TerraUSD, an algorithmic stablecoin, succumbed to a ‘death spiral’ when it de-pegged from its $1 (‘USD’) value.This death spiral sparked a market-wide virtual currency sell-off, wiping out $60 billion from crypto markets.1See Alex Ritchie, Stablecoin TerraUSD Death Spiral: Luna Foundation Guard Sells Assets to Repay Users, RATE CITY (May 19, 2022), https://www.ratecity.com.au/cryptocurrency/news/stablecoin-terrausd-death-spiral-luna-sells- assets-repay-users; see also, Matt Levine, Money Stuff: Terra Flops, BLOOMBERG (May 11, 2022, 1:44 PM), https://www.bloomberg.com/opinion/articles/2022-05-11/terra-flops; see also, Matt Levine, Money Stuff: Titanium Got Crushed, BLOOMBERG (Jun. 17, 2022, 12:59 PM), https://www.bloomberg.com/opinion/articles/2021-06-17/titanium-got-crushed. The algorithmic stablecoins (‘altcoins’) demise highlights the need for a regulatory overseer of virtual currency spot markets.2See Ekin Genc, Algorithmic Stablecoins: What they are and How They Can Go Terrible Wrong, COINDESK (May 16, 2022, 9:26 AM) (discussing how stablecoins are cryptocurrencies that are supposed to be pegged to fiat currencies like the US dollar. In the cases of USD-pegged stablecoins, their prices are supposed to be $1 at all times. Each stablecoin project differs in ways they maintain the peg. The two biggest ones, tether (USDT) and Circle’s USD coin (USDC), are “over-collateralized” by fiat reserves, meaning they have cash or cash-equivalent assets in their reserves. So each USDT or USDC traded in the crypto market is backed by what’s actually in the possession of the stablecoin issuers.), https://www.coindesk.com/learn/algorithmic-stablecoins-what-they-are-and-how-they-can- go-terribly-wrong/. The two most likely regulators, the CFTC and SEC, take distinctly different approaches to the regulation of capital and commodities markets, with the CFTC principles based approach leaning more towards activity based regulation.
The digital asset market would benefit from the CFTCs focused regulation centered around ensuring market integrity, customer protection, and market stability. 3See CFTC, The CFTC Role in Monitoring Virtual Currencies, H.R. DOC. NO 116-107 (2020). By looking at the text of the Commodity Exchange Act (CEA), precedents from federal case law involving virtual currencies, the history of the CFTC enforcement actions of virtual currency’s markets and market participants, and the inherent pragmatic strengths of a principles based regulatory framework, it becomes evident that numerous strong arguments exist supporting the CFTC’s Chairman’s statements that any future Digital Asset Commodity Exchange Act should grant the CFTC jurisdiction to regulate the virtual currency spot market. 4See Paul Kiernan, CFTC Chair Asks Congress for Authority to Regulate Some Cryptocurrencies, THE WALL STREET JOURNAL (Feb. 9, 2022, 4:31 PM ET).
Following this introduction, part II will explore the textual arguments for and against digital currencies being defined as commodities, and part III will review the federal court precedent supporting the same. Part IV will argue why historically, the CFTC’s enforcement of the digital asset marketplace justifies the Congressional appointment of its authority over the virtual currency spot market. Part V will explore multiple pragmatist arguments articulating why the CFTCs principle-based market regulatory approach is better suited to satisfy the needs of the virtual currency spot market and market participants, especially when compared to the disclosure base regulatory approach of the SEC. Finally, part VI will conclude.
