Why the Future of Cryptocurrency Depends on Regulators

Growing calls from the crypto industry and investors for clearer cryptocurrency regulation have fueled debate over who has jurisdiction, as digital assets don’t lend themselves to being neatly tucked under the rules of a single agency. Some believe the dynamic is setting the stage for a turf war between the two financial regulators.

Commodity Futures Trading Commission (CFTC) Acting Chairman Rostin Behnam said that almost 60% of the digital asset market meets the definition of commodities under his agency’s regulation. Similarly, Securities and Exchange Commission (SEC) Chairman Gary Gensler said that many cryptocurrency businesses meet the definition of securities and will fall under the scope of its rules.

David Yermack, a finance professor at New York University, said that the CFTC's attitude towards cryptocurrencies is very different from that of its sister regulators. He believes that commodity regulators have been quite welcoming to cryptocurrencies, and the SEC has been using its enforcement powers to deal with companies that the agency says have exceeded its boundaries. David Yermack said this is related to the size of each agency's budget, staff and influence. A regulator that is given the vast majority of power over digital assets will need more funds to bear this responsibility.

The CFTC allowed the launch of bitcoin futures products in 2017. These derivatives allow investors to bet on the price of the cryptocurrency a year in advance. At the same time, the SEC has delayed or rejected any attempts to launch bitcoin-based funds for ordinary investors. The SEC only recently allowed funds based on CFTC-approved bitcoin futures.

Behnam is President Joe Biden’s pick to lead the CFTC as a permanent commissioner. Sen. John Thune, R-Calif., asked him during his confirmation hearing to compare the role of his agency with the SEC and how he would coordinate on virtual currency issues. Behnam responded that the agencies have a “rich history of working together.”

Not everyone agrees that regulators will be divided. CFTC Commissioner Dawn Stump said the view that her agency regulates cryptocurrencies is oversimplified because it does not oversee the commodity’s “spot” market, only its derivatives.

Michael Piwowar, a former Republican SEC commissioner, pointed out that the SEC and CFTC operate under different regulations. The CFTC is responsible for overseeing institutional markets, while the SEC is responsible for overseeing institutions and ordinary investors. Michael Piwowar believes that the key difference in terms of who gets jurisdiction is whether a cryptocurrency is a security.

Alan Konevsky, chief legal officer of blockchain company tZero, believes that the CFTC is going in a direction that the SEC has not caught up with. If cryptocurrency futures are not listed, the Bitcoin futures fund will need a longer approval process.

Vivian Fang, an associate professor of accounting at the University of Minnesota, believes it is not clear who has jurisdiction over cryptocurrencies. She believes that the Bitcoin futures funds approved by the SEC are not good for retail investors and the agency should make this clearer. She said she would not recommend the Bitcoin futures funds approved by the SEC to friends or family. She believes that they have higher pricing risks than investing directly in Bitcoin. This is because futures contracts expire, so unexecuted contracts will be transferred to the next month, which has a premium, and some retail investors do not understand this.

The U.S. House of Representatives in April passed a bill introduced by Representative Patrick T. McHenry of North Carolina that would require the SEC and CFTC to jointly convene a working group to provide clarity and expand dialogue between the agencies.