Regulation
Why the SEC Should Regulate the Crypto Industry
In this illustration photo, the Commodity Futures Trading Commission (CFTC) logo is seen on a smartphone screen and the American flag in the background.
As America heads into the 2024 elections, the crypto industry seems determined to get a new set of rules. With a complete restructuring of financial rules in favor of crypto, apparently blocked in the SenateThe industry is seeking to adopt a narrower, though equally weak, framework.
Since June, the industry has collectively donated more than 160 million dollars to Super PACs. They already have successfully urged Congress to repeal the Securities and Exchange Commission’s guidance on how banks and other companies should account for cryptocurrencies in their financial statements, though they failed to gain enough support to override President Biden vetoed the repeal of the law. They are now pushing for custom legislation that would take regulation of the cryptocurrency industry out of the SEC and into the regulator strongly favored by industry leaders: the Commodity Futures Trading Commission (CFTC).
The CFTC’s total staff and budget is approximately a sixth SEC, which would make it more difficult for the agency to conduct examinations and oversee the volatile market but growth But more importantly, and probably attractive to the industry, the CFTC lacks most of the rules that the SEC has in place to protect retail investors and ensure a fair market.
The pressure for CFTC regulation comes primarily from Cryptocurrency brokers, exchanges and asset managers — cryptocurrency trading intermediaries. It is not impossible that these intermediaries adhere to SEC rules. They simply do not.
Compliance could compromise their ability to attract retail customersmany of whom are recklessly investing their savings in these highly volatile assets without the information essential to making a wise investment. In other words, compliance with the SEC’s rules that ensure a fair market could lead to a decrease in the cryptocurrency industry’s customer base and profit margins.
Although cryptocurrency advocates say the CFTC law authorizing While the argument is similar in many ways to the SEC’s, it ignores the robust rules established for decades by the SEC and the Financial Industry Regulatory Authority (FINRA), an independent, industry-funded organization that sets the rules for securities brokers and dealers.
Three key points illustrate why these rules are so important.
First, the fundamental problem with CFTC regulation is that, by design, the agency does not focus on retail investors. founded in 1974 to regulate complex financial contracts called derivatives, which are based on an underlying asset and are often used to hedge against risks in the agricultural, oil and gas, manufacturing and other industries. Retail investors and consumers generally do not participate in derivatives markets.
That’s why the CFTC has never developed a comprehensive set of requirements to protect retail investors. Instead, sellers of securities are required, both by law and by SEC rules, to disclose in detail their operations, assets, governance, risks, and finances. This information must be updated regularly as it changes.
While much of cryptocurrency is traded and sold as projects and companies looking to raise money to do things (much like companies that sell securities), cryptocurrency companies and brokers did not do disclosures close to what the SEC requires. CFTC regulation could ensure that they never have to make those disclosures.
Second, the SEC and FINRA have adopted and enforced detailed rules on how securities can be marketed and sold to customers by intermediaries. Regulating intermediaries in this manner has profound effects on marketing and customer access. There is nothing like these rules at the CFTC, which is probably exactly what the crypto industry loves.
Finally, although derivatives contracts are complex instruments, the markets in which they are traded are relatively simple. For example, when a futures contract (a type of derivative contract that allows you to buy or sell assets at a fixed price to be delivered in the future) is listed and traded on the Chicago Mercantile Exchange, it is generally tradable only on that market. In securities markets, however, there are more than one a dozen exchanges and hundreds of other regulated trading platforms to trade the same stock. Stock markets are a complex canvasso the risks are different.
In fact, the difference between these two markets lies in where much of the money invested in cryptocurrencies comes from. The cryptocurrency industry, including brokers and exchanges, knows how to exploit price differences in different markets. They also know that the SEC’s complex rules severely limit the fees they can charge and limit their profits.
So while the language of the CFTC’s governing law may resemble the language of core securities laws, the rules created by the CFTC and its self-regulatory body almost entirely lack the protective framework that has been developed over more than 80 years for securities trading.
Trying to recreate an SEC-like regulatory regime under the CFTC would not only be beyond its expertise (and budget), but would also be inefficient and wasteful. It is also unlikely to result in robust oversight of the industry or fair markets for investors, especially retail investors like average Americans who invest in crypto assets.
The CFTC’s shortcomings as a cryptocurrency regulator, the stalling of the industry’s dream bill, and recent industry lobbying make the current rush to pass crypto-friendly rules look like a desperate election-time gamble.
Alex Thornton is senior director of financial regulation policy at the Center for American Progress.