Washington long debated whether crypto was the future of finance or merely a fad. Meanwhile, American entrepreneurs built, investors put their capital to work and markets evolved faster than the rules governing them. Congress considered legislation to clarify the treatment of crypto assets under federal law and regulate firms 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 crypto regulatory market structure. Today, the CFTC is proposing its first round of regulations for crypto markets.
Under the prior administration, the CFTC and SEC targeted crypto exchanges, custodians and software developers for alleged failures to comply with laws and regulations. Rather than use their authority to issue new rules to account for the innovation occurring in our markets, the two agencies chose to regulate through enforcement. In response, many crypto asset firms fled the U.S. for foreign shores.
One was Sam Bankman-Fried’s FTX, the now-defunct Bahamas-based crypto asset exchange infamous for its meteoric rise and tumultuous downfall. FTX imploded after its founders fraudulently misappropriated approximately $8 billion in customer funds to finance their own proprietary investments. Only after the firm failed did the CFTC and SEC charge FTX and its founders for wrongdoing.
FTX and many other failed crypto platforms, like BlockFi and Voyager Digital, operated in the U.S. via subsidiaries with state money-transmitter licenses. Unlike federal agencies, state agencies have accommodated crypto intermediaries within their statutory frameworks for more than a decade. However, state money-transmitter laws aren’t uniform and are intended for payment-services providers rather than financial markets, which have historically been regulated by the CFTC and SEC. Federal regulations require trading venues to meet stringent standards to deter manipulation and abusive trading practices, ensure orderly and transparent trading, prevent conflicts of interest and safeguard customer funds.
Most of the offshore and state-regulated FTX corporate entities went bankrupt, but the customer property held by its CFTC-registered subsidiary remained segregated and secure.
The lesson should have been obvious. America doesn’t need to choose between responsible innovation and the protection all market participants need from fraudulent and abusive practices. It needs prophylactic rules that reasonably ensure both.
Instead, during the Biden administration, regulatory uncertainty became a defining feature of crypto-asset markets. Rather than establishing clear rules, the CFTC and SEC pursued a post-hoc regulation-by-enforcement approach that was overwhelmed by trillions of dollars in transaction volume. The result was uncertainty for legitimate businesses and, more important, 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 rule-making concerning Regulation Crypto Asset Transactions (Regulation CTX) and Regulation Crypto Asset Markets (Regulation CAM). This follows a joint interpretation by the CFTC and SEC earlier this year, which clarified that a swath of crypto assets, including bitcoin and ether, are non-securities within the CFTC’s regulatory authority.
Regulation CTX and Regulation CAM would establish requirements for CFTC-registered exchanges that offer these crypto assets for trading. Unlike the Clarity Act, these regulations wouldn’t require crypto assets to trade on CFTC-registered platforms. We don’t have the authority to impose such a requirement without congressional action. However, the rules would establish a purpose-fit option for crypto-asset exchanges that wish to operate under a single federal market-regulatory scheme. Unlike state-licensed exchanges, these exchanges would be permitted to allow retail customers to trade on a margined, leveraged or financed basis. Such platforms are distinct from ordinary spot-trading venues and are squarely within the CFTC’s regulatory jurisdiction.
Former SEC Chairman Gary Gensler glibly told crypto exchanges to “come in and register.” The exchanges would have had to concede that the crypto assets on their platforms were securities and operate under legacy rules and regulations designed for vastly different infrastructure. 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 starting the process of addressing gaps in crypto-asset market structure and creating clear rules of the road for innovators and market participants. We haven’t solved every problem, nor can agency action substitute indefinitely for a statutory framework passed by Congress, but we must do what we can.
America can lead the next generation of financial technology without repeating the mistakes of the last one: President Trump has made that clear.
The last chapter of crypto regulation was written by crisis. The new frontier of finance will be written by opportunity, innovation and clear rules.
