Because US lawmakers want bitcoin and ether to be under the control of the CFTC

WASHINGTON – Leaders of a Senate committee will propose legislation that would assign oversight of the two largest cryptocurrencies, bitcoin and ether, to the federal agency that regulates milk futures and interest rate swaps.

Senate Agriculture Committee Chair Debbie Stabenow and high-ranking Republican John Boozman of Arkansas are planning to introduce a bill on August 3 that would authorize the Commodity Futures Trading Commission to regulate spot markets for commodities. digital, a newly created asset class. Currently, the CFTC has the authority to control derivatives, such as futures and swaps, rather than the underlying commodities.

The bill marks the latest salvo in an increasingly intense battle between federal agencies and congressional committees that oversee them over who will regulate cryptocurrencies. Thirteen years after the creation of bitcoin, cryptocurrencies remain largely unregulated by the federal government, leaving investors with no key protections from fraud and market manipulation.

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Competition for jurisdiction has flared up in recent months as the collapse of the cryptocurrency markets underscored the need for guardrails in the eyes of many politicians. The competition also reflects the growing industry lobbying presence in Washington and its drive to reach more mainstream investors through Super Bowl announcements and other high-profile marketing initiatives.

“When there is a topical topic like cryptocurrency, everyone wants a seat at the table,” said Aaron Klein, a senior fellow at the Brookings Institution who focuses on financial regulation. “The question is, will we have regulatory turf paralysis?”

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In practical terms, for federal agencies such as the CFTC, the Securities and Exchange Commission, and the Federal Reserve, adding cryptocurrencies to their mandate would result in larger budgets, greater influence, and more employment opportunities for officials leaving the public service. For members of congressional committees overseeing such regulators, a new industry in their sandbox would create another stream of lobbyists and election donations.

Washington has introduced a flurry of bills in recent months to draw jurisdictional lines. Senators Cynthia Lummis and Kirsten Gillibrand presented a proposal in June that would create exemptions for cryptocurrencies in securities laws, banking statutes and the tax code. In July, leaders of the House Financial Services Commission said they were working on a bill to give the Federal Reserve a greater role in regulating certain stablecoins, dollar-pegged crypto tokens, and other official currencies.

Agencies are also trying to claim territory. CFTC chairman Rostin Behnam, a former Stabenow staff member, said last week that his agency is “ready and well positioned” to oversee the spot markets of some cryptocurrencies. He has been working with his former boss for months to help draft legislation that would authorize the CFTC to do so, people familiar with the matter say.

Meanwhile, SEC President Gary Gensler has repeatedly called for cryptocurrency trading platforms like Coinbase to register with the agency as exchanges similar to the New York Stock Exchange or Nasdaq. In May, the SEC nearly doubled the staff of a cryptocurrency-focused law enforcement unit.

“Four years ago when I started this job, there were some people who thought this thing was going to blow up and go away, that this was kind of a fad,” said Kristin Smith, executive director of the Blockchain Association, a trading group representing cryptographic companies.

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Now, he said, “We have all these regulators suddenly competing for control.”

After the SEC claimed in an insider trading case in July that at least seven cryptocurrencies listed on Coinbase should be registered as securities, Republican CFTC commissioner Caroline Pham accused the SEC of “regulation by enforcement.”

“The SEC is not working together with the CFTC,” Pham said in an interview. “They come out unilaterally to try to set a precedent that will dramatically reshape the landscape of what a security is and what a commodity is.”

Pham posted photos on her Twitter account of herself posing alongside lobbyists and crypto executives, including Sam Bankman-Fried, the billionaire founder of the FTX trading platform.

Pham said cryptocurrencies are one of the areas he focuses on and “I take pictures with everyone. Like, literally, everyone.”

At the heart of the territory war are questions about how cryptocurrencies fit into a stock’s definition, the legal classification that includes stocks and bonds.

A 1946 Supreme Court case created a test that focuses on whether investors buy an asset in hopes of profiting from other people’s efforts. In such event, the issuer is required to register with the SEC and publicly disclose any information that may be relevant to the price of the security.

While bitcoin and ether investors rely on a network of users and programmers to validate transactions and perform software updates, cryptocurrency enthusiasts insist that groups are too decentralized for assets to be regulated as securities. Instead, they argue, assets should be considered commodities, which have a broader definition and no full-time regulators.

Companies like Coinbase, FTX, and Ripple have spent millions of dollars over the past year lobbying Congress to create a new category for digital commodities and authorize the CFTC to regulate it. The agency has about one-sixth of the SEC’s staff and its rules are seen by the industry as easier to comply with than securities laws.

Cryptocurrency skeptics fear that creating a new legal concept for cryptocurrencies could create an alternative to stock registration for a wider variety of assets.

“People who are taking actions that could undermine our securities law are playing with fire,” said Dennis Kelleher, president of investor advocacy group Better Markets. “You can love or hate the SEC, but transparent disclosure, clear rules … and enforcement is what builds trust in our markets.”

The legislation presented on August 3 would seek to exclude securities from the definition of digital commodities, making it more restricted in scope than that of other bills related to cryptocurrencies that have fluctuated in recent months, such as the Lummis-Gillibrand proposal.

Because the bill is sponsored by committee leaders, the Stabenow-Boozman bill also has a better chance of advancing in the Senate than previous proposals.

It would require any entity acting as a digital commodity platform, including cryptocurrency exchanges such as Coinbase and FTX, to register with the CFTC as a trading facility, dealer or broker. Exchanges should monitor trading, protect investors from abuse, and only offer assets that are resistant to market manipulation, among other requirements.

The platforms would also be obliged to disclose certain information about the assets they list, such as the operational structure and conflicts of interest. Such information likely would not live up to the extensive information required by the SEC for securities.

The derivatives markets currently covered by the CFTC are dominated by professional investors, such as banks and hedge funds. Cryptocurrency markets, by contrast, attract legions of small investors who are more vulnerable to scams.

If the agency gains jurisdiction over bitcoin and ether, the CFTC would have to write rules from scratch to protect those investors.

“How strong would they be and how long would it take?” asked Tyler Gellasch, executive director of the Healthy Markets Association, a group of commercial investors.

Write to Paul Kiernan at paul.kiernan@wsj.com

This article was published in the Wall Street Journal, part of the Dow Jones

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