Senate Plan Would Put Bitcoin, Ether Under Commodity Regulator’s Watch

Regulators vie for authority over cryptocurrency markets

By Paul Kiernan (WSJ), Aug. 3, 2022

WASHINGTON—Leaders of a Senate committee are pitching legislation that would assign oversight of the two largest cryptocurrencies, bitcoin and ether, to the federal agency that regulates milk futures and interest-rate swaps.

Senate Agriculture Committee Chairwoman Debbie Stabenow (D., Mich.) and top-ranking Republican John Boozman of Arkansas unveiled a plan Wednesday that would empower the Commodity Futures Trading Commission to regulate spot markets for digital commodities, a newly created asset class. Currently the CFTC has authority to police derivatives, such as futures and swaps, rather than underlying commodities.

The bill marks the latest salvo in an intensifying battle among federal agencies and congressional committees that oversee them over who will regulate crypto. Thirteen years after bitcoin was created, cryptocurrencies remain largely unregulated by the federal government, leaving investors without key protections from fraud and market manipulation.

The competition for jurisdiction heated up in recent months as a meltdown in crypto markets underscored the need for guardrails in the eyes of many policy makers. The competition also reflects the industry’s ramped-up lobbying presence in Washington and its push to reach more mainstream investors through Super Bowl ads and other high-profile marketing initiatives.

“When there’s a topic as hot as crypto, everybody wants a seat at the table,” said Aaron Klein, a senior fellow at Brookings Institution who focuses on financial regulation. “The question is, are we going to have regulatory turf paralysis?”

In practical terms, for federal agencies such as the CFTC, Securities and Exchange Commission, and Federal Reserve, adding crypto to their remit would bring bigger budgets, greater influence and more job opportunities for officials who leave public service. For members of the congressional committees that oversee such regulators, a new industry in their sandbox would create another stream of lobbyists and campaign donations.

“We need to treat this seriously and take our responsibilities seriously for protecting consumers,” Ms. Stabenow said in a virtual press conference alongside Mr. Boozman.

Washington has introduced a flurry of bills in recent months to draw jurisdictional lines. Sens. Cynthia Lummis (R., Wyo.) and Kirsten Gillibrand (D., N.Y.) unveiled a proposal in June that would create exemptions for cryptocurrencies in securities laws, banking statutes and tax code. In July, leaders of the House Financial Services Committee said they were working on a bill to grant the Federal Reserve a greater role in regulating some stablecoins, crypto tokens pegged against the dollar and other official currencies.

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Agencies also are seeking to claim territory. CFTC Chairman Rostin Behnam, a former staffer to Ms. Stabenow, said last week his agency is “ready and well situated” to oversee spot markets for some cryptocurrencies. He has worked with his former boss for months to help craft legislation that would authorize the CFTC to do so, people familiar with the matter say.

Meanwhile, SEC Chairman Gary Gensler has repeatedly demanded that cryptocurrency-trading platforms such as Coinbase Global Inc. register with the agency as securities exchanges akin to the New York Stock Exchange or Nasdaq. In May, the SEC nearly doubled the staff of an enforcement unit focused on cryptocurrencies.

“Four years ago when I started this job, there were some people that just thought this thing was all going to blow up and go away, that this was sort of a passing fad,” said Kristin Smith, executive director of the Blockchain Association, a trade group representing crypto firms.

Now, she said, “We’ve got all these regulators suddenly vying for control.”

After the SEC alleged in an insider-trading case in July that at least seven cryptocurrencies listed on Coinbase should have been registered as securities, Republican CFTC Commissioner Caroline Pham accused the SEC of “regulation by enforcement.”

“The SEC is not working together with the CFTC,” Ms. Pham said in an interview. “They go out unilaterally to try to establish precedent that’s going to dramatically reshape the landscape as to what’s a security and what’s a commodity.”

Ms. Pham has posted photos to her Twitter account of herself posing alongside crypto lobbyists and executives including Sam Bankman-Fried, the billionaire founder of trading platform FTX.

Ms. Pham said that crypto is one of the areas she is focused on, and, “I take pictures with everybody. Like, literally, everybody.”

At the heart of the turf war are questions about how cryptocurrencies fit into the definition of a security, the legal classification that includes stocks and bonds.

Coinbase and other firms have lobbied Congress to create a new category for digital commodities and empower the CFTC to regulate it.

A 1946 Supreme Court case created a test that focuses on whether investors buy an asset in hopes of profiting from the efforts of other people. If so, the issuer is required to register with the SEC and publicly disclose any information that may be material to the security’s price.

Even though investors in bitcoin and ether rely on a network of users and programmers to validate transactions and perform software updates, cryptocurrency enthusiasts insist those groups are too decentralized for the assets to be regulated like securities. Instead, they argue, the assets should be considered commodities, which have a broader definition and no full-time regulator.

Firms such as Coinbase, FTX and Ripple have spent millions of dollars over the past year lobbying Congress to create a new category for digital commodities and empower the CFTC to regulate it. The agency has roughly one-sixth the head count of the SEC, and its rules are seen by the industry as easier to comply with than securities laws.

“When you ask the people that are in the industry…almost all feel like the regulator should be primarily the CFTC,” Mr. Boozman said. “The fact that they’re fairly united on that makes it easier on members.”

Crypto skeptics worry that creating a new legal concept for cryptocurrencies could create an alternative to securities registration for a wider variety of assets.

“People who are taking action that could undermine our securities law are playing with fire,” said Dennis Kelleher, president of investor-advocacy group Better Markets. “You may love or hate the SEC, but transparent disclosure, clear rules…and enforcement is what builds trust and confidence in our markets.”

The legislation being unveiled Wednesday would seek to exclude securities from the definition of digital commodities, making it narrower in scope than that of other crypto-related bills floated in recent months, such as the Lummis-Gillibrand proposal.

Ms. Stabenow said she expects the Agriculture Committee to hold a hearing on the bill as early as September.

The bill would require any entity acting as a digital commodity platform—including crypto exchanges such as Coinbase and FTX—to register with the CFTC as trading facilities, dealers or brokers. The exchanges would have to monitor trading, protect investors from abuse and only offer assets that are resistant to market manipulation, among other requirements.

Platforms also would be obliged to disclose some information about the assets they list, such as operating structure and conflicts of interest. Such information would likely fall short of the extensive disclosures required by the SEC for securities.

The derivatives markets the CFTC currently oversees are dominated by professional investors, such as banks and hedge funds. Crypto markets, by contrast, draw legions of small investors who are more vulnerable to scams.

If the agency wins jurisdiction over bitcoin and ether, the CFTC would have to write rules from scratch to protect such investors.

“How robust would they be and how long would that take?” asked Tyler Gellasch, executive director of the Healthy Markets Association, an investor trade group.

Write to Paul Kiernan at paul.kiernan@wsj.com

Appeared in the August 3, 2022, print edition as 'Bill Puts Crypto Under CFTC’s Watch'.

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