our financial regulators.”

The letter went on to say, “Americans should be able to trust that financial rules are designed to reduce risk, improve safety, and ensure the fair and efficient functioning of markets,” and that “Americans should be confident that regulators are working on behalf of public, instead of auditioning for a high-paying lobbying job when he leaves public service.”

The CFTC and SEC have yet to issue a statement on the letter, but with tensions already running high among regulators who continue to seek more enforcement and clarity in their jurisdictions, the letter raises untimely questions and inconvenient truths about their independence and credibility.

The stakes are incredibly high for the digital currency industry and its regulatory future, but with lawmakers increasingly asking questions and seeking tighter controls, enforcement in the space will be under a microscope with increasing performance pressures, and regulators must choose their path forward carefully. .

See: US Congressman Bill Foster on Bitcoin Association’s Blockchain Policy Matters

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