Why does everyone want to regulate Crypto?

Perhaps the SEC is very clear that the object of its attack and provocation is actually someone else. Less than a week later, the world’s two largest cryptocurrency trading platforms were successively sued by the SEC, and more than a dozen mainstream cryptocurrencies were designated as securities and included in the SEC’s regulatory scope. SEC’s “Power Move” against the cryptocurrency industry shocked everyone, and SEC’s current chairman Gary Gensler, who actually commanded and controlled the operation, became the “extinct master” of the cryptocurrency field.

In 2021, the cryptocurrency industry welcomed Gary Gensler’s appointment. The new SEC chairman, who once taught blockchain courses at MIT, is widely regarded as an ally of the cryptocurrency world at the authoritative level. However, after taking office, Gensler “changed his mind” and issued a series of strong regulatory signals against cryptocurrencies, and now he has become the “culprit” for sweeping the currency circle.

Why did Gensler have such a big contrast before and after taking office? Speculations such as “losing money in speculating coins” and “having a personal grudge with Binance” often appear in the chats of practitioners. On Wednesday night, a hearing in the U.S. House of Representatives caught BlockBeats’ attention. This hunt was originally aimed at cracking down on cryptocurrency platforms, but unexpectedly turned into a condemnation of the SEC. It turns out that even under the “toughest” regulatory environment, there are obvious differences between regulatory agencies.

If we carefully review the history of cryptocurrency regulation, we will find that behind Gensler’s unrelenting attack on the currency circle, there are increasingly fierce power struggles and endless infighting among US regulatory agencies. As a sacrificial product of the struggle between snipes and clams, Crypto is in an unprecedented state of uncertainty and faces four-cornered pressure.

The Hunt Has Gone Sour

After suing the world’s largest cryptocurrency trading platform Binance on June 5, the SEC did not leave the industry even a day of breathing space, and sued Nasdaq-listed Coinbase the next day with the same allegations, while classifying more than ten mainstream cryptocurrencies such as SOL, ADA, and MATIC as securities. No matter how it is interpreted, this lightning attack on the cryptocurrency industry is a “Power Move” that the SEC has shown to the world.

As for the effect, this attack is undoubtedly very satisfying for the SEC. Under regulatory threats, Robinhood immediately announced that it would delist Tokens defined as securities within a week. Binance.US, which faced additional SEC asset freeze applications, delisted hundreds of Token trading pairs in one night. However, it is difficult for the two lawsuits themselves to achieve any substantive results in the short term. I believe that the SEC itself is very clear about this. After all, even the Ripple case has been dragged on for years, let alone this time it is a fight against the industry’s leader and second.

Interestingly, after seeing the SEC’s heavy attack, not only practitioners in the cryptocurrency industry panicked, but also “peers” from regulatory agencies. Perhaps the SEC is very clear that its attack this time actually provokes others.

After the SEC charged Coinbase with violating securities laws for a few hours, the U.S. House Committee on Agriculture held a two-panel hearing on the regulation of the cryptocurrency spot market, with Rostin Behnam, chairman of the Commodity Futures Trading Commission (CFTC), Coinbase Chief Legal Officer Blockingul Grewal, and Robinhood Chief Legal Compliance and Corporate Affairs Officer Dan Gallagher all attending. The SEC became the target of everyone’s condemnation at this hearing.

The committee asked the CFTC chairman directly whether the SEC should have complete control over digital assets. Behnam’s answer is very intriguing.

“This is not a zero-sum game. What the CFTC may gain in terms of legislative or legal authority is not taken away from others. But there is a regulatory vacuum here, and there is a gap in the regulation of digital commodity assets,” Behnam said. “The SEC has authority over assets classified as securities. But in fact, the largest token, Bitcoin, is a commodity, as determined by U.S. courts. And under U.S. law, it is unregulated…And given that few of the crypto commodity assets listed by most trading platforms are officially classified as commodities, there is an urgent need to give regulators additional powers over the crypto commodity field.”

