As the SEC lawsuit against Ripple lingers, the CFTC’s Behnam is positioning himself as a critic of the practice of enforcement because “it cannot be seen as a viable substitute for a functioning regulatory oversight regime.”
CFTC Chairman Rostin Behnam addressed the US Senate to share his perspective on digital assets with a speech titled “Digital Asset Review: Risks, Regulation, and Innovation.”
The Commodity Futures Trading Commission is the primary regulator of the US derivatives markets in which commodity futures, swaps and options are traded.
The agency ensures the integrity of the derivatives markets, which requires its officials to have a good understanding of the underlying benchmark spot markets, where producers and institutional investors directly trade products, which include digital assets such as XRP , BTC and ETH.
The potential for fraud or manipulation in these underlying markets often poses the most immediate threat to the integrity of derivatives markets, the CFTC Chairman said, adding that while the CFTC does not have the power direct statutory body to regulate cash markets, it practices fraud and manipulation. enforcement authority.
CFTC’s Rostin Behnam started by saying that enforcement authority through judicial interpretation has proven to be an effective means uncover and close some of the regulatory gaps presented by innovation, but it cannot be considered a viable substitute for a functioning regulatory oversight regime for the digital cash asset market.
The digital asset market is unique and presents many new challenges for the CFTC. There is no single regulator, whether state or federal, with sufficient visibility into digital asset trading activity to fully control conflicts of interest and deceptive marketing practices affecting retail clients. , he continued.
Chairman Behnam went on to explain why the digital asset spot market would greatly benefit from CFTC oversight:
- Unlike most commodity spot markets, which are dominated by wholesalers and large financial institutions facilitating the transfer of commodities for commercial and consumer purposes, the digital asset spot market is currently characterized by a number high number of retail investors primarily engaged in price speculation;
- The speculative fervor around digital assets, often resembling a modern gold rush, has led many investors to routinely take on high levels of leverage when trading, leading to increased price volatility, often exacerbated by cascading liquidations during price declines;
- Most cash market investors entrust their digital assets to the platforms they trade on, without differentiating this type of custody arrangement from that offered by the traditional regulated banking industry. The technical complexities of securing and transacting digital assets, especially custody issues, have caused many platforms to lose funds through hacks, exploits, and poor cybersecurity;
Because the U.S. digital asset industry does not fall under a single, comprehensive regulatory regime, the CFTC has aggressively cracked down on fraud and manipulation since 2014, having filed nearly 50 enforcement actions. executed and oversaw a growing number of registrants offering derivative products based on digital assets.
Challenges remain and “we are past the stage where digital assets and decentralized financial technologies are a research project, sandbox what might happen in the future.”
On this point, the CFTC Chairman commits to continue to make full use of existing enforcement authority, but also recognizes the need to go beyond the limits of the Commodity Exchange Act.
“We see multiple government agencies examining the impact of this technology on federal policy relating to payments, custody, illicit activity, national security and a host of other issues.”
The Securities and Exchange Commission has actively tried to be the number one financial watchdog in the cryptocurrency space, but many critics fear that the agency’s enforcement practice will destroy the innovation and the country’s leading position in the emerging asset class.
In his speech, the CFTC’s Behnam clearly positions himself as a critic of this practice as “it cannot be considered a viable substitute for a functioning regulatory oversight regime”.
The digital asset industry and regulators are tuned into the SEC case against Ripple as the precedent-setting lawsuit heats up with upcoming rulings on the SEC’s motion to strike down the fair notice defense and the motion to dismiss the charges against Garlinghouse and Larsen.
Ripple recently filed an over-response on the fair notice issue that argues that the SEC’s 75 prior enforcement actions do not serve as fair notice. In fact, they support the defense of Ripple. The document includes a piece that analyzes each SEC crypto dispute.
In an exchange on Twitter a few days ago, attorney Jeremy Hogan agreed with the prediction that the fair notice defense will be allowed by the court, while the charges against Brag Garlinghouse and Chris Larsen will not. rejected.
In the meantime, a report by JP Morgan explained why XRP is so correlated with Bitcoin, namely the lack of partners on the Ripple network using XRP for cross-border payments. Critics have argued that the data is outdated.
CFTC Commissioner Dawn Stump again addressed confusion over the role of regulators in the digital asset space.
Ms Stump went to great lengths to explain the reach of regulators as something that needs to be addressed before government agencies engage in a jurisdictional grab.
“Until we clear up this confusion, we can’t have an honest conversation about whether an agency needs new authorities. And only then can informed stakeholders contribute to the design of a workable regulatory structure.”
Before extending the CFTC’s authority to cash markets, Commissioner Stump called for careful consideration “to determine whether the market infrastructure we oversee today can logically benefit cash markets, which have historically exceeded our expertise”.
Stump has already cleared up the “product versus security” fallacy. The 10 concise points set out by the CFTC Commissioner include the definition of “commodity” and CFTC authority that does not include surveillance of cash commodities (instead of futures and other derivatives).
In other wocashrds, the CFTC does not regulate commodities but their derivatives. “Therefore, even if a digital asset is a commodity, it is not regulated by the CFTC.” But trading Bitcoin or Ether futures falls within its scope.
One point that is well established is that the CFTC does not regulate securities, the SEC does. However, trading in derivatives on a security could fall within the scope of the SEC or the CFTC or both.
The problem with the current situation in the cryptocurrency space is that the SEC claims that many of the tokens listed on US exchanges may in fact be digital asset securities.
The SEC against Ripple can also both clarify the SEC’s position on this issue and create case law for future enforcement actions. The Securities and Exchange Commission has not been explicit about whether XRP is a security, but it appears to be trying to make that point.
Hinman’s infamous 2018 speech on Ether and its insecure nature may serve as a premise as to the (un)official position of the SEC, which could also clarify whether Ripple’s digital asset falls into the commodity category. or security.