The crypto regulatory landscape seems to be a territory many have ventured into at length but thus far, there have not been anything definite. This can be seen by the ongoing crypto turf war between the United States (US) Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
These two key federal agencies have different views on what constitutes securities and commodities, leading to uncertainty and confusion in the crypto industry. But to understand what and why they have been battling it out, we need to first understand what are securities and commodities.
Securities and commodities, though distinct in nature, fall under the purview of separate regulatory bodies within the US. Delving into the realm of crypto, the classification of a particular digital asset as either a security or a commodity carries significant consequences, shaping its sales framework, listing eligibility, and potential legal repercussions in case of issuer misconduct.
Securities, encompassing stocks, bonds, and derivatives, are financial instruments that bestow a claim upon the issuing entity. In the US, they are subject to regulation by the SEC. A pivotal legal precedent established in 1946, SEC versus W.J.Howey Co., defined the sales of securities as "invest contracts".
This definition pertains to situations where investors anticipate profits solely through the efforts of the promoter or a third party, as determined by the court. Such profits can materialise through the subsequent sale of the security or by receiving dividends or interest payments.
In contrast, commodities constitute tangible goods that are exchanged on wholesale platforms. This category encompasses a diverse range of products, spanning agricultural commodities like corn and wheat, as well as valuable metals such as gold and silver. The trading of commodities primarily revolves around their prevailing market worth.
In the US, the CFTC oversees certain misconduct in commodities trading. However, it is important to note that the CFTC's regulatory jurisdiction currently does not extend to spot trading in the same comprehensive manner as the SEC oversees securities. This raises intriguing questions about the boundaries of regulatory authority in this dynamic region.
So the debate is over whether crypto is a security or a commodity.
The CFTC has argued that crypto should be regulated as commodities, while the SEC has argued that they should be regulated as securities. The CFTC's position is based on the fact that cryptocurrencies are traded on exchanges and are used for hedging and other purposes that are similar to those of commodities. The SEC's position is based on the fact that cryptocurrencies are often used to raise money from investors, which is a characteristic of securities.
Deciding where crypto stands is important.
When a crypto is deemed a security, the issuance and exchange of such digital assets necessitate obtaining licenses from securities regulators. However, this is no easy feat, prompting the crypto industry to invest considerable efforts into ensuring compliance and circumventing securities laws. A primary strategy employed by issuers to avoid violating such regulations centers around the concept of decentralisation.
By developing a crypto in a manner that eludes identification of a centralised and orchestrated entity responsible for manipulating token value, the likelihood of it being categorised as a security diminishes.
The classification of crypto as securities entails potential repercussions for their listing on exchanges, as exchanges may opt to steer clear of listing these assets to mitigate the risk of penalties imposed by the SEC for hosting unregistered securities. Moreover, crypto faces the additional challenge of adhering to state-specific rules and regulations, which can vary in their stringency and enforcement.
On the opposing end of the spectrum, the CFTC has maintained a longstanding contention that crypto like Bitcoin and Ether should be categorised as commodities and subjected to regulation accordingly under the Commodity Exchange Act (CEA).
The core foundation of the CFTC's argument rests on the interchangeable nature of crypto, exemplified by Bitcoin. Just like how a bag of rice holds equal value to another bag of rice of the same grade, each Bitcoin is deemed identical in worth on exchanges. This characteristic of fungibility aligns crypto with the defining attributes of commodities.
SEC chair Gary Gensler, has expressed his belief that the SEC possess the authority to oversee the realm of crypto, asserting that "most crypto tokens are securities.” However, during a heated debate last month, he declined to provide a clear response regarding whether Ether should be considered a security.
In a notable development, the SEC opted to exclude the definition of "digital asset" from the final version of a hedge fund rule this month. And just last week, a hearing unfolded in Washington, D.C. where lawmakers from both sides of the political spectrum converge to deliberate the future of digital asset regulation in the US, with specific focus on delineating the respective roles of the SEC and the CFTC.
“Current federal laws and regulations provide few rules of the road for those who want to engage with those emerging technologies. I think we all agree that the current uncertainty doesn't serve the market well," Representative Dusty Johnson expressed in his opening address.
One of the witnesses called to testify, former CFTC chair Timothy Massad, said, "Something can be a commodity under our laws ─ such as ETH ─ by virtue of the fact that there’s a futures contract on it. That doesn't mean it is not a security. You can have something that's both. And the question for a lot of these tokens is: is there that enterprise behind that is affecting its value?”
Subcommittee on Digital Assets' ranking member Representative Stephen Lynch pointed out, "I do understand jurisdictional questions have been raised at times over whether crypto tokens are securities or commodities and whether the primary regulator of those tokens could be the SEC or CFTC. I worry we might be asking the wrong questions, however, and we risk feeding into industry-fuelled narratives about a turf war between these two agencies.”
The ongoing deliberations surrounding this issue reflect its complexity, and it seems improbable that a uniform resolution will emerge for the entire crypto market. Instead, the determination will likely vary on a case-by-case basis, taking into account the unique characteristics of each token.
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