In a strongly worded statement, CFTC Commissioner Dawn Stump called out what she sees as a growing misunderstanding of the CFTC’s jurisdiction over digital assets. Accordingly, the commissioner laid out a framework to clarify CFTC oversight in this area. She stated that the CFTC has exclusive jurisdiction over derivatives based on commodities but only limited authority over cash commodities, and it is incorrect to suggest that a crypto product necessarily falls under the jurisdiction of either the SEC or CFTC.
"Before considering whether to redesign the regulatory structure in the crypto context, let’s get the facts straight about our current system," said Stump.
CFTC oversight. Stump provided an infographic that lays out fundamental tenets relating to CFTC jurisdiction. Stump highlighted the following points:
- The definition of "commodity" under the Commodity Exchange Act is extremely broad.
- The CFTC has two types of authority: regulatory and enforcement.
- The CFTC does not have regulatory authority over cash commodities. Rather, the CFTC regulates derivatives instruments based on commodities, including futures and swaps contracts.
- For example, the CFTC regulates futures and swaps contracts on natural gas, but not the transmission and sale of natural gas for resale in interstate commerce, which is overseen by the Federal Energy Regulatory Commission (FERC).
- The CFTC has enforcement authority over products it regulates and over entities that offer them.
- For example, a trading platform that offers derivatives on digital assets to U.S. persons without registering, or in violation of CFTC trading rules, is subject to the CFTC’s enforcement authority. The CFTC has brought actions in this area since 2015, including the recent BitMEX action.
- The CFTC’s enforcement authority also includes broad anti-manipulation and anti-fraud authority relating to cash commodities, even though the CFTC does not regulate these commodities. This is because manipulation or fraud in underlying cash markets can affect derivatives markets, so the CFTC has authority to protect the integrity of cash markets.
"[T]here has often been a grossly inaccurate oversimplification offered which suggests [crypto products and other digital assets] are either securities regulated by the Securities and Exchange Commission, or commodities regulated by the Commodity Futures Trading Commission," said Stump. "The prevalence of this misunderstanding about U.S. regulatory delineations has grown to a point that I believe requires correction."
Therefore, said Stump, to determine the CFTC’s regulatory authority over a digital asset, the correct question is not whether the asset is a commodity or security. Rather, one should ask whether a futures contract or other derivatives product is involved.
Regulation of digital asset cash markets. Stump also emphasized that the CFTC does not regulate commodities, but rather derivatives—and this is true for digital assets just as for any other asset class.
Stump has made the point before. In March, the commissioner issued a statement in connection with the CFTC’s settled enforcement action against Coinbase, Inc., in which the cryptocurrency trading platform agreed to pay a $6.5 million civil penalty for misconduct involving inaccurate reporting and wash trading. Stump expressed "serious concerns" about the CFTC’s decision to bring the action. She noted that Coinbase was not required to register with the CFTC and that it did not offer any derivatives products regulated by the CFTC. Further, the misconduct did not affect any listed derivatives products on digital assets, because there were none traded at the time.
In remarks at a bitcoin conference in April, Stump reiterated that the CFTC regulates commodity futures, even where another regulatory body has jurisdiction over the underlying commodity itself. Stump cautioned against a "regulatory grab," warning that confusion between enforcement and frontline regulation could "potentially lead to a slippery slope of ever-expanding and ill-defined priorities for the CFTC."