Regulation
CFTC Chairman Says At Least 70% of Cryptocurrencies Are Not Securities
Behnam urged Congress to grant the agency greater authority over digital assets.
The Commodity Futures Trading Commission (CFTC) intends to expand its jurisdiction over digital assets.
Testifying before the U.S. Senate on Wednesday, CFTC Chairman Rostin Behnam, supported that Bitcoin, Ethereum and other cryptocurrencies should be considered commodities, not securities.
According to Eleanor Terrett, a Fox Business reporter, Benham valued that between 70% and 80% of cryptocurrencies are made up of “non-securities” assets.
Behnam noted that earlier this month, a federal court recently ruled in favor of the CFTC to file charges against a $120 million Ponzi scheme. Significantly, the judge ruled that BTC, ETH, and two obscure altcoins, Olympus (OHM) and KlimaDAO (KLIMA), comprise digital commodity assets.
“Cryptocurrencies share a ‘fundamental characteristic’ with ‘other commodities whose derivatives are regulated by the CFTC,’” Judge Rowland said. “These factual similarities … allow the CFTC to expand its jurisdiction from commodity ‘futures’ contracts to ‘spot commodity fraud.’”
Benham also said that regulators’ priority when it comes to digital assets should be regulating centralized exchanges, rather than going after DeFi. “I definitely believe there is a regulatory nexus for DeF, but maybe we need to take a unique look at it given its unique nature,” he said. She said.
The CFTC chairman urged Congress to give the agency more authority over the cryptocurrency industry, including oversight of the spot cryptocurrency sector.
“In fiscal 2023, actions involving allegations related to digital assets made up nearly half of our enforcement portfolio,” Benham said. “Of the 47 enforcement actions involving digital asset commodities, 35 alleged misconduct in the spot market.”
Because matter
The classification of cryptocurrencies as securities or commodities has significant implications for the regulation of the digital assets sector.
Securities are investment contracts, including stocks, bonds, and derivatives. They represent an ownership position in a publicly traded company (stocks), a credit relationship with a government agency or corporation (bonds), or property rights represented by an option.
The Securities and Exchange Commission (SEC) oversees securities regulation in the United States. The Howey test, based on a landmark case from 1946, is used to determine whether a transaction qualifies as an investment contract (and therefore a security). If an investor expects to make a profit primarily from the efforts of others, the asset is considered a security.
Commodities, on the other hand, include raw materials and primary agricultural products that can be bought and sold, such as gold, wheat, or oil. The CFTC regulates the trading of commodities. Commodities are usually interchangeable with other goods of the same type, making them “fungible.”
If a cryptocurrency is considered a security, issuers and exchanges must comply with strict SEC regulations. This includes registering the asset and adhering to extensive disclosure requirements to protect investors.
However, if a cryptocurrency is classified as a commodity, it falls under the purview of the CFTC. This generally means less stringent regulations than securities. While the CFTC currently has limited authority over spot trading, it does crack down on fraud and manipulation in the broader commodity markets.
SEC vs. CFTC
Tensions have recently emerged between the CFTC and the SEC regarding cryptocurrency regulation, despite the two regulators appearing to be of the same mind.
In January 2018, the CFTC and the SEC released a joint statement on combating fraud in digital currency markets. The move came a month after the launch of regulated Bitcoin futures products under the CFTC’s regulatory purview.
In June 2018, William Hinman, head of the SEC’s Corporate Finance Division, declared that both Bitcoin and Ethereum were decentralized enough to be considered commodities.
In February 2020, CFTC Chairman Heath Tarbert stated that both Bitcoin and Ether are commodities. “We’ve been very clear on Bitcoin: Bitcoin is a commodity under the Commodity Exchange Act, Tarbert She said. “We haven’t said anything about Ether, so far. My view as Chairman of the CFTC is that Ether is a commodity.”
In February 2021, regulated ETH futures were launched on the Chicago Mercantile Exchange under the supervision of the CFTC.
Regulation by enforcement
When Gensler took over the SEC in 2021, the agency began taking a more aggressive approach to the cryptocurrency industry. While Chairman reaffirmed that Bitcoin is considered a commodity in 2022, the SEC has launched an increasingly stringent regulatory campaign through enforcement actions targeting other web3 assets after Gensler’s appointment.
In February 2023, the SECreached up a $30 million settlement with Kraken for its cryptocurrency staking program. This move underscored the SEC’s determination to enforce securities laws on staking services. In March 2023, the SEC released a Wells warning to Coinbase. In June 2023, the SEC filed a lawsuit against Binance.
In 2023, Ethereum has also become a bone of contention for two regulators: the CFTC regulates futures products as commodities, while the SEC seems increasingly determined to classify ETH as a security.
In April 2024, Consensys, a US-based blockchain software company, sued the SECin an attempt to obtain a court ruling that ETH is a commodity. The legal proceedings revealed that the SEC had initiated a secret investigation whether Ethereum is a stock in March 2023. In the same month, Gensler said that all Proof of Stake assets look like stocks.
Amid the SEC’s growing hostility toward ETH, Benham attempted to reaffirm the CFTC’s position that Ethereum is a commodity during a Senate Agriculture Committee hearing in March 2023.
In March 2024, Benham warned that the SEC’s apparent stance that Ether is a security risked placing CFTC-regulated exchanges that list Ether as futures contracts in “non-compliance with SEC rules,” despite also adhering to CFTC guidelines.
In a context of growing backlash, the SEC green light Find Ethereum Exchange Traded Funds (ETFs) in May 2024, reporting that ETH includes a commodity and not a title. The following month, Consensys said the SEC had specifications and abandoned its investigation into Ethereum.
Court rules against SEC
The SEC’s regulatory campaign against cryptocurrencies has also recently received several blows from US courts.
In July 2023, Judge Analisa Torres governed that XRP is not inherently a securities investment contract while presiding over the SEC’s case against Ripple. The judge crucially determined that cryptocurrencies are not inherently securities assets, even when distributed primarily through a securities offering, meaning that cryptocurrencies traded on secondary markets are not securities.
On June 28, Judge Amy Berman Jackson of the U.S. District Court for the District of Columbia also dismissed the SEC’s cryptocurrency secondary trading charges against Binance. The SEC dismissed the charges supporting that the secondary sales of Binance’s BNB token and BUSD stablecoin constituted the distribution of unregistered digital asset securities, despite charges relating to the primary BNB initial coin offering being allowed to proceed.
Judge Jackson cited Torres’s ruling in the Ripple case as a starting point for his decision.
“The Court notes that several district courts before which SEC enforcement actions involving cryptocurrencies have been brought have taken pains to differentiate the purported investment contracts from the tokens themselves,” Judge Jackson said. “In the Court’s view, therefore, the SEC’s suggestion that the token is ‘the embodiment of the investment contract’ rather than the subject matter of the investment contract has confused the issues before the Court.”
On July 3, a federal court ruling designating OHM and KLIMA as commodities appears to have paved the way for the CFTC to expand its jurisdiction over the cryptocurrency industry.