Welcome to the Tacen Regulatory Corner! This post is the first part of a regular series highlighting the latest regulatory developments in blockchain and digital asset laws in the United States. The current regulatory atmosphere surrounding these important areas is uncertain and changing quickly.
As a "Legal First" software development company focusing on the digital asset space, staying up-to-date on the latest legal developments is a core part of our mission and we are excited to share our thoughts with the community.
The Turf War To Determine Who Will Regulate The Digital Asset Spot Market Is Over With The SEC Claiming A Clear Victory Over the CFTC
During the past week, the U.S. Securities and Exchange Commission (“SEC”) has won key victories in establishing itself as the presumptive regulator of digital asset spot markets in the United States over the U.S. Commodities and Futures Trading Commission (“CFTC”). While SEC Chairman Gary Gensler has yet to secure the congressional mandate that he seeks, the CFTC, after hinting at a willingness to battle for supremacy, now seems willing and poised to take a secondary role to the SEC in the regulation of digital asset spot markets. The resolution of this turf war makes it clear that “Legal First” blockchain companies are best positioned to weather the coming regulatory storm.
Key Statements By The SEC And CFTC
In his congressional testimony on May 26, 2021, SEC Chairman Gary Gensler called for greater authorization to close perceived “gaps for investor protections” in digital asset spot markets. Spot markets are those “where financial instruments, such as commodities, currencies, and securities, are traded for immediate delivery” in contrast to markets for futures. Chairman Gensler has argued that these markets are rife with "fraud, scams and abuse" because no agency is fully regulating them.
In response to Chairman Gensler’s congressional testimony, which was seen by market participants as a power grab, CFTC Commissioner Brian Quintenz took to Twitter on August 4, 2021, to defend the CFTC's jurisdiction stating, “Just so we’re clear here, the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil….or #crypto assets.”
However, this turf war between the SEC and CFTC was short lived. Not long after making his statement on Twitter, Commissioner Quintenz announced that he would be stepping down on August 31, 2021.
Shortly thereafter, and consistent with her prior statements that the CFTC does not regulate digital asset spot markets like Coinbase and that the CFTC should “[f]ocus the expenditure of its limited human and financial resources on the derivatives markets,” CFTC Commissioner Dawn Stump put out a statement accompanied by a primer reiterating the CFTC’s limited role in actively monitoring and protecting investors in digital asset spot markets.
In the statement, Stump argued that “[t]here has often been a grossly inaccurate oversimplification offered which suggests [digital assets] are either securities regulated by the Securities and Exchange Commission, or commodities regulated by the Commodity Futures Trading Commission.” Commissioner Stump’s goal was to make clear to digital asset spot traders that the CFTC is not actively policing the space and that they are not as protected as some may think. This is mainly because the CFTC does not have authority to regulate commodities spot markets for anything other than fraud or manipulation, but also, as Commissioner Stump stated, the CFTC does not have the resources to actively monitor and police digital asset spot markets.
Commissioner Quintenz’s departure and Commissioner Stump’s timely clarification of the CFTC’s limited oversight of digital asset spot markets clear the way for the SEC to expand its reach into this critically important area. In the face of this coming regulatory storm, blockchain and cryptocurrency companies that are not “Legal First” will find that “begging for forgiveness” will not save them.