It's time to 'to draw lines' between commodity and security crypto tokens — CFTC Chair Behnam on crypto regulation
(Kitco News) It is vital to start figuring out which cryptocurrencies are commodities and which are securities, said Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam, pointing to the biggest division between the CFTC and the SEC oversight purviews when it comes to crypto.
Behnam has outlined how the CFTC fits into the crypto space and how the existing framework for commodities can work for Bitcoin and other cryptocurrencies.
"As we see these coins develop and change, I think it's important … to start to draw lines around which coins are commodities and which coins are securities," Behnam said during his panel discussion at Consensus 2022 in Austin on Thursday.
And the sweeping crypto bill developed by U.S. Senators Republican Senator Cynthia Lummis and Democratic Senator Kirsten Gillibrand, unveiled Tuesday, attempts to do just that, Behnam added.
The most talked-about point in the Lummis and Gillibrand crypto bill is that the majority of cryptocurrencies, including Bitcoin and Ethereum, are defined as commodities, which fall under the purview of the CFTC and not the SEC (the U.S. Securities and Exchange Commission).
And it's important to use the CFTC's existing infrastructure, Behnam noted. "We don't have to reinvent the wheel here — provide additional authority to the CFTC, so that we can regulate cash digital commodities," Behnam said.
For the CFTC Chair, it is about his responsibility as a regulator and the gap the CFTC can fill. "We have a growing market that has a lot of risks, volatility, and promise. We've seen demand from retail and institutional clients, who want to get exposure to trade these products," he said.
However, regulating cash digital commodities will be a "departure" for the CFTC, Behnam stated. The traditional commodity markets are wholesale markets where you have wholesalers buying or selling large quantities of commodities. But the crypto space is a retail-oriented market that's highly speculative, Behnam clarified.
"We are a derivatives regulator. We don't regulate cash transactions in agricultural products or energy products, or metals products. But this [crypto] market that we're seeing emerge is retail-oriented and highly speculative," he explained. "For those coins that are commodities, it's important to use [CFTC's] infrastructure. And provide additional authority to the CFTC so that we can regulate cash digital commodities. And just leveraging the experience and expertise that we have."
Regarding the CFTC's oversight, Behnam wants to see pre-trade transparency, post-trade reporting elimination of any conflicts of interest, and information flow to ensure a level playing field.
To accommodate the crypto space, the CFTC will need to hire more experts, which is why Behnam is encouraged by the idea of a user fee that the Lummis and Gillibrand's crypto bill envisions. "A user fee would help fund us, we would have to staff up," he said.
The need for crypto regulation is front and center with the recent TerraUSD collapse, which shows why the guard rails are required for the space, Behnam weighed in.
"These are the exact issues that have been raised multiple times by myself and my colleagues about perhaps impacts that the crypto environment and the crypto ecosystem can have on traditional finance. And that's what we have to prevent," he said.
Former CFTC Commissioner Dawn Stump, who also participated in the panel discussion, said that the crypto space wants the CFTC to do more, which is why this is a critical inflection point.
"I think that it's really good that people want to see CFTC involved in their business," Stump said. "We know that this bill [proposed by Lummis and Gillibrand] won't probably end up looking exactly like it does today when it's ultimately finished. But … it's so important to have this bill start the conversation because what everybody is really hungry for is clarity."