SEC, CFTC’s Crypto Aspirations To Be Tested by Courts, Lawmakers

Oversight of crypto assets is a hot regulatory topic in the U.S.

Regulators and lawmakers are trying to design a new legal framework that offers more clarity to companies and investors. The Securities and Exchange Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) seem to be the most active agencies in regulating this space either with some regulatory proposals or through enforcement actions. Yet their jurisdictional limits to oversight crypto assets aren’t clear. The agencies seem confident they have broad crypto regulatory mandates, but Congress and some courts may set boundaries. 

SEC Jurisdiction 

SEC’s Chair Gary Gensler has stated that “crypto products are subject to securities laws and must work within our securities regime.” This statement from 2021 is probably old now, and even Mr. Gensler has admitted in Congress that bitcoin is probably a commodity and other cryptocurrencies like ether may also be a commodity. 

However, the definition of “securities” for the agency has not changed — it refers to “investment contracts,” based on the Howey test. This position was first taken by former SEC Chair Jay Clayton in 2018. The SEC has not changed its position that many crypto assets represent investment contracts where issuers are trying to raise money from investors, and therefore, they are securities, regardless of the form or technology used. The SEC focuses on the “nature” of the transactions rather than the item being sold. 

Gensler has urged legislators to grant the SEC more authority to oversee crypto. He stated, “It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These products are subject to the securities laws and must work within our securities regime.” 

As the SEC continues to rely on this broad definition, the agency may seek to receive from Congress a broad mandate to supervise many crypto assets, which could include stablecoins. As the situation stands now, if a stablecoin is considered a “currency” or a commodity (defined as a good exchanged in a market for uniform quality and value), the SEC doesn’t have jurisdiction over these assets — but Congress can always change the status quo. 

Additionally, the agency is involved in several lawsuits where courts could shed light on the qualification of some crypto assets as securities or commodities. 

Read More: SEC Chair Steps up Crypto Crusade, Sends Message to CFTC 

CFTC Jurisdiction 

The CFTC also wants to expand its jurisdiction over crypto assets. In 2019, the former CFTC’s chairman expressed his views that ether was a commodity, a few years after the agency determined that bitcoin was a commodity. In 2021, a Southern District Court of New York found that “bitcoin, ether, litecoin and tether tokens, along with other digital assets, are encompassed within the definition of “commodity.”

When the new CFTC chairman, Rostin Behman, took office in late 2021, he testified before the Senate that his agency was willing to take more responsibilities on crypto oversight. “I look forward to working with this Committee to reexamine — and, if appropriate, expand — the CFTC’s authority to ensure both the benefits and promise of the emerging digital asset market and the underlying technology can be harnessed.”

However, the CFTC’s jurisdiction over some crypto assets may not be exclusive. The same court that found many crypto assets were commodities also stressed that the “jurisdictional authority of CFTC to regulate virtual currencies as commodities does not preclude other agencies from exercising their regulatory power when virtual currencies function differently than derivative commodities.” This could suggest that some crypto assets could vary over time or have different features that would make them subject to different regulatory agencies. 

Read More: CFTC’s Chair Signals More Crypto Enforcement and Oversight 

New Proposals 

The soon-to-be-announced crypto bill by U.S. Senators Lummis and Gillibrand may continue, at least partially, the same line established by regulators while increasing the role of the CFTC. According to the senators, the bill could lean on the CFTC as the main regulator for spot markets and futures while leaving the SEC as supervisor of crypto that can be defined as securities according to the Howey test. This is an asset that’s “being offered to fund a company in the same way stocks are offered to fund companies,” said Senator Gillibrand.  

Interestingly, on Thursday, May 26, SEC and CFTC’s Commissioners Hester Peirce and Caroline Pham penned a joint op-ed in The Hill where they advocated for more collaboration between the regulators. “The jurisdictional lanes aren’t always clear,” said the Commissioners. They proposed holding joint roundtables with experts, investors, customers and other regulators to assess whether new regulations are needed.  As an example of this collaboration, the commissioners mentioned a 2020 meeting where both regulators held a meeting to vote on a shared rule.  

“If we act now, it could lead our two agencies to work better together. Doing so would benefit the capital markets, not just the crypto markets.”