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CFTC Chair Discusses SEC Chaos in House Testimony
What happened?
Last Wednesday, the House Committee on Agriculture held a hearing to collect testimony from the Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam. Several representatives asked Chairman Behnam about the CFTC’s existing authority to regulate digital asset transactions, the efficacy of the Financial Innovation and Technology for the 21st Century Act (FIT21), and how the CFTC may be generally equipped to regulate digital asset commodity transactions in the future.
Chairman Behnam reiterated the CFTC’s stance that “bitcoin and ether are commodities” and expressed concerns about the Securities and Exchange Commission (SEC) potentially making a contradictory determination that ether (ETH) is a “security.” According to Chairman Behnam, such a finding would put CFTC registrants that list ETH-based futures contracts into an untenable position: “non-compliance with SEC rules as opposed to CFTC rules.” To avoid such confusion, the CFTC Chairman expressed his hope to continue working with the SEC to “ensure that whatever steps are taken are deliberate, that [the CFTC is] involved, and that [the SEC] understand[s] what the consequences would be if there was a decision by the agency to determine that ETH was a security.”
Regarding FIT21, Chairman Behnam argued that the bill would provide regulatory clarity to digital asset market participants and help to protect consumers against fraud.
What does this mean?
The chaos that the SEC would wreck on U.S. businesses by U-turning on its view of ETH is yet another manifestation of the need for Congressional action to establish a legislative framework for the regulation of digital assets. Reality belies the SEC’s incantation that “the law is perfectly clear and the crypto scofflaws just don’t want to comply.” On the legislative front, although Chairman Behnam expressed a desire to prioritize traditional commodity futures market issues over those related to digital assets, his long-standing desire to see Congress establish a regulatory for digital asset markets is welcome.
State AGs: SEC Lacks Authority over Digital Assets in Kraken Case
What happened?
On February 29, attorneys general (AGs) from eight states filed an amicus brief in the Kraken case. The brief argued that the SEC “wrongly expands the definition” of an “investment contract,” exceeding the SEC’s statutory authority, and that the SEC’s theory “would preempt areas of law traditionally regulated by states such as consumer protection.” While their amicus “support[s] . . . neither party,” the state AGs urged the court to reject the SEC’s “regulation of crypto assets absent an investment contract.”
The state AGs of Montana, Arkansas, Iowa, Mississippi, Nebraska, Ohio, South Dakota, and Texas reached consensus in the brief, echoing some of Kraken’s arguments and other industry participants’ arguments. To begin, the state AGs argued that the SEC erroneously expanded the definition of “investment contract” in this enforcement action to cover any crypto asset that can increase in value. Such an expansive view would suggest that Congress intended the SEC to function as a “general purpose consumer protection regulator” to regulate any digital assets that could be expected to increase in value, which is not reflected in the law.
Furthermore, the state AGs argued that the SEC’s overbroad definition of “investment contract” and claimed authority over digital assets lacks congressional authorization and violates the major question doctrine. Last, the state AGs asserted the SEC’s interpretation of an “investment contract” would violate the federalism canon because it preempts state laws and regulations on consumer protection. Thus, the SEC’s exercise of undelegated power would deprive the states of their police power, “limits legal innovation and tailoring in [an] emerging area,” and puts consumers at risk, as some state laws are more protective and better tailored to counter the risks of certain assets.
What does this mean?
This amicus brief filed by eight state attorneys general, alongside other filings such as DEF’s and other industry amicus briefs, have robustly countered the SEC’s excessive expansion of the definition of “investment contract.” The SEC’s overreach in regulating crypto assets has caused much concern and confusion, even at the state level. A challenge by state regulators on grounds of federalism should carry significant weight with the court.
Tilting at Windmills: SEC Attempts to Make an Order on Default Judgment Matter
What happened?
On March 1st, Federal District Court Judge Tana Lin of Seattle granted the SEC's motion for default judgment in Securities Exchange Commission v. Wahi et al. Back in July 2022, the SEC charged Sameer Ramani, an ex-Coinbase employee, with insider trading, along with Ishan Wahi and others. However, Ramani never formally appeared in the court proceeding and never responded to the SEC’s complaint, leading to the SEC’s motion for default judgment. Within the order, Judge Lin found that “resolution on the merits [wa]s not reasonably possible,” but still held that secondary market sales were securities transactions.
A motion for default judgment is a procedural motion that asks the court to rule against an absent defendant simply for failing to appear. The court decides a motion for default judgment solely on the complaint, assuming all facts asserted in the complaint are true, and the plaintiff’s arguments. Because the defendant is not present to argue against the plaintiff’s assertions, there is limited discussion and development of the claims raised in the complaint, and an order for default judgment holds little precedential value. This means that it is not binding on any other courts and merely has persuasive value — if any.
Despite the limited weight this default judgment order holds, the SEC filed notices of supplemental authority citing it in its cases against Coinbase and Binance. Lawyers for Coinbase and Binance responded, pointing out the flimsiness of this “supplemental authority” and that Judge Lin did not cite the SEC v. Ripple summary judgment order among other important cases.
What does this mean?
A default judgment contains limited analysis and discussion to persuade courts and are rarely cited for any reason. Without a developed record or arguments from an opposing party, this trinket serves only to pat the backs of the SEC for their victory against a defendant who never showed up to defend himself. It is unlikely that this one-sided decision will change the mind of any judge. As the attorneys for Coinbase wrote to Judge Katherine Polk Failla, the order was “procured against an empty chair and its reasoning reflects as much.”
The FED Chair's Congressional Testimony
What happened?
Last week, Chairman of the Federal Reserve (Fed) Board of Governors Jerome Powell testified before the U.S. House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs.
While interest rates, inflation, and banking regulations were the central topics of these hearings, Chairman Powell commented on the issue of Central Bank Digital Currencies (CBDCs). In response to a question from Senator Kevin Cramer (R-ND), Chairman Powell said that “the [Fed] is nowhere near recommending or let alone adopting a central bank digital currency in any form.” He argued that the government should not surveil citizens' financial activity: “We would not stand for, or propose here in the United States…this is how it works in China.” “People don't need to worry about CBDC and nothing like that is remotely close to happening anytime soon…and if it is to happen, it will happen only through the banking system with the last thing we would want do to have individual accounts for all Americans or any Americans for that matter,” stated Chair Powell. He also noted that the Fed cannot proceed on the matter without Congressional authorization.
What does this mean?
Chairman Powell's testimony reflects how quickly CBDCs have become a major political issue and underscores the Fed's cautious approach. Chairman Powell’s focus on financial privacy issues was encouraging—given how little attention that important problem usually gets, and his statement that a potential U.S. “CBDC” could not be self-custodied (what he referred to as the Fed providing “individual accounts”) echoes previous Fed studies on the topic.
