Why does everyone want to regulate Crypto?

In less than a week, two of the world's largest encryption trading platforms were successively sued by the SEC, and more than a dozen mainstream cryptocurrencies were designated as securities and included in the SEC's supervision. The SEC's powerful "Power Move" against the encryption industry shocked everyone, and the current SEC chairman Gary Gensler, who actually took charge of the command, has also become a veritable "Master of Extinction" in the encryption field.

In 2021, the encryption industry is applauding Gary Gensler's appointment. The new SEC chairman, who taught blockchain courses at MIT, is widely regarded as an ally at the top of the crypto world. However, after taking office, Gensler "turned against the water" and issued a series of strong regulatory signals against cryptocurrencies, and now he has become the "culprit" in sweeping up the currency circle.

Why is there such a big contrast before and after Gensler took office? Speculations such as "losing money by speculating on coins" and "having a personal enmity with Binance" often appear in the chat conversations of practitioners. On Wednesday night, a hearing in the U.S. House of Representatives caught the attention of BlockBeats. What was originally a hunt for regulators to round up encryption platforms has unexpectedly become a denunciation meeting against the SEC. It turns out that even under the “most stringent” regulation in history, there are obvious differences among regulatory agencies.

Carefully reviewing the history of encryption regulation, we will find that behind Gensler's spare no effort to attack the currency circle is the intensified power struggle and endless internal friction among U.S. regulators. As a victim of the competition between snipe and clam, Crypto is in a predicament and is facing unprecedented uncertainty.

Smelling hunting

After filing a lawsuit against Binance, the world's largest encryption trading platform, on June 5, the SEC did not leave the industry even a day's respite. The next day, it filed the same lawsuit against Coinbase, which was listed on Nasdaq, and at the same time filed SOL, ADA, MATIC More than a dozen mainstream cryptocurrencies are classified as securities. No matter from which point of view it is interpreted, this lightning strike against the encryption industry is the "Power Move" that the SEC has shown to the world.

As far as the effect is concerned, this attack undoubtedly made the SEC very satisfied. Under the intimidation of supervision, Robinhood immediately stated that it would delist tokens defined as securities within a week. And Binance.US, which is facing an additional SEC asset freeze application, even delisted hundreds of Token trading pairs in one night. But in fact, it is difficult for the two lawsuits themselves to achieve any substantial results in the short term. This point, I believe the SEC itself is very clear, after all, even the Ripple case has been dragged on for several years, not to mention that this time it is the boss and the second in the industry.

What's interesting is that after seeing the SEC's heavy blows, not only practitioners in the encryption industry, but also "peers" from supervision are panicked. Perhaps the SEC understands very well that in this attack, the object of provocation is actually someone else.

Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam, Coinbase Chief Legal Officer Rostin Behnam, Coinbase Chief Legal Officer Paul Grewal and Dan Gallagher, Robinhood's chief legal compliance and corporate affairs officer, were in attendance. In this hearing, the SEC became the object of everyone's condemnation.

The committee asked the CFTC chairman straight to the point, should the SEC have complete control over digital assets? And Behnam's answer is very intriguing.

“It’s not a zero-sum game, and I’m not taking any legislative or legal authority that the CFTC might get from someone else. But there’s a regulatory vacuum here, a gap in regulation of digital commodity assets,” Behnam said, “SEC There should be authority on assets classified as securities. But the fact that the largest coin, Bitcoin, is a commodity is determined by US courts. And under US law, it is not regulated... and given that Few of the crypto-commodity assets listed on most trading platforms are now officially classified as commodities, so there is an urgent need to give regulators additional powers over the crypto-commodity space.”

Most notable in this statement was Behnam's language about cryptocurrencies. He didn't use the term "Digital Asset" but "Digital Commodity Asset". Behnam acknowledged that the SEC has regulatory authority over all assets classified as securities, but he did not admit that digital currencies should be classified as securities. In his speech, Behnam also repeatedly hinted that only by letting the CFTC regulate cryptocurrencies in a commodity way can the current regulatory vacuum in the industry be resolved.