What is most noteworthy in this speech is Behnam’s wording for cryptocurrencies. He did not use the term “digital asset”, but “digital commodity asset”. Behnam acknowledged that the SEC has regulatory authority over all assets classified as securities, but he does not recognize that digital currencies should be classified as securities. In his speech, Behnam also repeatedly hinted that only by allowing the CFTC to regulate cryptocurrencies as commodities can the regulatory vacuum in the industry be solved.

Aside from the battle over the classification of crypto assets, the SEC’s regulatory enforcement mode has also come under heavy fire. Glenn Thompson, chairman of the House Agriculture Committee, stood with the CFTC and explicitly stated, “Enforcement as a means of regulation is not an appropriate way to manage markets, fully protect consumers, or promote innovation.”

For Crypto, CFTC and SEC Have Torn Their Faces Apart

In fact, the confrontation between the CFTC and the SEC over cryptocurrency regulation has occurred more than once. In August 2021, when the SEC called for the expansion of regulatory oversight of the cryptocurrency industry, then-CFTC Chairman Brian Quintenz tweeted that cryptocurrencies were commodities and should be subject to CFTC regulation rather than SEC regulation. He wrote in the tweet, “The SEC has no jurisdiction over pure commodities or their trading venues, whether they be wheat, gold, oil, or crypto assets.” Subsequently, the U.S. House Agriculture Committee immediately supported the CFTC, stating that cryptocurrencies were beyond the SEC’s jurisdiction.

Earlier, former CFTC Chairman Christopher Giancarlo also tweeted that the CFTC has more experience in regulating Bitcoin and the crypto market than the SEC. Giancarlo wrote, “If the Biden administration really wants to regulate the cryptocurrency industry reasonably, it needs to nominate a CFTC chairman.”

To some extent, Giancarlo’s comments are not wrong. The legal basis for the CFTC’s jurisdiction over cryptocurrencies is indeed much clearer than that of the SEC. The CFTC has always regarded cryptocurrencies as commodities under section 1(a)(9) of the Commodity Exchange Act (CEA), and therefore within its regulatory jurisdiction. This interpretation has also been recognized by federal courts, so the CFTC exercises regulatory authority over cryptocurrency derivatives and anti-fraud and anti-manipulation enforcement authority over spot cryptocurrency transactions. Since 2016, many crypto giants, including Bitfinex, Tether, BitMEX, and Binance, have received fines issued by the CFTC. From this perspective, the CFTC does have more experience in regulating crypto platforms. (BlockBeats note, for more information about CFTC fine records, please read “These Years, the Fines Issued by the CFTC to Crypto Companies”)

Comparing to the CFTC, the SEC seems to have much lower regulatory consistency for cryptocurrencies. Prior to Gary Gensler taking office, the SEC did not seem to be interested in cryptocurrencies. The only clear action taken was against projects that engaged in initial coin offerings (ICOs) because that behavior was clearly unregistered securities issuance. However, SEC had always been evasive about broader regulatory attempts on cryptocurrencies. Therefore, although the SEC’s fines in the cryptocurrency industry exceeded $100 million, the fined projects were those that had conducted token financing, such as Tezos, Block.one (EOS), and Ripple, and seemed to be no threat to the cryptocurrency industry.

After Gensler took over the SEC, the situation changed significantly, and the SEC became more aggressive in regulating cryptocurrencies. In August 2021, Gensler, as SEC chairman, spoke at the Aspen Security Forum, stating that many areas of cryptocurrencies involve securities laws and need to be regulated by the SEC. This statement immediately sparked a strong reaction from the CFTC, leading to the confrontation mentioned above. Gensler, however, was not intimidated, and subsequently stated on several public occasions that the vast majority of tokens are securities and need to be placed under SEC’s regulatory jurisdiction.

Based on this, Gensler’s “enforcement team” began a series of investigations into different tokens and provided complex explanations of “investment contracts” according to the Howey test, trying to push the narrative that “cryptocurrencies are securities” into the mainstream. On November 8, 2022, a New Hampshire court ruled in favor of the SEC in its case against LBRY for issuing unregistered securities, determining that the cryptocurrency LBC issued by LBRY is a security. The SEC scored an important victory in the “cryptocurrency securitization” battle and added a new chip to its protracted tug of war with Ripple (XRP).

