CFTC: we regulate derivatives, not digital assets
CFTC: we regulate derivatives, not digital assets
Regulation

CFTC: we regulate derivatives, not digital assets

By Eleonora Spagnolo - 25 Aug 2021

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The CFTC had to intervene officially to remind us that its authority is only over derivatives, including those related to digital assets, and not anything else. 

The CFTC’s announcement

The CFTC is the Commodity Futures Trading Commission. Its role is one of oversight. Regarding the same authority it is called upon to exercise over digital assets, Chairman Dawn D. Stump, in a press release, wanted to clarify the areas within which it can exercise its power. 

The explanation was necessary because doubts have been raised with the exponential growth of the cryptocurrency sector, or false information has been made about the role that must exercise both the SEC (Securities and Exchange Commission) and the CFTC. 

It reads in this regard:

“The CFTC does not regulate commodities (regardless of whether or not they are securities); rather, it regulates derivatives—and this is true for digital assets just as for any other asset class. Before considering whether to redesign the regulatory structure in the crypto context, let’s get the facts straight about our current system.”

The CFTC’s 10 points

To better clarify what the authority’s competencies and powers are, the CFTC has issued 10 points.

They state that:

  1. The Commodity Exchange Act (CEA) definition of a commodity is extensive, so saying an asset is a commodity is “irrelevant.”
  2. The CFTC has two types of authority, regulatory and enforcement;
  3. The CFTC does not have regulatory power over cash commodities; therefore, the CFTC does not regulate commodities or those who buy, sell, or deal with commodity-related activities; it only regulates commodity futures contracts or derivatives.
  4. Therefore, the CFTC does not regulate digital assets, only derivative contracts related to them, as in the case of Bitcoin and Ethereum futures contracts listed on various CFTC-regulated exchanges;
  5. The CFTC does not regulate securities, which are instead delegated to the SEC;
  6. The CFTC can regulate derivatives based on securities, but in this case, it is Congress that determines who between the SEC and CFTC should intervene, based on the characteristics of that product;
  7. The CFTC has oversight power over the products it regulates, so for example, it can intervene on derivatives exchanges that are not in compliance with their licenses. 
  8. The CFTC can intervene in case of manipulation or fraud;
  9. That is precisely why it has intervened in cases of fraud and manipulation of digital assets, although it does not regulate them directly;
  10. Ultimately, before involving the CFTC, one must be sure that it is not dealing with security or commodity but a derivative product. 

Difference between security and commodity

But what is the difference between a commodity and security? 

A commodity is defined as fungible goods negotiable on the market which are practical and storable. Commodities are oil, gold, but also agricultural products, for example. 

Security, on the other hand, is a financial asset, an investment instrument. Include in this definition stocks, bonds, treasury bills. 

So cryptocurrencies are commodities or securities? Put in these terms, if it is true that Bitcoin is digital gold and gold is a commodity, it would be fair to say that they are commodities. And there is no shortage of SEC pronouncements to that effect, both on Bitcoin and Ethereum. 

There is a lawsuit between Ripple and the SEC to consider, though. XRP is a security for the SEC, so Ripple has put its token up for sale without the proper licenses. So there would be a clear difference between Bitcoin, Ethereum, and XRP. 

That’s why the end of this court case is highly anticipated: it can write the history of cryptocurrency regulation. 

 

Eleonora Spagnolo

Journalist passionate about the web and the digital world. She graduated with honours in Multimedia Publishing at the University La Sapienza in Rome and completed a master's degree in Web and Social Media Marketing.

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