Are US Crypto Regulators Exposing Territory Via Enforcement Actions?

As regulatory enforcement actions unfold between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), the latter only subtly claimed Ethereum (ETH) and DAI, a stable coin backed by other crypto tokens, as digital goods. The way these two symbols are now being claimed is at the heart of what could be a jurisdictional battle between the two agencies over who should regulate crypto.

With the latest CFTC action, the Ooki DAO complaint issued today involving complex legal arguments about whether holders of governance token holders who vote in a DAO are liable, quietly beneath the surface the complaint labels the tokens on the Ooki exchange as commodities that provide the agency necessary jurisdiction to file the complaint. Similarly, the SEC v. Wahi case against individuals accused of insider trading in tokens on the Coinbase exchange saw nine tokens labeled as crypto-asset securities.

In fairness, both of these regulators are facing instructions from the White House from the first-ever crypto framework introduced last week as part of Executive Order 14067. In the framework, the Biden administration calls for, “…regulators like the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), pursuant to their mandates, to aggressively pursue investigations and enforcement actions against illegal practices in digital assets.”

However, the need for each agency to issue enforcement actions may also create the opportunity for each of the regulators to make demands on which part of the crypto ecosystem they want to regulate in the future. While Ethereum (ETH) is already widely considered a digital asset, DAI is definitely more interesting with a lot on the line for the MakerDAO Foundation that created the stablecoin whether DAI is a security or a commodity. DAI argues that their stablecoin is not “algorithmically backed” but rather secured by other crypto-tokens. This is different from Tether, which uses the US dollar and its equivalents to back stablecoins, which was also claimed as a digital commodity in a CFTC complaint last year against Tether.

What is critical now is that if these enforcement actions are the method by which certain tokens are claimed as either digital commodity tokens or security tokens by the SEC and CFTC, it would mean that some could interpret that the CFTC has just determined that DAI is now a digital commodity and not a security.

In a recent Congressional Research Service (CRS) report titled ‘Stablecoins: Legal Issues and Regulatory Options’, SEC Chairman Gary Gensler was quoted as saying: “…that some stablecoins may qualify as “securities” under federal law – a designation that will impose registration and reporting requirements on issuers.” In particular, the report highlighted how Gensler explained that the SEC would require these stablecoins as securities if the token is part of an investment contract or if the stablecoin can represent “banknotes”.

Meanwhile, it still appears that neither the SEC nor the CFTC has provided guidance that would help clarify the landscape of whether digital tokens are securities and commodities, making the current business environment for the industry difficult and stressful to navigate. With just one week left before the end of the US government’s fiscal year, at a time when US regulators tend to issue enforcement actions before the end of the year, the pressure on whether a particular token project could be caught up in the current approach to ‘regulation by enforcement ‘, the industry is likely to be on edge with any further complaints that may be issued by one of the regulators.