Two of the United States’ most prominent financial regulatory bodies, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), are clashing over their jurisdictional rights regarding cryptocurrencies.
In March, the CFTC stated that Ethereum should fall under the ‘commodities’ category, as Ether futures have been trading on the CFTC exchange, which makes them subject to their oversight.
Regardless, on March 15, the agency’s Chair Gary Gensler stated that all Proof-of-Stake tokens and digital assets should be treated as securities.
The Conundrum of Ethereum
There is much regulatory confusion, especially concerning Ethereum, which moved from a Proof-of-Work to a Proof-of-Stake blockchain last year.
Proof-of-Stake is a process whereby cryptocurrency holders are rewarded financially for letting others use their cryptocurrencies to validate transactions.
Gensler remarked that PoS projects attract investors by offering an expectation of earning returns, stating that “I would suggest that each of these token operators, obviously consulting with the appropriate talent, seek to come into compliance.”
The CFTC’s stance on Ethereum differs from that of the SEC, and both have jurisdictional disputes. The CFTC considers Ethereum a commodity, whereas the other wants all Proof-of-Stake tokens and digital assets treated as securities.
Gary Gensler has hinted before that Ethereum should be treated as a security, expressing similar concerns during the Ethereum Merge event last September.
On the other hand, the CFTC has declared some cryptocurrencies as commodities but generally lacks the authority to issue oversight rules for commodity spot markets.
CFTC’s Authority
The CFTC has jurisdiction over margined, leveraged, or financed commodity spot trading offered to retail investors in the U.S.
Most crypto exchanges outside the US allow retail investors to trade crypto assets on margin, with CFTC-registered futures commission merchants providing margin, and CFTC-registered clearinghouses clearing these transactions.
However, the CFTC mainly governs the trading of derivative instruments, such as futures and swaps. Although the CFTC can declare certain cryptocurrencies as commodities, it does not have the power to issue rules providing oversight for commodity spot markets.
SEC’s Authority
In contrast, the SEC has the statutory authority to issue rules that enable crypto assets and crypto intermediaries to operate within federal securities laws’ contours.
Crypto-asset issuers have experimented with investment contract offerings under different registration exemptions, with some registering an investment contract with the agency, while others sold exclusively offshore in jurisdictions where cryptocurrencies are not regulated as securities.
The regulatory body could start writing rules to establish a workable framework for crypto-asset issuances and exchanges.
