(Kitco News) – The battle over digital asset regulation appears to be heating up as Commodity Futures Trading Commission (CFTC) Chair Rustin Behnam told an Illinois court that Bitcoin (BTC) and Ethereum (ETH) are digital commodities under the Commodity Exchange Act and that 70-80% of tokens in the cryptocurrency market are not securities.
Behnam made the comments while testifying before the U.S. Senate Committee on Agriculture, Nutrition and Forestry’s hearing on the oversight of digital commodities. The breaking update was provided by Fox Business journalist Eleanor Terret, who live-tweeted the latest developments in the ongoing court case.
?CFTC Chairman Behnam says an Illinois court confirmed that $BTC and $ETH are digital commodities under the Commodity Exchange Act.
— Eleanor Terrett (@EleanorTerrett) July 10, 2024
In prepared remarks, Behnam said, “During my almost seven years at the CFTC as both a Commissioner and as Chairman, I have observed the digital asset market evolve significantly, expanding and collapsing, at times with periods of high volatility.”
“What has concerned me most throughout the expansion of this digital asset class is that while everyday Americans fall victim to one digital asset scam after another, there remains no completed legislative response,” he added. “I have repeatedly been asked by members of Congress what I am doing to protect their constituents. I believe the single most important thing I have done, and continue to do, is advocate to this body to fill the regulatory gap. I am not alone in my concerns.”
“In 2022, a Financial Stability Oversight Council report highlighted that there is a gap in regulation of the spot market for digital assets that are not securities,” he noted. “This gap for non-security tokens continues to constitute a majority of the digital asset market measured by market capitalization. Given the risks that this unregulated market poses to U.S. investors, I have consistently and publicly called for new legislative authority for the CFTC, including before this Committee. Congress must act quickly in order for regulators, like the CFTC, to provide basic customer protections that are core to U.S. financial markets.”
Behman warned that inaction on the part of the government will “only result in greater risk to our financial markets and investors.”
“As the digital asset market continues to integrate into traditional financial institutions, concerns regarding broader market resiliency and perhaps even financial stability will ripen,” he said. “In short, our current trajectory is not sustainable. Federal legislation is urgently needed to create a pathway for a regulatory framework that will protect American investors and possibly the financial system from future risk.”
In making the case for the CFTC overseeing the digital asset market, Behnam said that the agency’s nine-plus years of digital asset experience “has given CFTC staff a deep understanding of the market and underlying technology that supports it. Market regulators like the CFTC were built precisely for situations we find ourselves in today. The flawed notion that regulating an asset class legitimizes it misses the point of our responsibilities.”
In his role as Vice-Chair of the International Organization of Securities Commissions (IOSCO), whose member agencies “regulate more than 95% of the world’s securities markets in over 130 jurisdictions,” Behman has “observed both major and developing economies establish regulatory frameworks for digital assets.”
“The delta between the U.S. and our international counterparts preserves weaknesses that are exploited by bad actors, and prohibits us from much-needed coordination efforts,” he said. “Further, and primarily for the members of this Committee to consider, any potential economic benefits and innovation arising from this technology ultimately will be stymied without regulatory certainty.”
Behman offered his opinion on six components that should be included in a regulatory framework to ensure the CFTC has the necessary tools to protect customers and the market.
They include the use of a “principles-based oversight model; appropriate funding; legislative authority for the CFTC to require registrants to provide a comprehensive disclosure regime regarding a commodity token’s structure, purpose, market-based characteristics, and general risks is also critical to ensure investors have access to material information; comprehensive authority for anti-money laundering, know-your-customer, and a customer identification program, built off of existing requirements for market participants; a disciplined, balanced framework for the determination of tokens as commodities or securities under existing law; and a comprehensive education and outreach program, building off of the CFTC’s Office of Customer Education and Outreach, [that] will enable the investing public to understand both the risks and opportunities of this technology.”
“I am encouraged by this Committee’s continued efforts, dating back to 2022, to fill the gap in regulation, prioritizing customer protections and market stability,” he concluded. “The principles and regulatory foundations that have made our capital markets and derivatives markets the deepest, most liquid, and most resilient in the world provide an effective model for the digital asset commodity market. We need to act thoughtfully, but with urgency, to fill this harmful regulatory gap in order to give American investors the protection they deserve.”
In follow-up questioning, Senator Sherrod Brown (D-OH) asked Behnam what the CFTC has learned from previous crypto frauds. He responded that the technology behind digital assets is “very unique and different” to traditional asset classes which “forces the agency to us to ask different questions around cybersecurity and operational resilience.”
Suggesting the need for more involvement by Congress was Senator Cory Booker (D-NJ), who said, “We've left it up to the Securities and Exchange Commission (SEC) and the CFTC to do our job for us and the market is still rife with abuse.”
Booker added that nearly half the cases on the CFTC enforcement docket are related to crypto, calling it “extraordinary.”
Behnam agreed that this was a startling fact, calling it a “staggering statistic for an agency that oversees trillion-dollar markets to have to regulate a market it does not have jurisdiction over and does not get funding for,” adding that it puts both markets at risk.
Addressing committee leaders Debbie Stabenow (D-MI) and John Boozman (R-AR), Booker said, “There's an urgency here, so I ask us to move with some haste. If we do not move and get something done more and more people will be taken advantage of and more and more people will lose their money.”
Dr. Roger Marshall, the Republican Senator from Kansas, brought up the turf war between the SEC and the CFTC over who gets to regulate digital assets, and asked Behnam, “Wouldn’t it be simpler if we put this whole thing under the CFTC's jurisdiction?”
"I speak for myself but I'd be happy to do that,” Behnam replied. “I think we have the expertise and the capacity." To accomplish this, he said it may be necessary to make some definitional changes to what a security is and what a commodity is under that regime.
Senator Tommy Tuberville (R-AL) brought up the topic of taxing crypto, asking Behnam if he thinks it’s fair that the IRS taxes Bitcoin miners regardless of whether they make a profit or not.
Behnam said he hasn’t investigated that specific concern, to which Tuberville replied, "If we're going to encourage people to get involved in crypto, we need to address this problem quickly as people are getting harassed.”
Behnam noted that while the SEC and CFTC coordinate from an enforcement perspective, they operate as separate entities and defend their turf regarding regulations.
And in response to a question from Senator John Boozman (R-AR), Behman said the priority right now should be regulating centralized exchanges as opposed to decentralized finance (DeFi).
“I'm a firm believer there is a regulatory nexus for DeFi, but perhaps we have to take a unique look given the unique nature of it,” he said.
