As part of a virtual presentation today hosted by the Brookings Institution, CFTC Chairman Rostin Behnam delivered a speech addressing crypto regulation. As any follower of the digital asset sector will understand, regulation of crypto remains a bit opaque
After a round-up of the developing digital asset marketplace in recent years, Chair Behnmam outlined the CFTCs claim to the “digital asset commodity cash market.” As the Commodity Futures Trading Commission historically oversees derivatives and commodities, its position relating to crypto has been vague. While the Securities and Exchange Commission (SEC) claims that virtually all cryptocurrencies are securities, perhaps with the exception of Bitcoin and maybe Ethereum, the CFTC seems to be pushing for oversight of stablecoins as well as BTC and ETH.
Digital asset commodity cash market
To quote Chair Behnam:
“To be clear, the CFTC’s oversight authority over all cash markets for commodities in interstate commerce is not currently at issue. However, there are several unique elements of the digital asset commodity cash market that distinguish it from other cash commodity markets, suggesting it would benefit greatly from CFTC oversight. The most notable difference between the digital asset market and other commodity markets is the level of retail participation. Most commodity derivative markets, such as the agriculture and energy markets, are dominated by wholesalers, end-users and institutional investors engaging in hedging and other risk management transactions. However, the digital asset market is characterized by a high level of retail participants that are engaged in price speculation.”
Behnam states that retail participation in the digital asset futures market is probably more than double that in other futures markets. This is due, at least in part, to the low barrier to entry and the opportunity for traders/investors to build wealth “by those who have found themselves shut out” by more traditional markets, claims Behnam.
At the same time, Behnam acknowledges that retail investors are the segment of investors least able to handle a significant loss. Recently, we have seen dramatic failures in the crypto sector as Voyager Digital filed for bankruptcy, as has Celsius Network.
Behnam states that the “digital asset market would benefit from uniform imposition of requirements focused on ensuring certain core principles, including market integrity, customer protection, and market stability.” No one will disagree with this statement, but questions remain as to who (which regulator) and how (under which specific rules).
While the SEC finds solace in the Howey Test, dealing with all digital assets as securities, Behnam is hopeful that the pending bipartisan legislation aiming to provide greater regulatory clarity will lead to greater “transparency, accountability, stability, customer protections, and oversight across the cryptoverse.” It should also assign which agency regulates what.
While Behnam is optimistic regarding the legislation introduced by Senators Lummis and Gillibrand, the timing of the bill being brought to a Senate Committee is unknown. Until legislation is signed into law, the current regulatory lines will remain in place along with its opaque application.