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State of Crypto: SEC vs. CFTC

A crypto turf war may be brewing between two U.S. regulators.

CoinDesk Insights
Aug 31, 2021 at 1:30 p.m. UTC
Updated Aug 31, 2021 at 2:31 p.m. UTC

Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.

While the Senate’s bipartisan infrastructure bill has been top-of-mind for the past month, the U.S. Securities and Exchange Commission has been signaling its own importance to the crypto industry, which may lead to an eventful autumn.

You’re reading State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. Click here to sign up for future editions.

What a year this month has been

The narrative

What dog days? August has been a pretty crazy month. While the Senate’s infrastructure bill has sucked up a large amount of the oxygen, there’s been quite a lot of other news. Maybe the most important items in the U.S. came from the Securities and Exchange Commission (SEC), which seems to be gearing up for a busy autumn.

Why it matters

The SEC is one of the most important federal regulators to the crypto industry in the U.S., and in recent months it’s been signaling a more aggressive approach to the crypto industry.

Breaking it down

There are three key things I’m watching for with the SEC this fall. The first is the possible approval of a bitcoin futures exchange-traded fund (ETF). We’ve talked about bitcoin ETFs before, and judging from comments from SEC Chair Gary Gensler, it sure seems like a futures-based ETF is more likely than a spot-based ETF. An approval wouldn’t be the same as if the SEC approved a full bitcoin ETF, but it’d still be a regulated investment product that people curious about crypto, yet hesitant about directly investing in bitcoin, could look to as an alternative.

There are two interesting signals on the ETF front that seem to support the idea that one (or more) futures-based products might be approved this year.

The first signal came when Gensler told the Aspen Security Forum that he looks forward to SEC “staff’s review of such filings, particularly if those are limited to these CME-traded bitcoin futures.”

A handful of companies immediately filed bitcoin futures ETF applications in the wake of his remarks.

More recently, VanEck and ProShares applied for ethereum futures ETF products, but simultaneously withdrew them on Aug. 20. This suggests that the SEC spoke to these companies privately. The SEC has asked companies to withdraw their ETF applications in the past (particularly 40 Act funds, so named because they operate under a 1940 law).

There’s still no guarantee that a bitcoin ETF – or even a bitcoin futures ETF – will receive the SEC’s green light this year, but the fact that agency officials are sending signals about how they’re approaching these applications says something.

The second big thing on my radar is what kind of, sort of, maybe looks like a brewing turf war between the SEC and its sister agency, the Commodity Futures Trading Commission (CFTC), over jurisdiction within the crypto market. It’s too early to say this is happening for sure, and it’s obviously way too early to predict how it’ll play out, but it’s worth keeping an eye on what agency officials say about what falls under their purview.

However, we’ve seen comments from current and former CFTC officials about the agency’s role in regulating the crypto markets, including Commissioner Brian Quintenz, Commissioner Dawn Stump and former Chair Chris Giancarlo.

These comments seem to be a response to Gensler asking for greater authority over the crypto markets.

I think the discussion is going to become:

  • Who has oversight of specific spot markets?
  • Is an exchange subject to SEC jurisdiction just because some of its listed assets might be securities while others (like bitcoin) aren’t?
  • Does the CFTC have oversight of exchanges that list spot markets for cryptocurrencies that aren’t securities?

Stump said the CFTC doesn’t oversee these spot markets, but it’s unclear to me the SEC necessarily has a clear case in favor of this supervision either.

This goes back to the ETF question as well. The SEC has said in the past that it’s uncomfortable approving ETF applications unless it can closely track the market for potential fraud or manipulation.

A futures market operated by CME is far more likely to meet this standard because CME and the futures product it lists are regulated by the CFTC. The bitcoin spot market, spread across scores of exchanges around the world, is somewhat more unwieldy.

Finally, I’m keeping tabs on regulatory issues faced by decentralized finance (DeFi). I wrote about this earlier this month, but the SEC seems to be building precedent for more enforcement actions in this part of the crypto world.

Last week, AnChain.AI, an analytics firm, told Forbes it had signed a deal with the SEC to monitor DeFi transactions.

This comes on top of enforcement actions against DeFi trading platforms.

And, just to tie this back to the infrastructure bill we’ve all been looking at for the past four weeks, I understand that the Treasury Department does want to capture data from so-called decentralized exchanges with intermediaries, so I imagine there may well be some crossover there as well.

Biden’s rule

Changing of the guard

Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated)

Today will be CFTC Commissioner Brian Quintenz’s last day at the agency. Biden has yet to formally nominate a chairperson to a full term at the agency (though rumors are he’ll tap Acting Chair Rostin Behnam), and it’s unclear how long it may take to fill Quintenz’s seat.

Elsewhere:

  • Cuba Regulates the Use of Virtual Assets for Commercial Transactions: The island’s central bank has published a resolution that defines how it will regulate virtual assets and virtual asset transactions. It also may create a license for virtual asset service providers, Andrés Engler reports.
  • Bitcoin Miners Hold Onto Rigs, Betting the Bull Run Will Continue: Crypto miners are holding onto their mining rigs in anticipation of their prices soaring as the bitcoin bull market continues, reports David Pan. There’s also (apparently) a roaring bitcoin miner futures market, where buyers can bet on the prices of these specialized machines at a future date. Note: These are different from hashrate futures.
  • Money Trail From Liquid Exchange Hack Points to Wasabi Privacy Wallets: The hackers allegedly responsible for stealing just under $100 million from Liquid Exchange may be using the Wasabi privacy wallet to launder their funds, Anna Baydakova reports. At least $20 million of BTC has been sent through Wasabi’s CoinJoin feature.

Beyond CoinDesk:

  • (Wall Street Journal) Avanti Bank, the Wyoming outfit spearheaded by Caitlin Long, has applied to be a full member at the Federal Reserve.
  • (CNBC) CNBC’s Lauren Feiner provides a nice rundown of the infrastructure bill fight, what it means and what may happen next.

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde.

You can also join the group conversation on Telegram.

See ya’ll next week!

DISCLOSURE

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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