SEC vs. CFTC — who will regulate crypto markets?

YEREVAN (CoinChapter.com) – In an announcement late on Aug 4, a staffer from U.S. Senator Cynthia Lummis’ (R-Wy) office asserted that every U.S. crypto exchanges, including Binance, are in various stages of investigation by the U.S. Securities and Exchange Commission (SEC).

The SEC wants crypto exchanges to obey

The law enforcement agency has previously sued several blockchain companies and exchanges for the alleged distribution of unregistered securities. The most notorious case against Ripple Labs is still ongoing.

Additionally, since last year, SEC Chair Gary Gensler has been adamant about bringing crypto exchanges to heel. In Sep. 2021, he pointed out that DeFi projects, specifically the ones that reward participants with “valuable tokens or similar incentives,” could come under investigation, no matter how “decentralized” they say they are.

“There’s still a core group of folks that are not only writing the software, like the open-source software, but they often have governance and fees. There’s some incentive structure for those promoters and sponsors in the middle of this.”

commented the chair.

Also read: SEC doubles down on crypto exchanges. Is Coinbase next?

While the SEC gradually asserted its domain in the crypto sphere, the U.S Commodity Futures Trading Commission (CFTC) pushed against the agency’s “regulation by enforcement.”

The regulations are unclear

SEC’s preferred “regulation by enforcement” means the agency reserves the right to compel market participants to obey the rules put forth by the SEC. However, the rules are vaguely defined when it comes to digital assets.

Many experts within the SEC voiced the dire need for clearer ways to regulate the crypto sphere. For example, Hester Pierce, a former Commissioner with the SEC, has called for crypto laws since she joined the agency in 2018. However, Pierce also pointed out that she thinks the definition of “securities” is quite unclear.

Also read: Former Coinbase manager charged with crypto insider trading.

In detail, defining securities is crucial for law enforcement, as they must mandatorily register with the SEC. If a crypto exchange does NOT offer securities, then the agency doesn’t have a case against them. However, the definition is up for interpretation, which means more lawsuits could follow.

CFTC sees compliance in the crypto future

However, the question remains, which agency should regulate crypto exchanges? The SEC or the CFTC?

The case SEC v. Wahi is a striking example of “regulation by enforcement.”The SEC complaint alleges that dozens of digital assets, including those that could be described as utility tokens and/or certain tokens relating to decentralized autonomous organizations (DAOs), are securities.

said  CTFC’s Commissioner Caroline D. Pham

The Commissioner also asserted that the SEC vs. CFTC dispute over crypto jurisdiction has to be put to rest. Legislators would have to get involved if the matter isn’t resolved internally, and Congress is likely to side with the CFTC.

Also read: Robinhood crypto arm to pay $30M in penalty amid massive layoffs.

In a 2018 document, the CFTC asserted the digital asset market needs a “multifaceted, multi-regulatory approach.” The document also cited CTFC’s 2014 ruling, which “declared virtual currencies to be a “commodity” subject.”

Since then, the CFTC has taken action against unregistered Bitcoin futures exchanges (BitFinex), and enforced the laws prohibiting wash trading and prearranged trades on a derivatives platform.

reads the document.

While it is unclear which regulator will have the upper hand, it is apparent that the crypto sphere cannot interact with the fiat economy without clear regulatory laws.

Moreover, given the growing crypto adoption, the SEC and the CFTC must resolve their jurisdiction boundaries before the matter reaches Congress.