Washington has long debated whether crypto is the future of finance or just a fad. Meanwhile, American entrepreneurs built, investors put their capital to work, and markets moved faster than the rules that governed them. Congress has considered legislation to clarify the treatment of crypto assets under federal law and regulate businesses in these markets, but failed to send a bill to the president’s desk. Fortunately, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have the statutory authority to issue rules and regulations establishing a federal structure for regulating the crypto market. Today, the CFTC is proposing its first round of regulations for the crypto markets.
Under the previous administration, the CFTC and SEC targeted crypto exchanges, custodians, and software developers for alleged failure to comply with laws and regulations. Rather than using their authority to issue new rules to account for the innovation present in our markets, both agencies have chosen to regulate through rule enforcement. In response, many crypto asset companies have fled the United States to take refuge abroad.
One of them was Sam Bankman-Fried’s FTX, the now-defunct Bahamas-based crypto asset exchange infamous for its meteoric rise and tumultuous fall. FTX imploded after its founders fraudulently misappropriated approximately $8 billion in customer funds to finance their own investments. It was only after the company’s bankruptcy that the CFTC and SEC accused FTX and its founders of wrongdoing.
FTX and many other failed crypto platforms, like BlockFi and Voyager Digital, operated in the United States through subsidiaries holding state money transfer licenses. Unlike federal agencies, state agencies have welcomed crypto intermediaries into their statutory frameworks for over a decade. However, state money transmitter laws are not uniform and are aimed at payment service providers rather than financial markets, which have historically been regulated by the CFTC and SEC. Federal regulations require trading platforms to meet strict standards to deter manipulation and abusive trading practices, ensure orderly and transparent trading, prevent conflicts of interest, and protect customer funds.
Most offshore and state-regulated FTX companies went bankrupt, but customer assets held by its CFTC-registered subsidiary remained segregated and secure.
The lesson should have been obvious. America does not need to choose between responsible innovation and the protection that all market participants need from fraudulent and abusive practices. It needs prophylactic rules that reasonably guarantee both.
Instead, under the Biden administration, regulatory uncertainty has become a defining characteristic of crypto-asset markets. Rather than establishing clear rules, the CFTC and SEC adopted a post-hoc rule-by-enforcement approach that was overwhelmed by trillions of dollars in trading volume. The result was uncertainty for legitimate businesses and, more importantly, an environment that would encourage the development of more FTXs.
Following the Senate’s failure to advance the Clarity Act this month, the CFTC is proposing rulemaking regarding the regulation of crypto asset transactions (Regulation CTX) and the regulation of crypto asset markets (Regulation CAM). This follows a joint interpretation by the CFTC and SEC earlier this year, which clarified that a portion of crypto assets, including bitcoin and ether, are not securities under the CFTC’s regulatory authority.
Regulations CTX and CAM would establish requirements for CFTC-registered exchanges that offer these crypto assets for trading. Unlike the Clarity Act, these regulations would not require crypto assets to be traded on platforms registered with the CFTC. We do not have the authority to impose such a requirement without Congressional intervention. However, the rules would establish a suitable option for crypto-asset exchanges that wish to operate under a single federal system of market regulation. Unlike state-licensed exchanges, these exchanges would be permitted to allow retail clients to trade on a margin, leverage, or funding basis. These platforms are distinct from regular spot trading platforms and clearly fall within the regulatory jurisdiction of the CFTC.
Former SEC Chairman Gary Gensler casually told crypto exchanges to “come on and sign up.” Exchanges should have admitted that the crypto assets on their platforms were securities and operated under legacy rules and regulations designed for very different infrastructures. Those days are over. The CFTC is moving quickly to institute rules and regulations that account for the distinctions between crypto assets and other types of commodities.
Today’s action is just the beginning. The CFTC is beginning the process of closing gaps in the cryptoasset market structure and creating clear rules of conduct for innovators and market participants. We have not solved all the problems, nor can agency action replace a statutory framework passed by Congress indefinitely, but we must do what we can.
America can lead the next generation of fintech without repeating the mistakes of the last: President Trump has made that clear.
The latest chapter in crypto regulation has been written by the crisis. The new frontier of finance will be written by opportunities, innovation and clear rules.
Gn bussni
