In testimony before the US House of Representatives Subcommittee on Commodity Markets, Digital Assets, and Rural Development, Daniel J. Davis, partner and co-chair of Financial Markets and Regulation, shared his views on digital asset regulation and the Commodity Futures Trading Commission's (CFTC) role in it.
Dan, a former General Counsel at the CFTC, explained that there is a significant gap in federal spot market regulation because the large majority of digital asset spot market activity falls outside the regulatory jurisdiction of both the CFTC and the SEC.
Five points highlighted by Dan:
- The CFTC has jurisdiction over the futures, options on futures, and swaps markets, as well as leveraged retail commodity transactions. The CFTC's regulatory authority includes the ability to require registration and examine registered entities that offer these products. The CFTC also has enforcement jurisdiction over anti-fraud and anti-manipulation in the commodities markets at large.
- The CFTC's anti-fraud and anti-manipulation authority over the spot markets is important because the spot markets highly influence the derivatives markets. Spot markets and derivatives markets are highly correlated, and derivatives market prices are largely determined by prices in the spot market. If someone can manipulate the price of the spot market, they can also influence the price of derivatives products based on the underlying asset.
- The CFTC has actively used its enforcement authority in the digital assets space, having brought at least 70 enforcement actions involving digital asset commodities. In the last fiscal year, more than 20 percent of the Commission's enforcement actions related to digital asset commodities.
- The CFTC has identified that seven of the top 15 digital assets – which account for about 76 percent of the digital asset market – are commodities, while the SEC has identified only one of the top 15 digital assets – which accounts for about 2 percent of the digital asset market – as a security.
- The CFTC has a long history of involvement with digital assets. As early as 2014, the first Bitcoin-denominated cash-settled swaps, options, and non-deliverable forwards began trading on CFTC-registered swap execution facilities. The next year, the CFTC found that Bitcoin and other virtual currencies were commodities. The first cash-settled Bitcoin futures contracts began trading on CFTC-registered Cboe Futures and CME in 2017.
Watch the subcommittee hearing.
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