In addition to the competition for the right to classify encrypted assets, the current SEC regulatory enforcement model has also been fiercely bombarded. Glenn Thompson, chairman of the House Agriculture Committee, sided with the CFTC and made it clear: "Regulation through law enforcement is not an appropriate way to manage markets, adequately protect consumers, or promote innovation."

For Crypto, the CFTC and the SEC are torn apart

In fact, the CFTC and the SEC have clashed more than once over cryptocurrency regulation. In August 2021, when the SEC called for expanding the scope of supervision of the cryptocurrency industry, Brian Quintenz, then chairman of the CFTC, tweeted that cryptocurrencies are commodities and should therefore be regulated by the CFTC rather than the SEC. “The SEC has no jurisdiction over pure commodities or where they are traded, whether those commodities are wheat, gold, oil, or cryptoassets,” he tweeted. Subsequently, the Agriculture Committee of the U.S. House of Representatives immediately supported the CFTC, saying that cryptocurrencies were beyond the jurisdiction of the SEC.

Earlier, former CFTC chairman Christopher Giancarlo also tweeted that the CFTC is more experienced than the SEC in the regulation of the Bitcoin and encryption markets. Giancarlo wrote: "If the Biden administration really wants to properly regulate the cryptocurrency industry, it needs to nominate a CFTC chairman."

To a certain extent, Giancarlo's remarks are not problematic. In terms of jurisdiction over cryptocurrencies, the CFTC's legal basis is indeed much clearer than that of the SEC. The CFTC has always considered cryptocurrencies to be commodities under Section 1(a)(9) of the Commodity Exchange Act (CEA), within its regulatory purview. This interpretation has also been recognized by the federal court, so the CFTC exercises regulatory power over encrypted derivatives, and exercises anti-fraud and anti-manipulation enforcement powers over spot encrypted transactions. Since 2016, many crypto giants, including Bitfinex, Tether, BitMEX, and Binance, have received fines from the CFTC. From this perspective, CFTC does have more experience in the supervision of encrypted platforms. (BlockBeats note, for more information on CFTC fine records, please read "In recent years, CFTC has issued fines to encryption companies")

In contrast, the SEC has much lower regulatory consistency for cryptocurrencies. Before Gary Gensler took office, the SEC did not appear to be interested in cryptocurrencies. The only ones explicitly taking action are those engaging in initial coin offerings (ICOs), which are clearly unregistered securities offerings. But the SEC has been evasive in trying to regulate cryptocurrencies more broadly. Therefore, although the SEC has fined more than $100 million in total in the encryption industry, the fines are all for projects such as Tezos, Block one (EOS) and Ripple that have undergone token financing, which seem to have no threat in the eyes of encryption institutions.

After Gensler took over the SEC, the situation has changed significantly, and the SEC has become more aggressive in regulating cryptocurrencies. In August 2021, Gensler spoke at the Aspen Security Forum (Aspen Security Forum) as the chairman of the SEC, saying that many areas of cryptocurrency involve securities laws and need to be regulated by the SEC. This remark immediately aroused a strong reaction from the CFTC, and there was the tit-for-tat scene above. Gensler, on the other hand, did not show any weakness, and later repeatedly stated in public that most of the tokens are securities and need to be classified under the regulatory functions of the SEC.

On this basis, Gensler's "law enforcement team" began to conduct a series of investigations on different tokens, and conducted a complicated interpretation of the "investment contract" according to the Howey Test (Howey Test), trying to make the narrative of "cryptocurrency is a security" into the mainstream. On November 8, 2022, the U.S. District Court of New Hampshire ruled that the SEC won the case against the accusation that LBRY issued an unregistered security, affirming that the cryptocurrency LBC issued by LBRY is a security. The SEC ushered in an important victory in the "cryptocurrency securitization" battle, and also added new chips to its protracted tug-of-war with Ripple (XRP).