II. Textual Justification
Virtual Currencies satisfy the textual definition of a commodity as outlined in the CEA.57 U.S.C. § 1a(9). The CEA defines “commodity” broadly to include all “goods and articles, . . . and all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in.”67 U.S.C. § 1a(9). Importantly, the statutory definition of commodity is not limited to tangible (i.e., physical) commodities, an extremely relevant factor in defining cryptocurrencies. Virtual currencies are nontangible goods with monetary utility, similar to hard commodities such as zinc, coal, or gold.7See Paul Kiernan, CFTC Chair Asks Congress for Authority to Regulate Some Cryptocurrencies, THE WALL STREET JOURNAL (Feb. 9, 2022, 4:31 PM ET). Furthermore, virtual currency futures are contracts between two investors that bet on a cryptocurrency’s future price.8See Prableen Bajpai, Cryptocurrency Futures, INVESTOPEDIA (May 9, 2022),https://www.investopedia.com/articles/investing/012215/how-invest-bitcoin-exchange-futures.asp. These crypto futures resemble standard futures contracts for commodities because they allow investors to bet on the price trajectory of an underlying asset. Therefore, per Section 1(a)(9) of the CEA, virtual currencies, such as Bitcoin, are properly defined as commodities.9See 7 U.S.C. § 1a(9); see also In re Coinflip, Inc., CFTC Docket No. 15–29, 2015 WL 5535736 (Sept. 17, 2015);see also In re TeraExchange LLC., CFTC Docket No. 15–33, 2015 WL 5658082, (Sept. 24, 2015).
The CFTC has exclusive jurisdiction to regulate commodities, and that jurisdiction should be extended to the regulation of virtual currencies.107 U.S.C. § 2(a)(1). Section 2(a)(1) of the CEA provides with respect to accounts, agreements (including an “option,” “privilege,” “indemnity,” “bid,” “offer,” “put,” “call,” “advance guaranty,” or “decline guaranty”), and transactions involving contracts of sale of a commodity for future delivery, traded or executed on a contract market, the CFTC retains exclusive jurisdiction. Therefore, if virtual currencies satisfy the definition of commodities, and the CFTC has exclusive jurisdiction to regulate commodities, then any future Digital Commodity Exchange Act should grant the CFTC exclusive jurisdiction to regulate the virtual currency spot market.117 U.S.C. § 7
Unsurprisingly, the SEC disagrees with the conclusion that all virtual currencies are inherently commodities and insists that many virtual currency tokens are unregistered securities. 12See William Hinman, SEC Commissioner, Digital Asset Transactions: When Howey Met Gary (Plastic), (June 14, 2018), available at https://www.sec.gov/news/speech/speech-hinman-061418. Section 2(a)(1) of the CEA provides an exception to the CFTCs exclusive jurisdiction of commodities markets stating that “nothing contained in this section shall supersede or limit the jurisdiction”conferred on the SEC.137 U.S.C. §2(a)(1). The SEC points to this provision to further support its right to regulate virtual currencies when they meet the definition of an investment contract.14See generally, Framework for Investment Contract Analysis of Digital Assets, SEC (Apr. 3, 2019), https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.
Historically, Congress charged the SEC with regulating the nation’s capital markets and securities industry, providing jurisdiction over the offering securities, including stocks, bonds, investment contracts, notes, and derivatives based on securities. 1515 U.S.C. § 77b(a)(1); 15 U.S.C. § 77e; 15 U.S.C. § 78o; 15 U.S.C. § 78f; 15 U.S.C. § 80a–8. under the Supreme Court’s “investment contract” test first announced in SEC v. Howey, an investment of money in a common enterprise with an expectation of profit derived from the efforts of others constitutes an investment in a security. 16SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (depending on the features of any given instrument and the surrounding facts, it may also need to be evaluated as a possible security under the general definition of security and the case law interpreting it). The SEC points specifically to virtual currency tokens offered in Initial Coin Offerings (‘ICO’), arguing they satisfy the Howey test. According to the SEC, ICOs are a bet on the success of the enterprise, which is due to promoters touting their ability to create an innovative application of blockchain technology. This implies that ICOs are inherently not a purchase of a store of value, because the investors are passive, and the purchaser usually has no choice but to rely on the efforts of the promoter to build the network and make the enterprise a success.17See William Hinman, SEC Commissioner, Digital Asset Transactions: When Howey Met Gary (Plastic), (June 14, 2018), available at https://www.sec.gov/news/speech/speech-hinman-061418. While ICOs may not achieve decentralized function from the start—meaning purchasers no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts (e.g., Bitcoin)—if the coin is successful, there will come a time when these tokens no longer represents an investment contract and thus should no longer be classified as a security.18See id.
