SEC vs CFTC: Changing of the Guard?

By Theodore Ouyang ’28

The Crypto Industry Looks Forward to Regulatory Tailwinds in the New Year

Bitcoin reached the $100,000 milestone for the first time ever this year on December 4, 2024, hours after President-Elect Trump nominated Paul Atkins to be the next Chairman of the Securities & Exchange Commission (SEC), stretching the cryptocurrency’s market cap close to $2 trillion. Mr. Atkins, a former SEC commissioner from 2002 to 2008, has been the co-chair of Token Alliance, the cryptocurrency industry’s advocacy and lobby group since 2017. In the 2024 election cycle, the industry spent $180 million, more than a third of all corporate super pac money, to support pro-crypto candidates. A day after Mr. Atkins was nominated, President-elect Donald Trump appointed pro-crypto Silicon Valley venture capitalist David Sacks as the White House AI and Crypto Tsar. Trump is also reported to be considering a pro-crypto candidate to chair the Commodity Future Trading Commission (CFTC). All these appointments highlight the industry’s political prowess due to its electoral involvement, but they also bring into focus the gray area of cryptocurrency regulation.

What is Cryptocurrency?

Cryptocurrency is a digital currency supported by decentralized digital ledger using blockchain technology. Some reports indicate about 40 million Americans have owned, traded, or consumed cryptocurrency. However, no law has been enacted giving guidance on how cryptocurrencies should be regulated and who should regulate cryptocurrencies. Currently, CFTC considers cryptocurrencies to be commodities, which fall under its jurisdiction, while SEC views some cryptocurrencies as securities under its mandate. The Internal Revenue Service considers cryptocurrencies to be property for income tax purposes. 

Premier Regulatory Agencies

Both the SEC and CFTC are premier regulatory agencies in the United States. 

The SEC was founded in 1934 during the Great Depression with the tripartite mandate to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC regulates securities markets, including stocks, bonds, and securities options. 

The CFTC was founded in 1974 with the mission to promote integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation. The CFTC polices derivatives markets, including futures, options, and swaps on commodities. 

Biden Administration’s Whole-of-Government Approach 

On March 9, 2022, President Biden issued a cryptocurrency executive order which outlined a “whole-of-government approach to addressing the risk and harnessing the potential benefits of digital assets and their underlying technology.” The crypto executive order covers six areas: consumer protection, financial stability, illicit activity, U.S. competitiveness, financial inclusion, and responsible innovation. 

The Biden crypto executive order did not directly designate an agency to regulate cryptocurrency. In the absence of legislative and executive clarity on jurisdiction, the SEC and the CFTC separately interpret their respective governing laws to give themselves the power to regulate cryptocurrency. Particularly, the SEC, under the leadership of Chairman Gary Gensler, has taken the lead in initiating enforcement actions against cryptocurrencies. Both the SEC and the CFTC’s interpretations of their power have been affirmed by the federal courts in many cases. This is mainly due to Chevron deference, a doctrine in which the court defers to an agency’s interpretation of a statute that it administers if the interpretation is reasonable, no matter whether the court may prefer an alternative interpretation. On June 28, 2024, the United States Supreme Court overturned Chevron deference, injecting more murkiness into the crypto regulatory jurisdiction scene.

Trump’s Change of Heart

As recently as June 2021, Trump told Fox Business that he believed that Bitcoin “just seems like a scam” and cryptocurrencies were “potentially a disaster waiting to happen.” In the runup to the presidential election, Trump changed his stance on cryptocurrencies, likely due to the influence of his bigtime supporters and donors who hold significant crypto positions and strong pro-crypto views. He vowed to make America “the crypto capital of the planet” and even promised to establish a strategic reserves of bitcoins. 

FIT21

On May 22, 2024, the U.S. House of Representatives passed the Financial Innovation and Technology for the 21st Century Act (FIT 21) in a bipartisan vote of 279-136, despite the White House’s objection. FIT21 gives the CTFC regulatory jurisdiction over digital commodities while also granting the SEC authority over digital assets that can be classified as securities. FIT21 would give the crypto industry clarity on the regulatory environment and avoid “regulation by enforcement” that both the SEC and CFTC are accused of. 

Clarity on the Horizon

FIT21 has broad bipartisan support; Democrats comprise the majority of opposition to the bill. Possible issues with the passage of FIT21 are new regulatory gaps and an upheaval of investment case precedent. SEC Chair Gary Gensler stated that FIT21 would “create new regulatory gaps and undermine decades of precedent regarding the oversight of investment contracts.” A key cornerstone of the opposition to FIT21 is it allows actors to work largely independent of the CFTC to certify their compliance with securities laws. This has been described by Congressman Gerry Connoly (D-VA) as “simply not meet[ing] the high standard of U.S. leadership in the global financial system.”

FIT21 so far has not made much movement in the Senate due to these concerns over self-certification of compliance and opposition from the Biden Administration. It is likely that FIT21 will pass through the Senate and be signed into law by President Trump. Republicans have regained control of the Senate and almost all of Trump’s nominees, such as  the AI & Crypto Tsar, SEC Chairman, Secretary of the Treasury, Secretary of Commerce, and potential candidates for CFTC Chairman, have all expressed strong pro-crypto and pro-CFTC authority over crypto views. 

If FIT21 passes through the Senate and is signed into law, there will be increased clarity in the regulatory space for digital assets. This would allow for actors such as online exchanges and backers of major cryptocurrencies to grow with an assurance of legality. However, there is a possibility for an abuse of the new system. Future developments will tell whether FIT21 and the overall changes in cryptocurrency regulation will be a positive movement for the country, the SEC, the CFTC, and crypto. Definite on the horizon, however, is an unprecedented period for regulators and traders.