CFTC Regulatory Authority Over Cryptocurrencies
The U.S. Commodity and Futures Trading Commission (CFTC) seems to be exercising its regulatory authority over cryptocurrencies as well. One of its first stances took place in 2015 when it determined that Coinflip Inc. was an unregistered security and could not conduct futures trading. As a result, those in the crypto community started questioning the CFTC’s authority in the crypto space.
Generally, the CFTC is responsible for promoting open, transparent, competitive, and financially sound derivative trading markets, along with preventing abuse, fraud, and manipulation concerning derivatives and other financial products that are subject to the Commodity Exchange Act (CEA).
Regarding cryptocurrencies, the CFTC has limited regulatory oversight over cash markets, which don’t utilize margin, leverage, or financing. However, it does have full authority to engage in anti-fraud and anti-manipulation enforcement actions on commodities markets when the currencies are traded in interstate commerce or traded as futures.
Treating a Virtual Currency as a Commodity
There is a great deal of uncertainty about the status of cryptocurrencies. The FTC interprets the term “virtual currency “as a digital representation of value (a “digital asset”) functioning as a medium of exchange, in addition to any other digital unit of account acting as a form of currency regardless of its format. Meaning, coins, tokens, or digital units distributed through smart contracted would fall into this definition.
The commission also emphasizes that the definition should not be treated as definitive or arbitrary. In September 2015, the CFTC stated that,
“Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities,and are therefore subject as a commodity to applicable provisions of the ACT [CEA] and regulations.”
Keep in mind that “other virtual currencies” does not include “all virtual currencies” in the above definition. A crypto token’s status as a security or commodity depends on the facts and circumstances. Further, the CFTC’s official position on virtual currencies does not contradict that of the SEC. Both will address the issue on a case-by-case basis and when it comes to Initial coin offerings, most are classified as a security and are under the SEC’s jurisdiction.
CFTC Jurisdiction Over Crypto Exchanges
Platforms and markets that conduct spot transactions and those who participate in the markets do not come under the CFTC’s regulatory oversight. But, it does not necessarily mean that the CFTC has no influence – it has enforcement jurisdiction to investigate fraud and market manipulation by subpoenas, civil enforcement actions, and other investigative powers.
The CFTC has already used such powers on numerous occasions. The commission issued subpoenas in 2017 to Bitfiniex and Tether. In June 2018, it also subpoenaed Bitstamp, Coinbase, itBit, and Kraken for market manipulation. The authority for these actions arose form a New York federal district court case, in which the court determined that the CFTC can regulate fraud and manipulation in currency spot markets.
The presiding judge, Jack B. Weinstein, granted a preliminary injunction over Patrick McDonnel and his company, Cabbage Tech, Corp, determining that virtual currencies and commodities are subject to CFTC jurisdiction under the CEA. The judge further found that “until Congress clarifies the matter, the CFTC has concurrent authority, along with other state and federal administrative agencies, and civil and criminal courts, over dealings in virtual currency.”
Overall, the CFTC’s prevailing attitude toward cryptocurrency and DLT, is positive. Commissioners seem to admire blockchain technology and its ability to change the financial world. The CFTC’s actions may provide security and less uncertainty to the crypto industry. Further, the CFTC has broadened powers under the Dodd-Frank Act, allowing it to continue its role as an important regulator in the virtual currency market.