When the Regulators are Confused

One of the challenges of crypto adoption has been regulatory bodies inserting themselves into new ideas like crypto without really understanding what it is, and/or trying to fit the new paradigm into something old.

The first decade of crypto was great since it was so small that regulators like the SEC and CFTC in the USA pretty much ignored it. However, after the FTX debacle (which was tied into major political donors), it became an embarrassment to these lawmakers, and “something had to be done.”

The latest issue has been with SEC Commissioner Gary Gensler insisting that most crypto assets are “securities” and fall under might tighter laws. Many disagree, and apparently so do those in the CFTC.

Former CFTC Commissioner Dan Berkowitz has spoken out about the status of crypto assets, and things are still no clearer.

Speaking on May 23rd, Dan Berkowitz muddied the regulatory waters even further by stating that crypto assets can be both commodities and securities.

The notion goes against the opinion of the SEC’s Gensler who asserts they are all securities with investment contracts.

Referring to Ethereum, he said there is a “special case” where something can be both. “It can be a commodity under the CEA [Commodity Exchange Act] and a security, and that would be like a futures contract on a security, which would be like a futures contract on Apple stock.”

If the regulators are still unclear on the status of digital assets such as Ethereum, what hopes do the crypto companies and exchanges have with their compliance efforts?

CFTC Chair Rostin Behnam also faced the burning question in a Bloomberg podcast published on May 23.

Behnam was asked if the logic that applied to viewing Ethereum as a commodity could be applied to other layer-1 blockchain assets such as Solana.

He said there are two listed futures contracts for BTC and ETH, which was a “market-driven effort by exchanges and probably client demand” and had nothing to do with whether they were commodities or securities.

Behnam added that there is a lot of legal analysis by exchanges and open dialogue with the CFTC before such products can be listed. This was carried out before approval of the BTC ETF in 2017 and ETH ETF in 2020, he said before adding:

“In the context of your question of is it a security or commodity, there’s no doubt that we within the agency and at the staff level examine the characteristics of the financial asset to ensure that it complies with the law and that is falls within the definition of a commodity, and more importantly, is not a security.”

“If you look up the definition of a commodity under the CEA, nearly everything is a commodity, including securities,” he added.

The lack of clarity from regulators is making it difficult for crypto companies to operate and comply with the law. It is also making it difficult for investors to know which assets are safe to invest in.

The situation is likely to continue to be fluid for some time, as regulators try to catch up with the rapidly evolving world of crypto. In the meantime, crypto companies and investors will need to be patient and careful.