Therefore, according to the SEC, the distinction between virtual commodity and virtual security comes down to decentralization. Choosing to place virtual currencies beneath the CFTC statutory jurisdiction while acknowledging the Section 2(a)(1) exception for the SEC to regulate investment contracts should enable the proper regulatory approach. Additionally, providing a mechanism by which ICOs can register as virtual securities and then apply for deregistration once they achieve sufficient decentralization should satisfy the SEC’s concerns while enabling the CFTC to oversee the vase remainder of the virtual currency market.
III. Federal Case Precedent
That Federal precedent defines virtual currencies as commodities provides additional support for the CFTC being the proper agency to regulate the digital currency spot market.19See CFTC v. McDonnell, 287 F. Supp. 3d 213, 218 (E.D.N.Y., Jul. 12, 2018). At present multiple federal courts have declared virtual currencies as meeting the CEA definition of a commodity.20See id; see also CFTC v. My Big Coin Pay Inc., No. 18-1007-RWZ (D. Mass. R. 1.1 Sept. 26, 2018). In CFTC vs. McDonnell, the court specifically addressed the question of “whether virtual currency may be regulated by the CFTC as a commodity. ” The court “answered in the Affirmative,” stating that “[a] commodity encompasses virtual currency both in economic function and in the language of the statute” under Title 7 U.S.C. § 1(a)(9).21See CFTC v. McDonnell, 287 F. Supp. 3d 213, 218 (E.D.N.Y., Jul. 12, 2018). Similarly, in CFTC vs. My Big Coin Pay Inc., the Court concluded that “My Big Coin is a ‘commodity’ under the CEA.”22 See CFTC v. My Big Coin Pay Inc., No. 18-1007-RWZ (D. Mass. R. 1.1 Sept. 26, 2018). These precedents give moral force, stability, and additional certainty to crypto markets as they have become guidelines for subsequent decisions involving similar disputes.
However, even in the face of this strong precedent, there are many who contend that virtual currencies are unregistered securities.23See Paul Kiernan, Crypto Security Debate Goes to Court: Private lawsuits could help determine whether digital tokens should be treated like stocks and bonds, THE WALL STREET JOURNAL, (May 26, 2022, 11:43 AM). One example supporting this position is the SEC order against blockchain technology company Block.one for conducting an unregistered initial coin offering of digital tokens that raised the equivalent of several billion dollars over approximately one year.24See Press Release, SEC orders Blockchain Company to Pay $24 Million Penalty for Unregistered ICO (Sept. 30, 2019). The company agreed to settle the charges by paying a $24 million civil penalty, effectively acknowledging Block.one did not register its ICO as a security offering pursuant to the federal securities laws, nor did it qualify for or seek an exemption from the registration requirements. 25See id.
A second example consists of a group of Coinbase users presently demanding reimbursement for trading fees and market losses and seeking to prevent the assets from continuing to trade on the platform.26See Paul Kiernan, Crypto Security Debate Goes to Court: Private lawsuits could help determine whether digital tokens should be treated like stocks and bonds, THE WALL STREET JOURNAL, (May 26, 2022, 11:43 AM ET). Among the assets targeted in the lawsuit are four of the ten largest cryptocurrencies by market value: XRP, Cardano, SOlana, and Dogecoin.27See id. Per the Securities Act of 1933, ordinary investors are empowered with the right to sue the seller of the securities for their money back. The sharp downturn in crypto values since January 2022 (e.g., the evaporation of $15 trillion from cryptocurrency markets) has led to an increase in investor class-action lawsuits.28Id.
While currently undecided, the outcome of this case could have a significant impact on virtual assets. If the court adheres to cross-jurisdictional precedents as a lode star, the court will likely hold that digital tokens are, for legal purposes, more similar to gold than investment contracts. Such a decision will provide yet another fence post in the regulatory permitter of virtual currencies, further solidifying the CFTCs as the primary regulator for digital currencies. The more precedent established that relies on virtual currencies meeting the definition of a commodity, the more judicial restraint and a limit on other judges’ ability to determine an outcome of future cases in a way that they might not choose were there not such a well-established precedent.
