For CoinDesk's State of Crypto Week, presented by Chainalysis, Daniel Davis, former CFTC general counsel and a current partner at Katten Muchin Rosenman LLP, discusses how FTX founder Sam Bankman-Fried's trial and the crypto exchange's bankruptcy proceedings could shape future crypto regulation in the U.S. Plus, his thoughts on whether ether (ETH) could be classified as a commodity.
This week coin desk is taking a closer look at what's next for the state of crypto regulation that's presented by cha analysis. Joining us now to discuss is cat and partner and co-chair for financial markets and regulation. Daniel Davis, welcome to the show. Daniel, thanks for having me today. Of course. Now we've just been talking about the Sam Ban free trial. We're entering the third week today. Talk to us about how you think this trial is going to affect crypto regulation in the US as we move forward. Well, I mean, the, the SPF trial and the FTX bankruptcy has certainly been top of mind for regulators and for Congress. Um obviously any regulation or legislation that comes out of DC certainly wants to be designed in a way that could avoid the next F TX. And you hear a lot of people from Congress saying that that certain proposed provisions would prevent the type of or or at least mitigate significantly the risk of the type of meltdown that happened with F TX. Uh It seems though that Congress is kind of distracted at the moment. I mean, they don't have a leader there. They might not have a leader anytime soon. Uh Given the whole fight between uh the Scalise faction and the Jordan faction and, and who might actually get enough votes, you know, the eight holding hostage, the rest of the majority. Uh plus there's also a war going on that, that the US all of a sudden seems to uh uh need attention to. So what happens now with crypto regulation? Is it definitely going to be on the back burner? It doesn't seem there's all that much excitement happening in crypto right now. So maybe perhaps the pressure is off of Congress for the time being. Well, it's always hard to predict. Obviously, as you mentioned, there are a lot of things that Congress is dealing with right now and crypto is, is, is one of them, but it certainly can't be the top priority of the current congress that said, you know, on, on the hill, crypto has gotten a lot of support on both sides of the aisle and in both houses, both the house and the Senate. So it certainly is an issue that has garnered bipartisan support. Do you think that we're going to get any kind of update on crypto regulation this year? Uh It's, it's, it's unlikely to get something from Congress during this year. A much better chance next year, we will certainly continue to hear from the agencies in the form of either enforcement actions or activity along that lines. But the the, the chance of something coming out out of Congress in the next couple of months is definitely low. Now, this morning, we were talking about the potential for spot Bitcoin ETF in the US. But I want to ask you about futures. ETF S. Uh they were recently approved by the SEC. We asked ETF Think Tank research Director Cynthia Murphy if this means that e is a commodity. Uh I want you to take a listen to what she had to say, at least from a regulatory perspective. Uh It is now uh a commodity just like Bitcoin. Uh It's, it's been termed that way. So it's going to be evaluated in that way. Uh I think, uh you know, it's the label they chose and it's the same one they chose for Bitcoin. So I think it's, uh, I mean, there's really no reason to expect this to change uh for the, for the purpose of ETF S or access. So it's, it's just uh how regulators chose to, to interpret this type of asset. All right. As a former general counsel at the CFTC, uh, talk to me about your thoughts when you hear that, does this indicate Ether is a commodity or is this something that's a little bit more nuanced? I mean, it certainly seems too, you know, Ether futures have been trading on CFTC, regulated exchanges for several years now. And so if the SEC thought that that product was instead, you know, a security based product that either was a security, you would expect the SEC to make some noise about those particular products trading on, um, on CFTC regulated exchanges. And the fact that the SEC hasn't done that, the fact that the SEC when they brought enforcement actions against platforms like Coinbase and Binance listed a number of digital assets that they thought were securities and Ether was not on that list. All of that strongly suggests that the SEC is not willing to go out there and publicly assert that Ether is a security right now, which certainly seems to make it a commodity. All right. And I also want to get your opinion on this quote from CFTC Chairman Roston Benham. He said the limits in the Commodity Exchange Act established and essentially another era create real barriers to engaging in rule making that is necessary to our mission. But just beyond our scope, that was said at the Financial Industry Association Expo, all of this while IC C Chair, Gary Gensler maintains his position that existing financial legislation works just fine. Where do you stand on this? Well, I think there's clearly a gap in um in in regulation of spot digital assets. If you just take assuming Ether is not a security, Bitcoin and Ether, depending on your day counts somewhere between 60 75% of the market capitalization of, of digital assets. And if those two assets are commodities, then by definition, 60 to 75% of the market does not have a federal regulator. And so that, that's a significant gap and you can fight about whether other assets are or are not securities, but that alone means that a significant amount of the, of the market is not subject to, you know, regulatory jurisdiction of a federal agency. You can check out more stories all about crypto regulation this week on coin desk dot com slash policy week 2023. Thank you to Daniel, even though he's not here. He is the cat, a cat and he is cat and partner and co chair for financial markets and regulation. That was Daniel Davis.