Then, the day after the LBRY case was won, FTX exploded. A multibillion-dollar super unicorn disappeared in just 48 hours, sparking yet another regulatory battle between the CFTC and the SEC. Both have brought enforcement action against SBF, accusing him of violating the Securities Act and the Commodity Exchange Act, respectively.

When charging FTX executives Caroline Ellison and Gary Wang, the SEC believed that the two manipulated FTT tokens and explicitly described FTT as a "crypto asset security." The CFTC did not specify the legal status of FTT, but used Bitcoin, Ethereum, and Tether as examples of "digital commodity assets" to imply the asset attributes of FTT. The competition for the right to interpret the attributes of tokens was extremely intense. In the end, CFTC Commissioner Caroline D. Pham even issued a statement directly, condemning the SEC’s actions as “a model of law enforcement supervision” and encouraging CFTC to use all available means to enforce the Commodity Exchange Act in the encrypted field .

Supervised "cash cow"

Why Are Regulators Going to War Over Cryptocurrencies?

Before the collapse of FTX, the authoritative community seemed to have reached a "new consensus", that is, Congress should establish a comprehensive regulatory framework for the encryption industry. For example, the Financial Stability Oversight Committee (FSOC) recommended to Congress in October 2022 to pass legislation to provide regulators with rule-making power over "non-securities encrypted assets." However, whether it is CFTC or SEC, the committee did not give a clear direction.

The Digital Goods Consumer Protection Act, proposed by Senators Debbie Stabenow and John Boozman in August of the same year, defines cryptocurrencies such as Bitcoin as commodities, but does not provide detailed guidance on which encrypted assets should be classified as "securities" . Obviously, this gives the CFTC more jurisdiction over encryption. The subsequent "Financial Innovation Act" initiated by Senators such as Cynthia Lummis even pointed out that most digital assets are much more similar to commodities than securities, further supporting the CFTC as the main cryptocurrency regulator.

One very important thing the above two bills have in common is that both will allow the CFTC to self-fund itself by charging encryption companies user fees. And the way of "fee-based fundraising" is exactly the power that the SEC has had in the securities market for a long time. Be aware that the fees charged by the SEC for securities trading and other market activities are the main source of its budget.

Since Congress greatly expanded CFTC's responsibilities and included swap transactions into its jurisdiction in 2009, CFTC's budget has never kept up with its expanded scope of power, and the budget still relies on congressional appropriations. So the CFTC's $300 million budget is an order of magnitude less than the SEC's roughly $2 billion budget. For an organization with a short budget, being able to obtain the right to "collect protection fees" is an absolute Game Changer.

Take the SEC as an example, a large part of its annual budget comes from fees charged by the securities market. These fees include registration fees (paid by companies when they issue stock or bonds to the public), transaction fees (paid by stock exchanges and other market participants when transactions are made), and many other small fees. Of course, there are all kinds of fines. So while its budget must be approved by Congress, the SEC never appears to be dependent on congressional appropriations.

There is no question that the ability to impose user fees will go a long way toward ensuring that the CFTC is effectively carrying out its mission. CFTC's earlier fines on Bitfinex and Tether reached $1.5 million and $41 million, respectively. In 2021, the CFTC and BitMEX reached a settlement, and BitMEX paid a fine of $100 million directly to the CFTC, accounting for one-third of the CFTC's budget for that year.

As CFTC Chairman Rostin Behnam said, there is a vacuum in the regulation of crypto assets. Then the regulatory agency that gets the upper hand can not only take the initiative, but also gain more power, and the benefits it can get are also obvious. For regulators, finding their own "cash cows" is becoming more and more important in an environment where the U.S. has a serious fiscal deficit and the whole country is talking about the debt ceiling.