US CFTC as Crypto’s Regulatory Savior? Crypto Firms Might Not Like What They Get
The Securities and Exchange Commission is treated as a villain in crypto, but the view of the Commodity Futures Trading Commission as a government ally may not survive the honeymoon, insiders suggest
Just because Rostin Behnam is the rare government official who can casually drop a comment that suggests a future explosion in bitcoin’s price doesn’t mean he’s a crypto bro.
The chairman of the Commodity Futures Trading Commission (CFTC) is widely seen in crypto circles as a relatively friendly face in government, and Behnam often says things that seem to reinforce that view.
Speaking to students at New York University last week, Behnam said he was “cautious to be a cheerleader” for crypto, but described the industry’s explosive growth as “exciting” and “fascinating.”
“I think there’s a few folks who wish this technology might go away, think it might go away, think it might go offshore, but I think there’s a number of reasons from a U.S. perspective that it’s important we engage [with the industry],” Behnam said.
Behnam also predicted that cryptocurrency businesses finally submitting to government rules and supervision will make investors more money, suggesting that the price of bitcoin could even double. Getting a bitcoin price prediction – even a hypothetical one – from a sitting regulator left Jeremy Liabo, a Chicago-based attorney at law firm Ropes & Gray, “surprised.”
But Behnam is a federal regulator installed by the same president that picked Securities and Exchange Commission (SEC) chief Gary Gensler, who is held up by the crypto industry as its governmental antagonist. Gensler’s SEC is often accused of regulating crypto through enforcement actions, and it’s showing signs that it only intends to speed up that process. While Behnam had been seen as the gentler hand who was less openly scornful of the digital-assets movement, his agency has been waging an enforcement battle that belies that reputation.
“If somebody thinks you're going to get a pass at the CFTC, I think that's a mistaken belief,” said Gary DeWaal, a former CFTC enforcement lawyer now at Katten Muchin Rosenman. “Any violation is going to be met with enforcement actions by either regulator, and they're going to be severe.”
The CFTC itself has also pushed back against the misconception that it will regulate the industry with a lighter touch than the SEC.
“We’ve been very strong in enforcement in the digital asset space,” CFTC Commissioner Caroline Pham told attendees at Korea Blockchain Week in August. “Anybody who thinks that the CFTC is not going to be tough might have missed when we fined all the banks billions of dollars for fraud and manipulation after the financial crisis.”
Mike Selig, a New York-based attorney at law firm Willkie Farr & Gallagher, said that crypto firms should not equate enforcement actions with “unfriendly” regulation.
“New laws and rules will be needed to accomodate [decentralized finance],” Selig said. “But I think there is a willingness both at the commissioner level and staff level to work with the crypto industry to bring responsible innovation to the U.S.”
The momentum in Congress is on track to elevate the CFTC as the key front-line regulator for cryptocurrency trading. Every serious legislative effort favors that path, such as the bill in Senate and House agriculture committees that would make the agency the regulator of the so-called spot market for tokens that aren’t securities. In Behnam’s view, that means trading of bitcoins and ethereum which represent the vast majority of crypto’s market cap.
The Senate Agriculture Committee bill – pushed by Behnam’s former boss, panel Chairwoman Debbie Stabenow (D-Mich.) – would give the CFTC an unprecedented ability to charge the crypto industry fees to fund the new oversight. The CFTC, with fewer than 700 employees, is tucked into a humble building in northwest Washington, D.C. It’s always been much smaller than the SEC, which employs more than 4,500, but these new fees could allow it to build up considerably.
Some of the industry’s preference for the CFTC may be a vestige of its previous management, including figures such as previous Chairman J. Christopher Giancarlo (also now at Willkie), who favored a “do no harm” approach to digital assets and went on to write a crypto book, advise companies in the industry and earn a French knighthood in part because of his crypto work.
Would crypto firms still favor the agency if it grew longer arms and bigger teeth?
Liabo said he believes there’s a misconception in the crypto industry about what it means to be a friendly regulator.
“The CFTC is a friendly regulator in that it is open to innovation,” Liabo explained. “Friendly does not, however, mean that the CFTC does not enforce the laws.”
Wave of enforcement
In his public remarks, Behnam often comes across as knowledgeable about crypto and enthusiastic about its potential.
At New York University last week, Behnam used privacy browser Brave and decentralized storage protocol Filecoin as examples of crypto’s potential.
“I used to rave about Filecoin … it’s empowering us as individuals,” Behnam said. “I think there’s a bit of frustration that we all see about the way the internet functions right now. And if the new internet can empower us as individuals and allow us to monetize what we do and how we do it, you’d be hard-pressed to find someone who wouldn’t be at least willing to engage and indulge in that activity and make an extra buck.”
However, a telling sign has emerged that reveals some of the CFTC’s inner thinking. In its latest enforcement action, the agency targeted the Ooki DAO with accusations it offered illegal trading without the proper government approvals or regulatory controls. That potentially sets a controversial precedent in holding participants in a decentralized autonomous organization accountable for their organization’s missteps.
"The CFTC is pushing its legal authority," said Jaret Seiberg, an analyst with Cowen, citing the Ooki DAO action. "It confirms our view that the agency would be a tough regulator if Congress makes it the lead on crypto."
Behnam said it himself at a meeting of top U.S. regulators this week, when the Financial Stability Oversight Council issued a report saying the spotty government powers over crypto could threaten the wider financial system.
“I think we are going to collectively – the SEC and CFTC – work together to ensure we use all of the existing enforcement authority we have until new authority is provided,” Behnam said.
DeWaal contends the CFTC had already been showing it’s willing to be aggressive in enforcement, such as in cases against Tether, Bitfinex and Coinbase Inc.
“If you stack up the big names in the crypto industry, there have been more big names captured by the CFTC in their lawsuits than the SEC,” DeWaal said.
“I do worry about the political jockeying for power ahead of the decision by Congress – the desire to one-up each other to show who is the tougher regulator,” said Paul McCaffery, the head of alternative capital sales at investment bank Keefe, Bruyette & Woods. “It disappoints me that the CFTC opted for the SEC rule-by-enforcement playbook. Hopefully we see a legitimate process going forward and less splashy grandstanding, which is what I think this Kim Kardashian settlement was with Gensler this week.”
SEC here to stay
Still, even if the CFTC becomes a primary regulator, the industry is never going to get rid of the SEC. Whenever anything in crypto looks like an investment contract, the agency will be there to regulate it. And key legislation still allows the securities regulator to make important calls on defining which tokens it thinks are securities, which Gensler routinely says will include most cryptocurrencies.
Behnam has publicly agreed with Gensler.
“I have no doubt that the vast majority of the tokens that exist in the digital asset ecosystem are security tokens,” Behnam said at NYU last week, stressing the need for both regulators to working together to best regulate the crypto industry.
“Both agencies will have a role going forward,” DeWaal said.
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