IV. Historical Justification
In addition to Federal court precedent, the CFTC has a long history of treating virtual currencies as commodities under the CEA.29See In re BFXNA Inc., CFTC Docket No. 16-19, at 5-6 (June 2, 2016); see also In re Coinflip, Inc., CFTC Docket No. 15-29, at 3 (Sept. 17, 2015). In 2015, the CFTC found in In re Coinflip, Inc. that “the definition of a commodity is broad…and Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.”30See In re Coinflip, Inc., CFTC Docket No. 15-29 (June 2, 2016). In 2016, the CFTC took action against a bitcoin exchange—Bitfinex—for offering futures without registering with the agency in violation of Sections 4(a) and 4d of the Act, 7 U.S.C. §§ 6(a) and 6d.31See In re BFXNA Inc., CFTC Docket No. 16-19, at 5-6 (June 2, 2016). In In re BFXNA Inc., the CFTC found that “virtual currencies are encompassing in the CEA definition and properly defined as commodities.”32See In re Coinflip, Inc., CFTC Docket No. 15-29, at 3 (Sept. 17, 2015). In 2017, the CFTC proposed guidance regarding its jurisdiction over certain retail transactions involving virtual currency. It finalized this guidance in 2020.33See Retail Commodity Transactions Involving Certain Digital Assets, 85 FR 37734 (June 24, 2020). In 2018, federal courts affirmed the CFTC’s jurisdiction over digital assets per the two cases previously mentioned, CFTC v. McDonnell and CFTC v. My Big Coin Pay, Inc.34See CFTC v. McDonnell, 287 F. Supp. 3d 213 (E.D.N.Y. 2018); see also CFTC v. My Big Coin Pay, Inc., 334 F. Supp. 3d 492 (D. Mass. 2018). In 2019, CFTC Chairman Heath Tarbert expressed his view that the Ether token is a commodity, as defined by the CEA. In 2020, the CFTC released its strategic plan for 2020-2024, and among the stated goals was the Commission’s commitment to “addressing both the risk and opportunities arising from 21st-century commodities” as well as developing “a holistic framework to promote responsible innovation in digital assets.”35See CFTC, The CFTC Role in Monitoring Virtual Currencies, H.R. DOC. NO 116-107 (2020). In February 2022, the Chairman of the CFTC, Rostin Behnam, testified before Congress stating that “The CFTC is well situated to play an increasingly central role in overseeing the cash digital-asset commodity market.”36See Paul Kiernan, Crypto Security Debate Goes to Court: Private lawsuits could help determine whether digital tokens should be treated like stocks and bonds, THE WALL STREET JOURNAL, (May 26, 2022, 11:43 AM ET).
What this detailed history demonstrates is, first, the CFTC’s extensive experience in the virtual currency regulatory space, and second the established expectations of the participants—traders, exchanges, and developers—in operating beneath the CFTCs regulatory preview. Both add further support to justify virtual currency spot market regulation placement beneath the CFTCs jurisdiction. Nevertheless, it must be acknowledged that the SEC also has a detailed history of enforcement actions against virtual currencies. For example, since 2017, the SEC Division of Enforcements Crypto Assets and Cyber Unit has brought more than 80 enforcement actions related to fraudulent and unregistered crypto-asset offerings and platforms, resulting in monetary relief totaling more than $2 billion.37See Press Release, SEC Nearly Doubles Size of Enforcement’s Crypto Assets and Cyber Unit, SEC (May 3, 2022). While both agencies possess experience regulating digital currencies, the long-established supervision of digital asset futures and options trading markets, in comparison to the SEC’s history of investing securities laws violations as they apply to crypto- asset offerings, exchanges, and decentralized finance platforms, is the critical historical factor which supports the CFTCs, and not the SECs, claim to regulate the virtual currency spot markets going forward.
