Benham on Bitcoin, Ether: Commodities, Not Securities
On Thursday, May 18th, Commodities Futures Trading Commission (CFTC) Chair Rostin Benham chimed in on the crypto regulatory landscape on Bloomberg’s Odd Lots podcast— particularly touching on the debate between who the primary regulator for digital assets should be.
When asked about whether Ethereum is to be construed as a security or a commodity, Chair Benham explained, “There's no doubt, you know, we within the agency and at the staff level, examine the characteristics of a financial asset to ensure that it complies with the law and that it falls within the definition of a commodity. And more importantly, is not a security.”
Explaining the process by which Bitcoin and Ether contracts came to be construed as commodities, Chair Benham stated that the CFTC’s existing self-certification process accommodated futures on both Bitcoin and Ethereum. Chair Benham elaborated, “This was a market driven effort by exchanges, probably driven by client demand, to list two particular tokens. There's open dialogue over sometimes many months to make sure that the contract conforms with our legal requirements. And then at some point, there's two avenues to go down. You can [do] something called self-certify a contract, or you can seek approval from the commission. So this is what happened with both the Bitcoin and the Ether contract. Bitcoin in 2017, Ether in about 2020.”
Beyond the security vs. commodity debate, Chair Benham provided insight into the agency’s stance on regulation by enforcement of DeFi, as Polygon’s Chief Policy Officer Rebecca Rettig notes in a Twitter thread. When discussing how a DeFi exchange could become compliant with the CFTC’s requirements, Chair Benham stated, “ultimately, and I do think, you know, this raises this question about regulation by enforcement,” which he “very vigorously oppose[s], at least from a CFTC perspective.” Without commenting on the OokiDAO enforcement action, Benham argues that the CFTC embraces proactively providing clarity, suggesting “we have done everything in our power…to remain transparent and to engage with market participants in this digital asset DeFi space to ensure they know as much as they can about what the Commodity Exchange Act requires and what is required of them if they're going to offer futures options or swaps to us customers.” Explaining why proactive clarity is so important, Benham suggests “we have to be open to technological disruptions in market execution…if we don't do it, we're going to potentially be behind from a US perspective.”
What does this mean?
Chair Benham’s clarification on the CFTC’s stance on Ethereum is a far cry from Security & Exchange Commission (SEC) Chair Gary Gensler’s murky silence on the matter. Most recently, despite testifying before the House Financial Services Committee in April for a nearly five-hour hearing, Chair Gensler declined to clarify whether Ethereum is a security. “It depends on the facts and the law,” Chair Gensler reiterated.
Thankfully, it appears that CFTC Chair Rostin Benham is willing to offer the industry the clarity it needs to operate amidst a backdrop of regulatory contradictions. Indeed, Chair Benham emphasizes the importance of clarity, arguing, “you want to create a resilient, transparent market environment so that the individual investor, whether retail, but more commonly institutional, understands the risks associated with investing in commodity markets,” and so they “can understand and know with confidence that the infrastructure around those trading markets—whether it's the intermediary, the exchange, the clearinghouse, the custodian—are well regulated and sort of resilient in their ability to manage that trading and that execution.”
Coinbase Continues Push for Regulatory Clarity Through Mandamus Reply
On Monday, Coinbase replied in the Third Circuit Court of Appeals to the Securities and Exchange Commission’s (SEC) arguments against its petition for a writ of mandamus. Coinbase’s reply marks the latest step in a series of efforts to seek regulatory clarity from the SEC.
Coinbase's reply to the SEC presents several key arguments. First, Coinbase argues that the SEC's enforcement actions are not a substitute for the information-gathering process that the Administrative Procedure Act (APA) requires. The company asserts that the SEC cannot justify its refusal to act on a rulemaking petition by posturing enforcement actions as a substitute for notice-and-comment rulemaking.
Second, Coinbase points out that the SEC's threatened enforcement action against Coinbase is a direct rebuke of Coinbase’s rulemaking petition. The SEC's threat of a lawsuit against Coinbase for allegedly listing unspecified digital asset securities based on unspecified legal standards, and failing to register under a registration path that does not yet exist, effectively denies Coinbase’s rulemaking petition.
