When Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) revealed that their bipartisan bill creating a regulatory framework for cryptocurrencies would define most digital assets as commodities instead of securities, the response was predictable.
The Commodity Futures Trading Commission (CFTC) was ecstatic and the Securities and Exchange Commission (SEC) aghast.
See also: Senate Crypto Bill Debuts and Crypto Industry Gets Big Wins
Both have thrown elbows as the political debate over who should regulate the crypto industry came to a boil over the past year.
SEC Chairman Gary Gensler, an even more aggressive regulator than predecessor Jay Clayton, has called the crypto industry the “Wild West of finance” and believes that almost all tokens are securities. Among other things he’s gone after have been cryptocurrency exchanges and lending platforms, demanding they register as brokers and comply with the agency’s regulations.
CFTC Chairman Rostin Behnam was all smiles, telling reporters that Lummis and Gillibrand did “a very good job” in drafting the Responsible Financial Innovation Act, adding “one of the trickiest things we’re going to have to do — and I think they address this very well — is deciphering between a commodity and security.”
On the other hand, Gensler was politically correct, telling an audience at the Wall Street Journal’s CFO Network Summit on June 14 that he wanted to speak to the senators before commenting publicly, CoinDesk reported.
Read more: SEC Chair Steps up Crypto Crusade, Sends Message to CFTC
He then said he wanted to “continue to protect” the SEC’s role in overseeing corporate fundraising from the public — meaning continue doing what it has been doing — before essentially warning that the Lummis Gillibrand bill would encourage stock exchanges, money market funds and other public companies to seek political support to move “outside of the regime” of SEC regulatory authority.
His remarks more or less amounted to a warning of a complete regulatory meltdown of the financial markets.
Under a CFTC Regime
This raises another question: What would the new regime look like if the CFTC — and thrilled cryptocurrency industry, which wants out from under the SEC’s thumb — get their way?
Both agencies would still have a hand in, but the CFTC would have “clear authority over applicable digital asset spot markets, which aligns well with their current purview over other commodity markets,” the senators said.
Read more: SEC, CFTC Coordination May Be the Way Forward for Crypto Regulation
This means that instead of just bitcoin and ether — which both agencies already agree are commodities — the CFTC would have control over most digital assets, with the SEC relegated to cryptocurrencies that provide the holder with certain privileges shared by corporate securities like dividends and liquidation rights.
While the new bill would give the CFTC oversight of cryptocurrencies, it wouldn’t necessarily give it regulatory control of the crypto spot market — meaning an exchange where anyone from a small retail buyer to an institutional investor buying tokens for immediate delivery — but rather over futures contracts and derivatives. So Main Street investors wouldn’t see their purchases controlled by the CFTC, but the agency would have the authority to police fraud and market manipulation.
See also: Gensler Says SEC Plans to Regulate Crypto Exchanges, Sharing Power With CFTC
That would differ from an SEC-controlled cryptocurrency market — which is more or less what exists now, as seen by the recent decision of the Coinbase spot exchange to register as a broker. While the agency is encouraging others to follow suit and not too subtly threatening to start suing those who don’t, its authority is unclear.
However, the agency would still have control over initial coin offerings (ICOs) — which it claimed and enforced as far back as 2017, which is why they’re very rare now — and over a large chunk of decentralized finance, or DeFi.
So, with the CFTC, there would be a lighter hand on the regulatory throttle — which is why the crypto industry is thrilled.
If Gensler’s agency ends up getting what it wants, on the other hand, expect far more aggressive enforcement.
What’s less clear is how this will all play out after the various federal agencies develop the regulatory framework proposal ordered by President Joe Biden in a March executive order. That’s due in September. Either way, expect the crypto industry’s recent but influential lobbying efforts to increase as September approaches and redouble after that.
See more: Crypto Industry Lobby Punching Above Its Weight Class
One thing that process will provide is a route for people to express their opinion on the various options, as the agencies will likely gather public input — one Commerce Department agency already has one up and running.
Public opinion will play a part in the outcome. And if the markets are cratering like they have this year and especially this month, the SEC will have more support on its side.
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