V. Pragmatic Justification
There are several pragmatic arguments for why the CFTC should be given exclusive jurisdiction over virtual currency spot markets. The first is that this is what crypto companies desire.38See Robert Schmidt & Allyson Versprille, Crypto Platforms Ask for Rule But Have a Favorite Watchdog, BLOOMBERG (Mar. 31, 2022, 5:00 AM), https://www.bloomberg.com/news/articles/2022-03-31/crypto-exchanges- want-say-in-rules-under-biden-administration. Digital Asset companies express concern that the SEC’s rules for traditional securities like stocks and bonds would be impossible for most cryptocurrencies and trading platforms to comply with, as they impose significant disclosure requirements and liability upon issuers. For this reason, cryptocurrency lobbyists have recently shifted their focus to convincing lawmakers and regulators that the CFTC should have primary jurisdiction over their industry.39See Robert Schmidt & Allyson Versprille, Crypto Platforms Ask for Rule But Have a Favorite Watchdog, BLOOMBERG (Mar. 31, 2022, 5:00 AM), https://www.bloomberg.com/news/articles/2022-03-31/crypto-exchanges- want-say-in-rules-under-biden-administration; see also Paul Kiernan, Crypto Security Debate Goes to Court: Private lawsuits could help determine whether digital tokens should be treated like stocks and bonds, THE WALL STREET JOURNAL, (May 26, 2022, 11:43 AM). While this might be viewed as mere behavior akin to pick your regulator arbitrage, some preference and faith should be given to the cryptocurrency developers’ understanding of both their product and which agency would best fit their platform’s capacity to grow and innovate in the future.
Again, looking back to TerraUSD, an algorithmic stablecoin in which a crypto token is used to maintain the value of another crypto token at exactly $1.40See Matt Levine, Another Algorithmic Stablecoin Isn’t, BLOOMBERG MONEY STUFF (May 5, 2022, 1:47 PM). Asking Terra’s founders to provide 10-Ks and 10-Qs comprised of balance sheets, income statements, and disclosures about looming business fundamentals does not make sense. This is because the basic structure of the virtual currency is more concerned with keeping the peg to the dollar than with producing a service or product.41 See id. The goal of altcoins is to achieve the decentralized permanence of a Bitcoin by diversifying its foreign reserves instead of relying on its own made-up counter-peg virtual currency.42Andrew Ross Sorkin & etc al., A Stablecoin ‘Death Spiral’, The New York Times (May 12, 2022). This requires acceptance andtrust in the pegged supportive asset, Luna.43See Matt Levine, Another Algorithmic Stablecoin Isn’t, BLOOMBERG MONEY STUFF (May 5, 2022, 1:47 PM). Keeping that trust requires an assurance that market participants do not engage in manipulative trades to move the Luna virtual currency price intentionally.44Matthew Makowski, What Happened to Terra Luna and Can It Be Salvaged, SEEKING ALPHA (May 12, 2022, 11:25 AM), https://seekingalpha.com/article/4510634-can-terra-luna-be-salvaged.
Per 7 U.S.C. §9(1) of the CEA, it is unlaw for any person to directly use or employ “any manipulative or deceptive device or contrivance.”457 U.S.C. §9(1). While its regulatory oversight authority over commodity cash markets remains limited, the CFTC maintains general anti-fraud and manipulation enforcement authority over virtual currency cash markets as a commodity in interstate commerce.46See Abe Cherin, Nicole M. Moran, & Simona Mola, The CFTC’s Approach to Virtual Currencies, THE NAT’L L. REV. VOL. XXI (Jun. 7, 2022); see also CFTC, The CFTC Role in Monitoring Virtual Currencies, H.R. DOC. NO 116-107 (2020). Just as it promotes transparency by conducting research on economic issues related to the futures and options markets and sharing data about market activity in traditional commodities markets, applying such oversight to virtual currencies markets logically fits market regulator and oversight needs of altcoins like TerraUSD.47See CFTC, The CFTC Role in Monitoring Virtual Currencies, H.R. DOC. NO 116-107 (2020). For this reason, from a purely pragmatic perspective, the CFTC fits the needs of virtual currency market participants more than the SEC.
Next, continuing on the theme of actively protecting market participants against fraud, price manipulations, and abusive trading practices. It is suggested that the demise of the TerraUSD altcoin resulted from intentional market manipulation by large hedge funds seeking to depress the price of bitcoin in order to allow them to buy more at a lower cost.48See Matthew Makowski, What Happened to Terra Luna and Can It Be Salvaged, SEEKING ALPHA (May 12, 2022, 11:25 AM), https://seekingalpha.com/article/4510634-can-terra-luna-be-salvaged. Asking questions such as who did this, when this occurred, and how the market economics for manipulation transpired are much more the realm of the CFTC than the SEC. The CFTC encourages market efficiency through principles-based regulation, which involves working with exchanges, self-regulatory organizations, and other governmental and international organizations to enforce against instances of manipulative or disruptive market activity.49See CFTC, The CFTC Role in Monitoring Virtual Currencies, H.R. DOC. NO 116-107 (2020). In contrast, the SEC is much more concerned with whether or not all the information relating to a corporation’s shareholders is accurate and complete.50Matt Robinson, SEC Investigating UST Stablecoin Blowup in Fresh Threat to Terra, BLOOMBERG (June 9, 2022, 12:18 PM) (discussing the US Securities and Exchange Commission is investigating whether the marketing of the TerraUSD stablecoin before it crashed last month violated federal investor-protection regulations, according to a person familiar with the matter).
