Regulation
Why the SEC Should Regulate the Cryptocurrency Industry
In this photo illustration, the Commodity Futures Trading Commission (CFTC) logo is visible on a smartphone screen, with the United States flag in the background.
As America limps toward the 2024 elections, the cryptocurrency industry seems set to equip itself with a new set of rules. With a complete pro-crypto overhaul of financial rules seemingly deadlocked in the Senatethe sector is trying to push through a more restrictive, yet equally weak, regulatory framework.
Since June, the industry has collectively donated over 160 million dollars to Super PACs. They have already successfully urged Congress to repeal Securities and Exchange Commission guidelines on how banks and other firms should account for cryptocurrencies on their financial statements, though they failed to get enough members to to go beyond President Biden Vetoes Repeal. Now, they’re pushing for custom legislation that would shift cryptocurrency regulation away from the SEC and toward the regulator strongly favored by industry leaders: the Commodity Futures Trading Commission (CFTC).
The CFTC’s total staff and budget amount to approximately a sixth of the SEC, which would make it more difficult for the agency to conduct examinations and oversee the volatile but growing cryptocurrency industry. But much more significant, and arguably attractive to the industry, is that the CFTC lacks most of the rules that the SEC has put in place to protect retail investors and ensure a fair market.
The push for CFTC regulation comes primarily from Cryptocurrency brokers, exchanges and asset managers — cryptocurrency trading intermediaries. It is not impossible for these intermediaries to comply with SEC rules. They just aren’t.
Compliance could hinder their ability to attract retail customersmany of whom are recklessly investing their savings in these highly volatile assets without essential information for sound investing. In other words, complying with SEC rules that ensure a fair market could cause a contraction in the cryptocurrency industry’s customer base and profit margins.
While cryptocurrency advocates say the CFTC Authorizing statute It is similar in many ways to the SEC’s, but this argument ignores the strict rules established over decades by the SEC and the Financial Industry Regulatory Authority (FINRA), an independent, industry-funded organization that sets the rules for securities brokers and dealers.
Three key issues illustrate why these rules are so important.
First, the fundamental problem with CFTC regulation is that, by design, the agency does not focus on retail investors. It was founded in 1974 to regulate complex financial contracts called derivatives, whose value is based on an underlying asset and which are often used to hedge against risks in agriculture, oil and gas, manufacturing and other industries. Retail investors and consumers generally do not participate in derivatives markets.
For this reason, the CFTC has never developed a comprehensive set of requirements to protect retail investors. Instead, securities sellers are required by both law and SEC rules to make detailed disclosures about their operations, activities, governance, risks, and financials. And those disclosures must be updated regularly, as they change over time.
While most cryptocurrencies are marketed and sold as projects and companies looking to raise money to do things (similar to companies selling stocks), cryptocurrency companies and brokers typically they did not disclosures that are close to those required by the SEC. CFTC regulation could ensure that they never have to make such disclosures.
Second, the SEC and FINRA have adopted and enforced extensive rules on how securities can be marketed and sold to customers by brokers. Regulating brokers in this way has profound effects on marketing and customer access. There is nothing like these rules at the CFTC, which is probably just how the cryptocurrency industry likes it.
Finally, although derivatives contracts are complex instruments, the markets in which they are traded are relatively simple. For example, when a futures contract, a type of derivative contract to buy or sell assets at a fixed price to be delivered in the future, is listed and traded on the Chicago Mercantile Exchange, it is typically only tradable there. In securities markets, by contrast, there are more than one dozen exchanges and hundreds of other regulated trading venues for trading the same share of shares. Stock markets are a complex networkso the risks are different.
In fact, the difference between these two markets is where much of the cryptocurrency money comes from. The cryptocurrency industry, including brokers and exchanges, knows how to exploit price differences in different venues. They also know that the SEC’s complex rules severely limit the fees they can charge and limit their profits.
Thus, while the language of the law governing the CFTC may appear similar to that of the basic securities laws, the rules created by the CFTC and its self-regulator are almost entirely devoid of the framework of protections developed over 80 years of operations for securities trading.
Attempting to recreate something like the SEC’s regulatory regime under the CFTC would not only be outside its purview (and well outside its budget), it would also be inefficient and unnecessary. Nor is it likely to result in robust industry oversight or fair markets for investors, especially retail investors like average Americans who invest in cryptocurrencies.
The CFTC’s shortcomings as a cryptocurrency regulator, its blocking of the industry’s ideal bill, and the industry’s recent lobbying make the current rush to pass crypto-friendly regulations look like a desperate campaign ploy.
Alex Thornton is senior director of financial regulatory policy at the Center for American Progress.