In a joint letter, leaders of the House Committee on Agriculture and the Senate Committee on Agriculture, Nutrition and Forestry asked CFTC Chair Rostin Behnam to issue regulatory guidance on digital asset markets.

The letter highlighted the CFTC's existing authority over certain digital assets (e.g., Bitcoin and Ether) under the Commodity Exchange Act, including the CFTC's (i) regulatory authority over all commodity derivatives, and (ii) antifraud authority as to physical transactions. The letter noted the very substantial benefits that can result from digital assets and decentralized finance (such as lower transaction costs and reduced settlement times), but also highlighted the potential for fraud and manipulation without the presence of responsible regulatory oversight.

The leadership requested that the CFTC provide comparisons between digital asset marketplaces and other financial markets with regard to: (i) size; (ii) participation; (iii) scope of retail investor involvement; and (iv) financial intermediaries. The leaders also requested responses detailing:

  • the proportion of the digital asset market being traded by U.S. persons;
  • the types of misconduct observed in the digital asset marketplace and whether such misconduct presents unique risks when compared to misconduct found in traditional financial markets;
  • how the CFTC has been working with stakeholders to support market growth, while ensuring consumer protection and market integrity;
  • the CFTC's collaborative work with other federal regulators in this space; and
  • any shortcomings in the CFTC's regulatory authorities to adequately regulate the digital asset space as the market continues to grow.

Commentary Steven Lofchie

The questions asked are perfectly reasonable, but they are not the most important questions and they are not directed to the most important regulator. The letter begins with the assumptions that the digital asset markets are growing and that there is some level of fraud in those markets (both of which assumptions are certainly true) and essentially asks what the CFTC is going to do about it. While many digital assets may be "commodities," and therefore the CFTC has antifraud jurisdiction, the CFTC is not particularly well positioned or staffed to chase every incident of commodity fraud across the United States - at least if the CFTC wants to keep doing its day job as well.

The more important step is for the SEC (or for Congress to push the SEC) to revisit the Securities Law Treatment of Utility Tokens. Until the SEC modifies its securities law treatment of utility tokens in light of the special characteristics of the product, the digital asset industry is to a good extent forced to go underground. There is no upside for market participants to attempt to conform to a regulatory scheme that makes it impossible for them to do business. As a result, digital asset firms either move outside the United States or they take their chances with the regulators. A modified regulatory scheme, such as that proposed by SEC Commissioner Hester M. Peirce, could allow well-intended creators of digital assets to come forward, which would in turn assist the federal regulators in focusing their efforts on the genuine bad guys.

(Note: the Agriculture Committee has authority over the CFTC, but not over the SEC, and thus is not itself the Committee that can push the SEC.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.