Terra blockchain is a canvas for projects and ideas of an unconnected consortium with a debt-to-equity synthetic-coin capital structure.51Andrew Ross Sorkin & etc al., A Stablecoin ‘Death Spiral’, THE NEW YORK TIMES (May 12, 2022). When thinking about what the SEC might have done as the virtual currency regulator to prevent the possible manipulation that led to the TerraUSD death spiral, one might ask, “what information needed to be shared that wasn’t?” Unfortunately, one pretty quickly realizes that such an approach does not fit the needs of virtual currency spot market participants. Even with a large Twitter following, and no regulator, it’s difficult to imagine any information shared with the holders of Luna or Terra that might have somehow prevented the death spiral.
A third reason virtual currencies could benefit from CFTC market oversight from a pragmatic perspective is related to the composition of market participants. Cash markets for other commodities, such as corn and oil, are dominated by companies. In contrast, the cryptocurrency market is full of individual investors.52See Paul Kiernan, Crypto Security Debate Goes to Court: Private lawsuits could help determine whether digital tokens should be treated like stocks and bonds, THE WALL STREET JOURNAL, (May 26, 2022, 11:43 AM). These investors often take on high amounts of leverage to trade. They also entrust their crypto tokens to trading platforms that have frequently lost funds to hacks and poor cybersecurity.53See id. As a result, retail investors could benefit from a regulator who actively protects investors through market oversight and takes active steps to educate the investor.54See CFTC, The CFTC Role in Monitoring Virtual Currencies, H.R. DOC. NO 116-107 (2020).
The CFTC Office of Customer Education and Outreach has developed several customer advisories related to digitalassets and virtual currencies.55See CFTC, The CFTC Role in Monitoring Virtual Currencies, H.R. DOC. NO 116-107 (2020). These advisories provide tips customers can take to avoid fraud or other problems. In addition, the CFTC provides information on how to check the registration of virtual currency over-the-counter spot trading websites using the money service businesses registrant search operated by the Financial Crimes Enforcement Network.56See id. This is included with other registration information that encourages customers to verify entity registration before committing funds to a trade or investment.57 Id.
In contrast, the SEC takes a more ‘informed consenting adults’ approach to consumer protection. For example, through the SEC, investors can find information about certain people who have had judgments or orders issued against them in SEC court actions or administrative proceedings. In contrast, the CFTC ‘red list’ provides information relating to entities that have been identified as acting in a capacity that appears to require registration without actually being appropriately registered. The distinction between the information provided by either agency is small but extremely important. The SEC provides information relating to ex-post actions of fraudsters, while the CFTC provides information in regards to ongoing ex-ante behaviors (i.e., businesses advertising such things as “high guaranteed returns with little or no risk.”)58SEC Investor Alert: Watchout for Fraudulent Digital Asset and “Crypto” Trading Websites, https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_fraudulentdigitalasset.
A final reason the CFTC should be the market regulator for virtual currencies spot markets is the Commission’s commitment to facilitating market-enhancing innovation.59See Abe Cherin, Nicole M. Moran, & Simona Mola, The CFTC’s Approach to Virtual Currencies, THE NAT’L L. REV. VOL. XXI (Jun. 7, 2022); see also CFTC, The CFTC Role in Monitoring Virtual Currencies, H.R. DOC. NO 116-107 (2020). Because virtual currency and distributive ledger technology (‘DLT’) have the potential to revolutionize the world of finance, and innovation is a part of U.S. markets, the future digital asset regulatory should adopt a “do no harm” regulatory approach.60See Abe Cherin, Nicole M. Moran, & Simona Mola, The CFTC’s Approach to Virtual Currencies, THE NAT’L L. REV. VOL. XXI (Jun. 7, 2022); see also CFTC, The CFTC Role in Monitoring Virtual Currencies, H.R. DOC. NO 116-107 (2020). The CFTC’s principle-based approach would allow the market to develop under sound regulation but with market participants and not regulators determining which virtual currencies are commercially viable.
