Crypto Regulation
Key Takeaways
- The SEC and CFTC, two key regulators in the US, don’t always agree on how to classify cryptocurrencies.
- Some crypto projects and agencies have settled court cases rather than bear ongoing legal expenses.
- Ultimately, regulatory clarity in the crypto space may require new legislation.
One of crypto’s most appealing features is its autonomy from existing monetary systems and financial markets. Unsurprisingly, many governments around the globe would prefer tighter controls or, in some cases, perhaps to ban certain crypto projects altogether. However, some nations like El Salvador and the Central African Republic have embraced the promise of digital assets.
In the US, the battle between crypto exchanges and individual projects has reached epic proportions, with the Securities and Exchange Commission (SEC) taking some of the world’s largest exchanges and crypto projects to court. The Ripple case is ongoing, and most recently, the SEC sued both Coinbase and Binance.
Much of the uncertainty in the market and regarding who has jurisdiction over crypto projects stems from the fact that crypto is relatively new. Many cryptocurrencies may not fit perfectly with the decades-old Howey Test, a way to determine if a financial instrument is a security (an investment contract) — or something else.
And if it’s not a security, like stocks or bonds, then what is it, and who has the power to regulate it?
The Role Of The SEC
The depression years following the 1929 stock market crash led Congress to enact two key bills to provide safeguards for investors and hopefully prevent another catastrophe.
The agency came into being following the Securities Exchange Act of 1934. The SEC is the US agency responsible for regulating securities and brokers who sell securities.
The agency has a three-part mission:
- Protect investors
- Maintain fair, orderly, and efficient markets
- Facilitate capital formation
Much of the SEC’s stated reasoning for regulation and enforcement activity in the crypto market has focused on the first of these: protecting investors.
Traditional investments, like stocks and bonds, require fair disclosure. For example, publicly traded companies must provide SEC filings, including accurate reporting of the company’s health and expenses.
By contrast, crypto investors are left to their own devices to determine the health of a given project and whether to make an investment. Many crypto projects are also decentralized, meaning there’s no management team to prepare reports for the SEC or investors.
Whether the SEC has jurisdiction over crypto projects or exchanges — and to what degree — is still a matter for the courts to decide. And the answer may be different for each cryptocurrency or platform.
Several exchanges have already settled with the SEC, likely due to the legal cost associated with prolonged court battles. The Ripple case, now in its third year of litigation, is expected to cost the company over $200 million.
The Role Of The CTFC
A sister agency to the SEC, the Commodity Futures Trading Commission (CFTC) regulates commodities markets. A big part of the debate centers around whether cryptocurrencies are securities (financial instruments or an investment in an enterprise) or commodities, much like gold or pork bellies.
In court filings, the CTFC named BTC, ETH, and USDT (Tether) as commodities.
However, these cryptos – and ETH, in particular, share many similarities with other projects (such as Solana and Cardano), which have been deemed securities by the SEC.
The CFTC also oversees Bitcoin and Ethereum futures trading alongside well-established commodities like gold, copper, oil, and corn on the Chicago Mercantile Exchange.
The lack of clarity, even among government agencies, could threaten innovation in the industry, pushing legislators to provide modern guidelines for cryptocurrencies.
Legislators’ Role In Crypto Regulation
Crypto has its free-market proponents as well as detractors in Congress. Proposed legislation ranges from bills that could hamstring the industry, eliminating privacy aspects of transactions, to proposed bills that could provide much-needed clarity regarding which cryptos are commodities and which are securities.
Until that clarity arrives, the crypto market is likely to remain somewhat chaotic, with two primary US agencies engaging in a turf-driven tug-of-war, pulling at the frays of crypto investors and the industry itself.
Around the globe, the discussion takes several forms, with some nations like El Salvador adopting Bitcoin as legal tender and others still debating the role of crypto in each jurisdiction.
