Crypto interests have been pressing for months to empower the relatively small agency tasked with regulating financial derivatives to oversee digital assets. They view it as a friendlier option than the Securities and Exchange Commission, where Chair Gary Gensler has described the crypto industry as rife with scams and pursued aggressive enforcement cases.
Gensler recently said crypto platforms operate similarly to traditional stock exchanges, so “investors should be protected in the same way” under the SEC’s supervision. CFTC Chairman Rostin Behnam, meanwhile, has said his agency is ready to expand its oversight into much of the roughly $2 trillion digital asset market. The agency already regulates futures contracts for bitcoin and ethereum, two cryptocurrencies that together make up more than half the value of the market.
At the heart of the matter is how federal regulators classify digital assets. Gensler, and a number of Democratic lawmakers skeptical of the technology, maintain that most crypto coins are effectively securities, so their issuers need to register with the SEC and offer regular public disclosures to inform investors.
A number of crypto industry leaders, and the sponsors of the new bill, argue most coins instead are commodities. “Where you have cases where these cryptocurrencies look more like gold or dollars or currencies than securities, then they should be treated the same way,” Khanna said. “And that’s all this bill is saying: When you have highly diffuse control over an asset, then it should be regulated by the CFTC.”
Yet others are pitching a third approach, advocating the creation of an altogether new regulator for the industry. Rep. Patrick T. McHenry (RN.C.), who is in line to chair the House Financial Services Committee if Republicans capture control of the chamber in the midterm elections, said a digital asset is “neither fish nor fowl.” “It is neither a commodity nor a security,” McHenry said in a Punchbowl News interview this week. “I think you have to have a different regulatory sphere for digital assets that’s neither the SEC nor the CFTC.” Coinbase, the largest US-based crypto exchange, advanced its own proposal for the creation of a new crypto regulator last year.
The debate underscores the degree to which policymakers are starting from scratch in trying to determine how to fit the emerging technology into a financial regulatory structure dating back nearly a century. The Biden administration last month ordered a sweeping review of the government’s approach to crypto, mandating reports on everything from its implications for financial stability to its national security risks. The new bill, called the Digital Commodity Exchange Act, is the latest among a flurry of congressional proposals floating approaches to federal oversight, with still more in the works.
As the industry faces intensifying scrutiny in Washington, it is racing to build a lobbying and political machine capable of influencing the outcome, quadrupling its lobbying spending from $2.2 million in 2018 to $9 million in 2021, according to a report by Public Citizen.
The sector has trained much of new muscle on the debate over its federal oversight. On Thursday, crypto industry groups applauded the latest bill. “There is a growing consensus in Washington that federal oversight of digital asset spot markets is needed, and we believe that the [bill] sets forward an intelligent framework to ensure these markets are safe and secure,” the Blockchain Association said in a statement.
Former Senator Cory Gardner (R-Colo.), now chief strategist of political affairs at the Crypto Council for Innovation, said legislation that “promotes sound crypto policy and creates a new atmosphere of opportunity without stifling innovation is a step forward.”
But Todd Phillips, director of financial regulation and corporate governance at the liberal think tank Center for American Progress, said that while he had not yet read the bill, he is skeptical that shifting oversight wouldn’t result in less stringent enforcement.
“I will say, legislation to give authority over most of the crypto market to the CFTC would likely be deregulatory and would make the applicable law weaker than it currently is,” he said. “Even if existing law isn’t being enforced.”