The day after the LBRY case was won, FTX collapsed. A super unicorn worth tens of billions of dollars disappeared in just 48 hours, leading to another regulatory battle between the CFTC and the SEC. Both agencies took enforcement action against SBF, accusing him of violating securities and commodity trading laws, respectively.

When accusing FTX executives Caroline Ellison and Gary Wang, the SEC believed that the two manipulated the FTT token and explicitly described FTT as a “cryptocurrency security”. The CFTC did not specifically describe the legal status of FTT, but used examples of Bitcoin, Ethereum, and Tether as “digital commodity assets”, implying the asset nature of FTT. The struggle for the interpretation of token attributes is unusually intense, and even CFTC commissioner Caroline D. Pham directly issued a statement condemning the SEC’s actions as “an example of law enforcement regulation” and encouraging the CFTC to use all possible means to enforce commodity trading laws in the cryptocurrency field.

Regulatory “Cash Cow”

Why are regulatory agencies making such a big deal about cryptocurrency?

Before the collapse of FTX, the authoritative industry seemed to have reached a “new consensus” that Congress should establish a comprehensive regulatory framework for the cryptocurrency industry. For example, in October 2022, the Financial Stability Oversight Committee (FSOC) recommended to Congress to legislate to provide regulatory agencies with the power to formulate rules for “non-securities cryptocurrency assets”. However, the committee did not give a clear direction as to whether it should be the CFTC or the SEC.

The Digital Commodity Consumer Protection Act, introduced by Senators Debbie Stabenow and John Boozman in August of the same year, defines cryptocurrencies such as Bitcoin as commodities, but does not provide detailed guidance on which crypto assets should be classified as “securities”. Obviously, this gives the CFTC more jurisdiction over cryptocurrencies. The Financial Innovation Act, initiated by Senators Cynthia Lummis and others, further supports the CFTC as the primary cryptocurrency regulatory agency by pointing out that the similarity between most digital assets and commodities is much greater than securities.

There is a very important commonality between the above two bills, and that is that both will allow the CFTC to raise funds by charging user fees to cryptocurrency companies. And the “fee-raising” approach is exactly the power that the SEC has long held in the securities market. It should be noted that the fees that the SEC charges for securities trading and other market activities are the main source of its budget.

Since Congress significantly expanded the CFTC’s responsibilities in 2009 and included swaps trading in its jurisdiction, the CFTC’s budget has not kept up with its expanded authority, and its budget still relies on appropriations from Congress. Therefore, compared to the SEC’s budget of about $2 billion, the CFTC’s budget of $300 million is a whole order of magnitude lower. For an agency with a budget shortfall, the right to “collect protection fees” is an absolute game changer.

Take the SEC as an example, a large part of its annual budget comes from fees charged by the securities market. These fees include registration fees (paid by companies when issuing public stocks or bonds), transaction fees (paid by securities exchanges and other market participants when conducting transactions), and many other small fees. Of course, there are also various types of fines. Therefore, although its budget must be approved by Congress, the SEC seems to never rely on appropriations from Congress.

There is no doubt that the ability to charge user fees will greatly ensure the CFTC’s effective fulfillment of its mission. The CFTC previously fined Bitfinex and Tether $1.5 million and $41 million, respectively. In 2021, the CFTC reached a settlement with BitMEX, which directly paid a $100 million fine to the CFTC, accounting for one-third of the CFTC’s budget that year.

As CFTC Chairman Rostin Behnam said, the regulation of cryptocurrencies is in a vacuum. Therefore, regulatory agencies that gain the upper hand can not only take the initiative and gain more power, but also obtain obvious benefits. For regulatory agencies, in the context of the severe U.S. fiscal deficit and the entire country discussing the debt ceiling, finding their own “cash cow” has become increasingly important.

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