CFTC reminds SEC “We regulate derivatives not digital assets”

The Commodities Future Trading Commission (CFTC) has clarified its role on cryptocurrency regulation following a recent public spat with the Securities and Exchange Commission (SEC).

CFTC Commissioner Dawn DeBerry Stump sought to provide clarification on the nature of the regulatory agency’s work and how this will relate to the regulation of digital assets in the United States.

“There has often been a grossly inaccurate oversimplification offered which suggests [crypto assets] are either securities regulated by the Securities and Exchange Commission, or commodities regulated by the Commodity Futures Trading Commission,” she said.

“The prevalence of this misunderstanding about US regulatory delineations has grown to a point that I believe requires correction.

“Even if a digital asset is a commodity, it is not regulated by the CFTC. However: The CFTC does regulate derivatives on digital assets, just like it regulates other derivatives.

“That includes the regulation of trading, clearing, etc, of futures contracts and swaps on digital assets (such as the futures contracts on Bitcoin and Ether listed for trading on various CFTC-regulated exchanges).”

The comments were designed to make the position of the CFTC absolutely clear – it regulates corn traders not corn farmers.

In tandem with the comments DeBerry pointed to a new infographic that has been created to clarify the CFTC’s work.

Wide definition of a commodity

The clarification highlights the purposefully wide definition of a commodity. However, the regulator’s work is focused on the regulation of the derivatives trading relating to these commodities – not the underlying assets themselves.

Derivatives traders don’t necessarily trade spot digital assets, they trade contracts on the digital assets.

The contracts vary in nature with famous types being options (rights to buy at a certain price that can be held) as well as futures (which enable traders to speculate on price action). Contracts can also be known as perpetual, which simply means they can run in perpetuity without a defined exit date.

With reference to the CFTC clarification, this means that while Bitcoin (BTC) is an underlying asset, the job of the regulator isn’t to regulate the Bitcoin industry. Rather, it is to regulate the derivatives contracts being traded in relation to Bitcoin.

This goes a long-way in clearing up the jurisdictional spat that broke out between the CFTC and the SEC over who was responsible for regulating the cryptocurrency industry and market.

The regulators came to blows following increased commentary from SEC head Gary Gensler relating to the question of whether cryptocurrencies and digital assets more broadly could be defined as securities products, and thus under the remit of the SEC.

Gensler’s comments come at a poignant time in the SEC vs Ripple case, with it seeming likely that the court could rule this week that XRP isn’t a securities product.

Brian Quintenz, an outgoing Republican CFTC Commissioner spoke up in the jurisdictional spat, citing the Biden Administration’s slow progress in appointing his replacement as a delaying move that has allowed the SEC to seize ground on crypto regulation.

Commissioner Quintenz – a Trump-appointee – posted the firebrand tweets as he comes to the end of his tenure on the five seat CFTC panel. His departure will leave two vacant seats at the CFTC following the end of term for former CFTC Chairman Heath Tarbert early this year.

This presents a huge opportunity for the Biden Administration not only to appoint two agreeable replacements, but also because the Democrats will represent a majority on the soon to be three-member panel, thereby giving them control over commodities trading regulation.

With battle lines drawn – the SEC responsible for crypto assets if classified as a security product, and the CFTC responsible for risky derivatives trading – all eyes turn to the SEC vs Ripple case fact discovery deadline on August 31 to reveal the future of American crypto regulation.

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