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Enforcement in the digital-assets space faces a crossroads. Whilst the agencies governing the area vie for authority and plead for more power to act, their objectivity is being called into question, as they bleed top officials to the industry they’re charged with overseeing.
Enforcement tug-of-war
Two U.S. regulators have staked a claim over digital asset regulation. On one hand 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 such as 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 it views BTC and many other digital assets as commodities, and as a result it claims regulatory authority over the trading of those assets.
As a result, digital assets are jointly regulated by two agencies. The boundaries between the authority of each are murky, 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 being a case in point.
More clarity is needed. A number of bills currently before U.S. congress seek to extend 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 commodities trading including spot markets and including, crucially, BTC and ETH.
The DCCPA has bipartisan support and should it pass would prove a blow to the CFTC’s main rival for enforcement authority over the industry, the SEC.
SEC chair Gary Genseler has been vocal on his belief that many digital tokens qualify as securities and thus fall under the purview of his agency, and the seeding 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 eroding of its authority in the industry might be welcomed by exchanges and crypto advocates in the U.S. and abroad. However, speaking at a symposium hosted by Rutgers Law School and Lowenstein Sandler LLP, CFTC Chair Rostin Behnam suggested that one of the main obstacles that the CFTC faces to more proactive enforcement has been that his agency lacks the oversight and surveillance authority enjoyed by the SEC. This has meant that the CFTC has had to rely on complaints and whistleblowers. The lack of those tools, Behnam bemoaned, “prevents us and handcuffs us from doing real, deep analytics about trading patterns and disruptive trading.”
The DCCPA would go some way to uncuffing the CFTC by giving it a broader scope, allowing the regulator, as Behnam said,“ a much larger glance into what does this ecosystem look like, what are the patterns we’re seeing, and what rules that we could implement to prevent these patterns from continuing.”
A side effect of the CFTC’s increased mandate may be to transfer the shackles to the SEC, however Behnam continues to dispute the “cynical view” that the agencies can’t work together in the space, insisting that the bill would simply provide clarity in the regulatory “grey areas.”
If new legislation can keep the regulators from stepping on each others toes and in the process keep any potentially ambiguous cases from slipping through the cracks, then this can only be seen as a positive step for honest actors in the digital currency space. Yet, just as this back and forth might be approaching some kind of resolution, another existential threat for the authorities is raising questions in the capital.
The regulatory revolving door
Around the same time CFTC Chair Rostin Behnam was making the case for less restrictions on enforcement power and more harmony with the SEC, Sen. Elizabeth Warren and four of her Democratic colleagues in Washington were sending out letters to both agencies, as well as five other regulators, questioning the “revolving door” of top officials and former staff members leaving federal employment to lobby on behalf of the digital asset industry.
Ironically, it seems the regulators have been haemorrhaging senior officials and top talent to the very people they are supposed to be keeping in check. All of the agencies that received the letter, including the CFTC and the SEC, have seen employees leave over the last few years to work for the crypto industry as advisers, board members, legal counsel or in-house executives.
Notable cases include former SEC Chair Jay Clayton, who has advised at crypto companies since re-joining the private sector, and former CFTC Chair J. Christopher Giancarlo, who was featured by the American Crypto Association among the ‘top 10 crypto lawyers’ in its 2020 ranking.
Of equal concern to Sen. Warren and her colleagues was the number of public employees who came from the other direction, taking 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 staffers 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 the regulators, the lawmakers voiced their concerns that this excessive cross contamination between the public sphere and the crypto industry, “risks corrupting the policymaking process and undermining the public’s trust in our financial regulators.”
The letter went on to say, “Americans should be able to trust that financial rules are crafted to reduce risk, improve security, and ensure the fair and efficient functioning of the market,” and that “Americans should be confident that regulators are working on behalf of the public, rather than auditioning for a high-paid lobbying job upon leaving government service.”
The CFTC and SEC have yet to make a statement on the letter, but with tensions already high amongst authorities who continue to seek more enforcement power and clarity on 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 pressure for results, and the regulators must pick their path forward wisely.
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