Chair Behnam Says CFTC Ready and Able to Regulate Digital Asset Markets
Commentary by Steven Lofchie and Conor Almquist
CFTC Chair Rostin Behnam asserted that the CFTC has the existing authority to regulate digital assets markets and the relevant experience to do so.
In a speech at the Brookings Institute, Mr. Behnam said the CFTC is "well situated to address the risks in the cash markets for digital assets through direct oversight." He highlighted that the CFTC oversaw the first bitcoin futures contracts in 2017, and that the agency's management of fintechs ever since are strong indicators of the CFTC's regulatory capabilities. Mr. Behnam noted that the CFTC brought over 50 enforcement actions relating to digital assets since 2014, 20 of which came in 2021.
Mr. Behnam argued that digital asset markets share many similarities with traditional commodity derivative markets, though he noted an important difference between the two: there is a high level of retail participation in digital asset markets compared to wholesaler dominance in traditional commodities markets. He explained that this level of retail participation creates additional risk, citing a CFTC study that showed that a percentage of investors in digital assets "are less likely to have the financial resources to absorb losses." He also expressed concern that retail investors place their trust in the exchange platforms they trade on, despite the fact that these exchanges are not currently subject to the same regulations as traditional banking entities and other exchanges.
Mr. Behnam offered support for legislation that recognizes the need for guardrails in the digital asset economy, calling for additional regulation that ensures accountability, stability and oversight. He added that the CFTC will (i) continue to use existing enforcement authority to the fullest extent to protect customers from fraud and manipulation, and (ii) promote interagency cooperation to ensure that no fraudulent or manipulative activity "falls through a gap."
Commentary
Until either the SEC or Congress provides more substantial guidance as to the treatment of various digital assets under the securities laws, there is a ceiling on the CFTC's ability to oversee the digital asset markets. The fact that the CFTC is holding itself out as the principal regulator of these markets may motivate the SEC to propose some clearer jurisdictional lines, for fear that Congress may determine (see, e.g., the Lummis-Gillibrand proposal) that the only way forward is to give the CFTC much broader jurisdiction at the expense of the SEC's jurisdiction.
Commentary
There were a number of notable moments in a discussion Mr. Behnam had with Aaron Klein, senior fellow at the Brookings Institution, after the Chair delivered his prepared remarks. Mr. Behnam restated that the CFTC needs clear market oversight over digital commodity assets, emphasizing that traditional market surveillance and oversight authority would bring transparency to digital markets, protect customers and ultimately support the market's growth. While Mr. Benham repeatedly emphasized the CFTC's competency and ability to oversee the digital commodity asset market under existing law, he suggested that substantially expanded regulatory authority was the ideal. Mr. Benham voiced his discomfort in determining the regulatory status of any specific digital asset, looking to guidance from Congress and generally deferring to court precedent. He stated that, based on prior court guidance, "we understand what constitutes a security and what constitutes a commodity." But he recognized that, while there is clarity from a court decision that Bitcoin is a commodity, "there are hundreds, if not thousands of other coins" which have uncertain status. For existing market participants, having regulatory certainty for a single digital asset likely gives little comfort.