SEC Vs. CFTC — The Failure Of US Regulators
Market participants in the United States are still struggling to decipher whether digital assets fall under the securities or commodities category, as the distinction is not always straightforward. The lack of clarity in American legislation has left people in a state of bewilderment, desperately searching for unambiguous direction. It’s quite possible that a crypto asset could be deemed a security or a commodity, or something altogether distinct, based on the regulator consulted and the moment of inquiry.
And while Coinbase sues the SEC due to lack of clarity surrounding crypto laws and Gerry Gensler is getting grilled by the congress, the EU pushes ahead and is leaving the US behind.
With this article we want to have a look into the US crypto regulatory puzzle and what the European Union is doing to provide a regulatory framework for the industry.
The Regulatory Landscape In The US
In the good old USA, the two biggest dogs in the crypto regulatory yard are the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). But their boundaries are as blurry as a hungover Sunday morning.
The SEC keeps an eye on securities, and if a crypto passes the Howey Test, then it’s game over, it’s a security. And what the hell is the Howey Test, you ask? Well, back in 1946, the Supreme Court established this legal yardstick. Simply put, if a person invests money with the expectation of profits generated primarily from the efforts of others, then that’s a security.
On the flip side, the CFTC calls Bitcoin and Ethereum commodities, and they have jurisdiction over them under the Commodity Exchange Act. But why does this classification matter, you may ask? Well, each one of these classifications comes with its own set of regulatory and legal requirements.
Now, let’s take a look at the recent legal tussle between Binance, the CFTC, and its CEO Changpeng Zhao. The CFTC’s lawsuit explicitly states that Bitcoin, Ethereum, and Litecoin are commodities. And this ongoing scuffle just goes to show that we’re still trying to figure out how to classify crypto within the regulatory framework.
A Call For Clearer Regulations
The regulatory haze has led to a litany of legal disputes, with both the SEC and CFTC claiming jurisdiction over the same crypto assets. This lack of clarity has left market participants scratching their heads about the legal status of their investments, while the regulatory landscape remains mired in uncertainty.
Industry titans and lawmakers alike are starting to clamor for a more lucid and comprehensive regulatory framework. This regulatory uncertainty has forced US-based businesses to spread their wings abroad. Gemini’s latest move to expand its presence across APAC and Coinbase’s registration in Bermuda are just a couple of examples of this trend.
A clear regulatory framework is desperately needed to promote innovation and growth in the crypto sector while reassuring investors. Coinbase’s Chief Legal Officer, Paul Grewal, shares this view, stating his confusion over the classification of crypto assets. Grewal highlighted the ambiguity of the situation, stating that crypto can seemingly be “both a security and a commodity, except when it isn’t.” He pointed out that the distinction “depends on which regulator you consult and when.”
Many industry leaders are exasperated by this regulatory vagueness and question if this is truly the best America can offer.
The EU Pushes Ahead
EU regulators are moving forward with plans to establish their influence by introducing policy frameworks before other jurisdictions. The European Union’s Markets in Crypto-Assets Regulation (MiCA) supertext has finally been approved after years of negotiations. MiCA’s text aims to provide a comprehensive regulatory framework for centralized crypto actors.
Patrick Hansen, Circle’s Director of EU Strategy and Policy, believes that MiCA could provide a boost for EU crypto businesses and the EU economy, but its success will depend on the practical implementation standards that will be developed in the future.
MiCA has specific provisions for stablecoins, which are divided into two subcategories: E-Money Tokens (EMTs) and Asset-Referenced Tokens (ARTs). EMTs are tokens that aim to stabilize their value by referencing the value of a single fiat currency, such as USDC, USDT, and EUROC. EMT issuers must maintain certain equity capital reserves, and significant institutions are subject to additional rules and are regulated by the European Banking Authority. ARTs, on the other hand, cover stablecoins not pegged to a single fiat currency and include those referencing brackets of currencies, commodities, and cryptos.
While these designations provide some clarity for stablecoin issuers, the effectiveness of MiCA will depend on how the standards are implemented. MiCA also includes carveouts for decentralized organizations, clarifying that “where crypto-asset services… are provided in a fully decentralized manner without any intermediary, they should not fall within the scope of this Regulation.” However, some fear that MiCA may alienate European developers from building projects that aim to progressively decentralize. Early-stage stablecoin issuers reliant on centralized features may find the regulatory atmosphere hostile and avoid incorporation in EU member states.
Conclusion
In the world of crypto regulation, the EU is making moves while the US is dragging its feet. The recently approved Markets in Crypto-Assets Regulation (MiCA) supertext is a broad patchwork of regulation aimed at providing a comprehensive crypto regulatory framework for centralized crypto actors. While it may have some drawbacks for builders, it’s certainly a step up from the lack of clarity in the US.
The stalling of legislation and ham-fisted enforcement efforts in America provide little benefit to the good actors in the space, and as hostility towards crypto continues in the US, the EU may be boxing some crypto companies in. But as builders, we must keep pushing forward, fighting for the ideals we hold dear.
It’s true that MiCA may be a massive leap forward for crypto regulation, but we must remember that crypto is a rapidly evolving landscape, and comprehensive legislation for an industry just beginning to spread its wings is a tall order. Nonetheless, we must keep building, keep innovating, and keep pushing the boundaries of what’s possible in this exciting space.
Who We Are
Moonrock Capital is a Blockchain Advisory and Investment Firm, incubating and accelerating early stage startups since 2019.
Website: https://www.moonrockcapital.io
Twitter: https://twitter.com/MoonrockCapital
Disclaimer: None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.
