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In a Congressional hearing on 9 Wednesday, Rostin Behnam, chair of the U.S. Commodities Futures Trading Commission (CFTC), asked Congress to grant his agency the authority to regulate cash markets in cryptocurrencies.
The CFTC already regulates derivatives markets.
“My responsibility is to assume that [crypto] will continue to take root and emerge and wind itself into traditional finance,” Behnam said in testimony quoted by The Wall Street Journal.
Without proactive regulation, “we run the risk of stability…safety…and soundness issues,” he added.
Behnam urged Congress to enact a law that would give the CFTC oversight of aspects of cryptocurrencies that now fall outside the purview of the U.S. Securities and Exchange Commission (SEC) and thus go unregulated.
Markets in commodities such as oil or sugar are dominated by large corporations, he pointed out.
In contrast, while crypto markets have attracted some hedge funds and other professional investors, they are dominated by individuals, many of whom borrow heavily to play on platforms that lack adequate security and have been hacked, as illustrated by the 2016 multi-billion-dollar theft from the Bitfinex crypto exchange.
SEC chair Gary Gensler has asked Congress to enable the SEC to extend its remit to regulate some digital currency markets that, he contends, fall within the regulatory definition of securities.
The SEC and CFTC have both toughened their oversight of digital assets but have not yet persuaded Congress to act, which has left Bitcoin and Ether—which together make up about 60 percent of the cryptocurrency market—unregulated.
Two issues are in play.
First, many contend that Bitcoin and Ether are, in legal terms, commodities and not securities, meaning the SEC should not oversee them.
Second, the CFTC has the power to regulate swaps, futures, and other derivatives, which gives it powers only in part of the crypto realm. The agency lacks the authority to govern cash deals or spot markets.
“The CFTC is well-situated to play an increasingly central role in overseeing the cash digital-asset commodity market,” Behnam said.
TRENDPOST: The SEC and CFTC are engaging in a turf battle.
SEC chair Gary Gensler has been lobbying Congress for months to legislate his agency’s authority to rein in digital currencies, as we have reported in our “Market Overview” of 3 Aug 2021, “SEC Chief Sets Regulatory Sights on Cryptocurrencies” (10 Aug 2021, and “SEC Push to Regulate Crypto” (7 Dec 2021).
Gensler has likened the crypto universe to “the Wild West” (“Gensler: Crypto Not Viable Long Term,” 28 Sep 2021).
Meanwhile, one of Gensler’s colleagues on the SEC has urged Congress to regulate digital currencies lightly if at all, arguing that regulation smothers innovation (“Regulator Calls for Few Rules on Cryptocurrencies” 15 Jun 2021).
TREND FORECAST: The SEC already has staked its claim to overseeing digital coins by permitting Bitcoin ETFs to trade in the U.S.
This not only advances the SEC’s case to ride herd on crypto but also helps a wider group of investors feel comfortable enough to think about playing crypto markets.
Crypto and digital assets will be regulated. The extent of government oversight will be closer to what Gensler and Behnam are suggesting, but probably less than either would like.
As we noted in “Bitcoin ETFs in Prep as SEC Highlights Path to Approval” (24 August, 2021), regulation of crypto is inevitable.
Regulations will take shape in parallel with central banks’ creation of stablecoins, the prices of which are linked to national currencies or other widely accepted forms of value.
As nations roll out those stablecoins, The Street will be more ready to accept them, drawing interest away from freewheeling digital coins whose values often bounce on market whims.