It’s a confusing time to be a crypto company. The markets are volatile and trading activity is shaky right now, but the biggest problem for crypto firms seems to be that there’s no clarity at the moment around the laws they’re supposed to be in alignment with.
Take, for instance, what the U.S. Commodity Futures and Trading Commission (CFTC) considers crypto to be: In its lawsuit against the crypto exchange Binance and its CEO, the CFTC alleged the firm violated trading and derivative rules, and referred to the two largest cryptocurrencies, bitcoin and ether, as commodities.
Per the CFTC’s filing against Binance, the regulator said certain digital assets, including bitcoin, ether, litecoin and “at least two fiat-backed stablecoins,” tether and the Binance USD, “as well as other virtual currencies as alleged herein, are ‘commodities.’”
The complaint also alleged that Binance and the respective parties charged “solicited and accepted orders, accepted property to margin and operated a facility for the trading of futures, options, swaps and leveraged retail commodity transactions involving digital assets that are commodities.”
This stance is “a significant issue if the same company [and] exchange is sued by multiple agencies for the same tokens,” Yankun Guo, partner at Chicago-based law firm Ice Miller, told TechCrunch+. “This stand is also a stark contrast to the position taken by the SEC and possibly weakens the SEC’s argument that the tokens are securities.”
The CFTC’s viewpoint diverges from another major U.S. government agency, the Securities and Exchange Commission (SEC), which views most crypto assets (aside from Bitcoin) as securities.
Earlier this month, SEC Chair Gary Gensler told Bloomberg that the crypto market, while smaller than capital markets, is “not necessarily compliant” compared to traditional finance.
At the SEC, there’s “one goal,” Gensler said: “For them to come into compliance. […] They can call themselves crypto exchanges or lending or staking as a service or other intermediaries. [Our goal is for them] to come into compliance and ensure that they don’t mislead the public or commingle the funds or take the publics’ funds and do things we don’t allow in our financial markets.”
Gensler compared it to how the SEC doesn’t allow the New York Stock Exchange to play with customers’ funds, make markets, run hedge funds or be in the clearing business. “We separate out those conflicts,” he added.
The CFTC and SEC did not immediately respond to requests for comment.
So are cryptocurrencies commodities or securities? Well, it depends on who you ask. As someone who’s been covering this space, I can empathize with firms offering crypto trading on this, as it feels wishy-washy. Almost like if your mom told you one thing, but your dad told you another. Who are you going to listen to?
For there to be fewer lawsuits, charges and so forth, there needs to be a concise stance from both agencies, but truth be told, I think that’s unlikely for quite some time, given how slowly regulators in the U.S. move. It’s a sticky position for companies to be in.
“If you look at what’s happening in the United States, overall, we are in an unprecedented situation,” said Jason Allegrante, chief legal and compliance officer at Fireblocks, a digital asset custody platform. “A picture is emerging where every major prudential and markets regulator in the U.S. is coming out with enforcement against crypto businesses.”
Just last week, the SEC announced charges against Justin Sun, the founder of Tron, alleging he orchestrated “unregistered offer and sale, manipulative trading and unlawful touting of crypto asset securities.”
The SEC said it was suing Sun, the Tron foundation, the BitTorrent Foundation and BitTorrent (now referred to as Rainberry) over the sale of two tokens: TRON, or TRX, and BitTorrent, or BTT. Both TRX and BTT were referred to as unregistered crypto asset securities by the SEC, further fueling the debate on whether cryptocurrencies are, in fact, securities.
This lawsuit also came around the same time the SEC issued a Wells notice to Coinbase.
In response to the announcement, Coinbase executives took to Twitter Spaces on Thursday to discuss the decision.
“I think it is easy to look at the situation right now and conclude that the SEC is trying to change the game,” Paul Grewal, chief legal officer of Coinbase, said during the Twitter chat. “What’s actually happening is the SEC is trying to cancel the game after it’s been played. And so we think it’s very important to keep a focus on what this means [longer term for Coinbase and the industry].”
In the Coinbase filing on Wednesday, SEC language appeared to indicate that staking through a third-party service can run afoul of securities law. But the Coinbase Wells notice, alongside charges on crypto companies from the SEC and other agencies alike, may lead to more regulatory confusion if the agencies don’t coincide on what is a security, commodity or neither.
“For crypto, this is the worst of both worlds: one company with an SEC allegation, Coinbase, and one with a CFTC allegation, Binance,” Allegrante said. “How are we supposed to understand what rules do or do not apply? With unclear regulation coming from two different sides, I’m not sure how people are supposed to figure out what set to comply with, if it’s possible to receive banking services, or if it’s possible to have a crypto bank.”
Until the agencies make clear decisions together, waters will continue to rise.
“There is growing tension around how the CFTC and SEC are classifying certain tokens,” Guo said. There are also fears that, in the future, companies could use the legal interpretations of one agency against the other. For example, stating the SEC has “no authority to regulate in this area because crypto is a commodity per the CFTC,” Guo added.
The CFTC affirming that these cryptocurrencies are commodities also creates greater tension and room for arguments that the agencies are contradicting one another, according to Jeffrey Blockinger, chief legal counsel for decentralized exchange Vertex Protocol.
“It feels like the CFTC is strategically undercutting Chairman Gensler, which is unprecedented, at least, as far as I can recall,” Blockinger said. “More importantly, though, the CFTC’s position supports those of us who have been calling on Congress to exercise their responsibility to settle this interagency dispute through legislation.”
This further makes the point that indecision and infighting within the federal government are discouraging innovation, Blockinger said.
“Regulatory agencies should not be competing against each other; they should be working together to create a collaborative framework that fosters innovation and protects investors,” he added. “We clearly need the clarity that everyone is asking for. By the time it comes, the U.S. may very well be left behind.”