Photo Illustration by Jonathan Raa/NurPhoto via AP
A hearing today in the Senate Agriculture Committee is likely to set the future of regulation for cryptocurrencies. The hearing will review a bipartisan bill from committee chair Sen. Debbie Stabenow (D-MI) and ranking member Sen. John Boozman (R-AR), which would give oversight of so-called “digital commodities” to the Commodity Futures Trading Commission (CFTC). Oversight of assets deemed securities would stay with the Securities and Exchange Commission (SEC).
Right now, tokens like Bitcoin or Ether are traded on platforms with no regulatory oversight. Hacks, pump-and-dumps, rug pulls, and other scams are rampant and deeply damaging. Many financial reformers have wanted regulation to move entirely through the SEC, which is better resourced and has an explicit investor protection mandate.
But legislation to that effect has not been introduced, and the Stabenow-Boozman bill, known as the Digital Commodities Consumer Protection Act (DCCPA), gains the first-mover advantage. A separate bill from Sens. Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) is widely seen as an industry wish list; on the other end of the spectrum, members like Rep. Brad Sherman (D-CA) just want to see crypto banned.
The DCCPA slots in as the attractive-to-Washington reasonable compromise, with support from both sides of the aisle. Stabenow spokesperson Elizabeth Rivera told the Prospect that the chair is still working with Republicans on when to do a markup for the bill.
Even individuals who are sympathetic to strong financial regulation have endorsed the DCCPA. Todd Phillips of the Center for American Progress, who has argued vehemently for protecting crypto purchasers, will be testifying at the hearing, arguing that the bill is the best available option to close critical regulatory gaps in a targeted way.
But the finreg community is not universally on board. A new letter out today from two academics and senior policy analyst for Americans for Financial Reform Mark Hays highlights several problems. The CFTC, they say, is understaffed and has scant experience drafting rules to protect retail investors. In addition, it has not performed ably in early efforts to deal with new offerings like Bitcoin futures. “Overall, the CFTC has thus far adopted a permissive approach to cryptocurrency oversight that has undermined market integrity and exposed consumers to potential harm,” the letter states.
At the heart of the fight is the question of which federal agency will get to regulate crypto—and which members of Congress will get jurisdiction. Even though the CFTC and the SEC sit in the same broad category of financial market oversight, because commodity futures grew out of farmers hedging futures prices for grain and other crops, the CFTC is under the purview of the House and Senate Agriculture Committees. The SEC goes through the more typical Banking and Financial Services Committees.
This matters because the crypto industry has dropped an incredible amount of money this election cycle. Banking and Agriculture Committee members both benefit from having some part of the financial system interested in their work, and if crypto regulation goes all to one agency or the other, one of those committees will be deprived of the opportunity for campaign cash. “The empathetic view is that this is how committees work and they can still do effective oversight. The cynical view is, that’s what’s wrong with Washington,” said Hays.
At the heart of the fight is the question of which federal agency will get to regulate crypto—and which members of Congress will get jurisdiction.
But by keeping regulatory oversight in both agencies, critics fear, the industry could simply forum-shop for whatever agency offers the lightest touch, and contour their offerings to fit the definition of a digital commodity or a security. It will lead to interagency turf battles over who gets to regulate what, which could ultimately harm the overall regime. “The industry says, ‘Get us rules,’” said Lee Reiners, policy director at the Duke Financial Economics Center. “When they get these rules, they will know how to game them.”
THE HEARING TODAY has two parts. CFTC chair Rostin Behnam, himself a former Stabenow senior counsel, will testify in the first session, which coincidentally will occur while SEC chair Gary Gensler is testifying at the Senate Banking Committee. Gensler has been a sharp critic of the crypto industry. The Wall Street Journal ran a piece last week suggesting that Gensler would support Congress handing authorities to the CFTC for digital commodities oversight, though it appeared to mostly take his words out of context. Behnam, meanwhile, has been asking for more regulatory authority over crypto assets.
The second panel is composed mostly of industry groups, including representatives of Coinbase, Citadel Securities, and the Crypto Council for Innovation, alongside Phillips. In an interview, Phillips told the Prospect that there is simply no current regulatory regime sufficient to address the harms from digital commodities. “This is the only bill that has been introduced to do that,” he said.
The DCCPA would require all entities that allow for the trading of digital commodities—platforms, brokers, dealers, and the like—to register with the CFTC. Those entities would be held to the standards of traditional financial institutions, required to hold sufficient capital, report suspicious transactions and abusive practices, and ensure investor custody of their assets. There are also disclosure requirements around risks and conflicts of interest. “This gives the CFTC the ability to examine every transaction on these platforms,” Phillips said.