With many nations grappling with how to regulate crypto on the world stage, it’s not unreasonable to make the assumption that whoever leads in the technology will end up drafting the rules and developing the rails upon which virtual currencies operate for the rest of the world going forward. If the U.S. desires to design the DLT virtual currency payments system structure for the future global digital asset-based economy, having a regulator and regulatory framework committed to encouraging innovation is paramount.
The virtual currency spot market should be regulated by the CFTC. The world’s first and most popular crypto token, Bitcoin, is widely accepted as a commodity by federal courts, federal agencies, and market participants.61See 7 U.S.C. § 1a(9); see also In re BFXNA Inc., CFTC Docket No. 16-19, at 5-6 (June 2, 2016); see also In re Coinflip, Inc., CFTC Docket No. 15-29, at 3 (Sept. 17, 2015). With each passing day, that fact becomes more and more entrenched in the history of digital asset regulatory precedent, which leads to crypto market participants, retailers, and wholesalers alike reliance on that regulatory foundation as they make further innovations in the virtual currency trading space.62See 7 U.S.C. § 1a(9); see also In re BFXNA Inc., CFTC Docket No. 16-19, at 5-6 (June 2, 2016); see also In re Coinflip, Inc., CFTC Docket No. 15-29, at 3 (Sept. 17, 2015). Understanding this fact, the CFTC has taken efforts to protect crypto’s large retail investor population by educating market customers about their rights and how to spot, avoid, and report fraud.63See CFTC, The CFTC Role in Monitoring Virtual Currencies, H.R. DOC. NO 116-107 (2020). Where the CFTC to be armed with exclusive jurisdiction to regulate virtual currency commodities, it could actively regulate cryptocurrencies markets by bringing transparency and integrity to investors while simultaneously deterring and prosecuting fraud and abuse.64See CFTC, The CFTC Role in Monitoring Virtual Currencies, H.R. DOC. NO 116-107 (2020).
Under the authority of the CEA, the CFTC supervises market activity and market participants—including exchanges, clearing organizations, large traders, and the companies and individuals who handle customer funds or offer trading advice.65See id. This focus on the economics of the market, instead of the predominant information and disclosure-based approach of the SEC, empowers the CFTC to serve as a more active supervisor of trading markets. However, because there are instances—such as ICOs—where virtual currencies truly are acting as investment contracts, any future Digital Asset Commodity Act passed by Congress should still include a carve- out similar to 7 U.S.C. §2(a)(1) of the CEA that grants the SEC authority to exercise its authority when digital asset meets the definition of an investment contract.667 U.S.C. § 2(a)(1).
There is an acknowledged benefit for the SEC to continue its guidance no-action letters, staff statements, risk and investor alerts, speeches, and public testimony. The SEC should continue to pursue enforcement cases within its jurisdiction, including, for example, cases for failure to register the offer and sale of digital assets that are securities, failure to register as a broker or national securities exchange, and for fraud. None of these cases involved new regulations or laws explicitly enacted for blockchain projects. Meaning the SEC remains fully justified in applying existing law consistent with its long practice. Ultimately, this suggests that cooperation between the CFTC and SEC remains critical to ensuring innovative, liquid, but safe digital currency markets. There is undoubtedly a role for the SEC in regulating virtual currencies, just not necessarily a leading role.
With global leadership in the virtual currency space still not guaranteed, virtual currency markets need the flexibility and space to innovate. Fittingly, the CEA requires that CFTC “consider the costs and benefits” of its actions and evaluate those costs and benefits in light of five factors: “considerations of protection of market participants and the public; considerations of the efficiency, competitiveness, and financial integrity of futures markets; considerations of price discovery; considerations of sound risk management practices; and other public interest considerations.”677 U.S.C. § 19(a)(2). Therefore, as the principles-based regulator who embraces the idea of “doing no harm” the CFTC is the proper agency to take the lead in regulating the virtual currency spot market in the future blockchain-based economy.