Finally, Coinbase highlights the SEC's track record of ignoring other crypto industry petitions. The SEC has received five digital-asset-related rulemaking petitions since 2017 and has acted on none. The SEC offers no excuse for allowing all of those rulemaking petitions to languish, no indication of any decision-making activity on those petitions, nor any reason to expect that Coinbase’s petition will meet a different fate.
What Does This Mean?
Coinbase's ongoing efforts to seek regulatory clarity from the SEC highlight the current uncertainties and challenges faced by the crypto industry. The outcome of the Third Circuit’s ruling could have significant implications for the future regulation of digital assets, and a favorable ruling could compel the SEC to provide greater regulatory clarity. Either way, the SEC’s specific arguments in regulating digital assets may prove useful to market participants in defending against potential enforcement actions going forward.
Digital Pound: consultation and the need for new laws
After the creation of the Central Bank Digital Currency (CBDC) taskforce in 2021, the Bank of England and the Treasury have opened a consultation window for public feedback on plans to launch the digital pound. The consultation aims to inform the modeling of the CBDC in technology, policy, and legal realms.
Since the Bank of England (BOE) is the issuer of the digital pound, and the government is the backing entity, the United Kingdom is most likely to see a direct legal claim on the digital pound between the BOE and the end user. Since CBDC is an emerging technology, the United Kingdom faces an absence of an adequate legal framework in place, opening the need for CBDC-specific laws.
What does this mean?
Although current regulations such as The Data Protection Act and The Payment Services Regulations serve as important safeguards, they may fall short in adequately protecting users when it comes to CBDCs. The underlying technology of CBDCs establishes a central database, granting the central bank access to detailed information about individuals' financial transactions. Naturally, this raises concerns about government surveillance and the potential privacy breaches.
For instance, under the Data Protection Act, enforcement agencies must go through various formal steps and institutions before they can collect consumers' financial information and take actions like freezing accounts. However, with the centralization of consumer accounts through CBDCs, authorities can bypass existing privacy buffers and retrieve private data more easily.
Furthermore, CBDCs can be programmed to implement a "dual track system" where the central bank could exclude users from accessing certain services based on their credit history and income. This approach opens doors to potential financial discrimination.
Given these implications, it is essential for governments to reconsider moving forward with a retail CBDC as it has a very strong potential to violate individual right to privacy and avails information that would illustrate their beliefs, associations, sexual orientation, etc.—attributes that could lead to discrimination from both governments and corporations.
IOSCO's Crypto Recommendations: Genuine Progress or Empty Rhetoric? What happened? The International Organization of Securities Commissions (IOSCO), a key global securities regulatory authority, has unveiled an initial framework of policy recommendations for the crypto and digital asset markets. These 18 policy recommendations address wide-ranging areas including market abuse, conflicts of interest, and protection of client assets. Notably, the recommendations aim to address pervasive concerns about investor protection and market integrity within the rapidly evolving crypto markets. The task of drafting these recommendations was assigned to IOSCO's Fintech Task Force, which comprises representatives from 27 of the 33 member jurisdictions of the IOSCO Board. The Fintech Task Force was established to create a regulatory agenda for fintech and crypto markets, which have seen substantial growth and innovation in recent years.. One recommendation for regulators underlines the importance of a unified approach to crypto-asset regulation, accommodating for flexibility due to diverse legal structures worldwide. It encourages consistent regulation across all crypto-assets, their issuers, and associated services, highlighting the possibility of crypto-assets serving as substitutes for regulated financial instruments. IOSCO also provides several recommendations in regards to stablecoins in the final chapter of the report. Key among these is requiring enhanced transparency, necessitating disclosure about the nature of the stablecoin, its backing mechanisms, redemption rights, and claims against the issuer. Information about how the reserve assets are protected, possible conflicts of interest, and the regulatory status of the stablecoin should also be made available. Further, IOSCO underscores the necessity to apply custody and client asset recommendations to the reserve assets that back stablecoins. These recommendations form part of IOSCO's broader objective of promoting regulatory consistency in response to the cross-border nature of crypto markets. The organization is keenly aware of the risks of regulatory arbitrage and the potential harm facing retail investors in these markets. Thus the policy recommendations emphasize the need for regulators around the world to strive for outcomes that parallel those in traditional financial markets.
What does this mean? The recent recommendations by IOSCO are meant to foster a more stable and secure investment environment. Importantly, the framework does not include specific guidelines for Decentralized Finance (DeFi).