The definition of “digital commodities” in the DCCPA isn’t entirely precise, but it specifically names Ether and Bitcoin, two of the biggest crypto assets, as the types that would qualify. Ethereum, the parent company of Ether, is going through a change in its security model, which some reformers think gives it more resemblance to a security. “Unless the bill authors and CFTC hammer out a clear understanding of where the SEC begins and ends, and doesn’t leave it to CFTC rulemaking, we feel the bill may be doing more harm than good,” Hays said.
That puts a lot on the plate of an agency that has done little to convince critics of its regulatory value. “When it comes to crypto, CFTC is a modern-day OTS, they just are,” said Reiners, referring to the now-defunct Office of Thrift Supervision, seen as so weak a regulator that banks would shape their institutions to get under its purview.
Phillips disputed that, noting that Gensler himself once ran CFTC. “It doesn’t have to do with one agency over the other, it’s who does the president nominate and will Congress give them the money to carry out the law.”
Still, early returns on CFTC’s efforts in crypto have not been promising. Donald Trump’s choice to run the agency, Christopher Giancarlo, literally wrote a book with a title referring to himself as “CryptoDad.” (As Reiners noted, “Can you imagine if Alan Greenspan called himself SubprimeDad circa 2005?”) The letter points out, “Since 2014, the CFTC has brought just over 50 enforcement actions pertaining to cryptocurrency, a surprisingly low number considering the rampant fraud and abuse in cryptocurrency markets.” The SEC has nearly doubled that number in a shorter time frame.
In June, the agency, now under Behnam’s direction, filed a civil lawsuit against Gemini, a crypto exchange, under its anti-fraud and anti–market manipulation authorities. The suit alleges that Gemini’s Bitcoin futures product based its reference price on a thinly traded auction that could be easily manipulated, which Gemini knew and lied to the CFTC about. This means that it took five years for the CFTC to recognize market manipulation and take action. “How is that effective regulation when you come in after the fact?” Reiners asked.
The problem, critics say, is that the CFTC typically regulates derivative products, which large and sophisticated investors purchase. Retail investor concerns don’t play a role, meaning that the agency is untested in writing rules about things like deceptive marketing. CFTC has also historically lacked resources to even deal with its derivatives monitoring. In the DCCPA, the agency would be able to impose user fees on crypto platforms to fully fund oversight. That, along with additional appropriations, would be crucial, Phillips said.
BUT THE CFTC COULD STILL end up behind the curve. Crypto tokens can be created at the drop of a hat, through a “self-certification” regime, where a product can be listed as long as the entity selling it certifies that it complies with all rules and regulations. “This regime allows you to say, ‘We put out this paper, it’s got all the right stuff in it, we’re good to go, we’ll start marketing,’” Hays explained. “And CFTC will have to decide whether to halt that process.” Since anyone can just pull source code from a token, marginally change it, and produce a new one, new coins can be created in arbitrary quantities in mere minutes, creating a potential overload of the CFTC.
The Bitcoin futures market also relied on a self-certification process; that’s how Gemini’s allegedly manipulated futures lasted for five years before the CFTC filed a complaint. The CFTC hasn’t halted trading in any self-certified commodity derivative since 2017, though it has said it engaged in “heightened review” with platforms to ensure compliance. But that’s a nonstatutory, informal regime. CFTC has also said that it just looks at the derivatives contract for exposure to fraud and not the underlying asset, which was the case with Gemini.
“This creates a fast lane,” Reiners said. “That’s obviously a problem with fundamentally novel products that should be subject to greater scrutiny by regulators.” He suggested a process where issuers would have to submit the product to the CFTC for approval, rather than self-certification.
Critics are also concerned that the DCCPA could preempt state efforts at strong regulation, like in New York and California. Preemption was a problem during the housing bubble, when the Office of the Comptroller of the Currency overrode state predatory-lending laws.
Supporters of the DCCPA say that the importance of getting some oversight in place for these unregulated parts of the crypto market supersedes any concerns about forum-shopping or turf wars. “There will always be Bitcoin assets that are not securities, we need some kind of regulatory oversight for them,” Phillips said. “I like this bill because for the things that aren’t securities, it does a good job.” Asked whether the SEC should handle those non-securities, Phillips said he didn’t really have a preference.
But other reformers, while recognizing that spot market oversight is a huge gap, are concerned that the legislation wouldn’t just backstop the SEC but erode its jurisdiction. “I do agree that this bill, should it pass, is an improvement over the status quo,” Reiners said. “But the status quo is pretty awful. I just think we can do better.”
