The First Crypto Mortgage: Bitcoin Continues to Rapidly Expand Across the US Markets
Crypto regulation has long been a topic of debate in policymaking circles. As the white-hot market continues to soar in popularity and adaptation throughout the world, lawmakers in the United States are scouring common ground to comprehend the complex jargon and mechanism of the crypto sphere. Potential policies should be scrupulous yet inviting for the digital revolution to fully unravel in this modern financial reality. And with the rapid expansion of cryptocurrencies in the notoriously arcane derivatives market, lawmakers are expediting efforts to harness the outpacing development with a proper framework before another financial crisis overwhelms the economy. The question at the forefront is a dilemma: how to categorize the crypto offerings in a traditional sense?
The Bitcoin ETFs were all the rave when the Commodity Futures Trading Commission (CFTC) – the regulator of the derivatives markets – flashed the green light to the bitcoin futures to start trading in 2017. Yet, a debate sparked in terms of the broader classification of the crypto market. Would you define cryptocurrencies (tokens like Bitcoin and Ether) as securities or commodities? NFTs are digital products. By that definition, cryptocurrencies ought to be too. However, securities are passive investments in an enterprise with the expectation of returns (US Securities Act of 1933). Commodities are goods/services that entail a future delivery contingent on a contract (US Commodity Exchange Act of 1936). Neither of these definitions fully contemplate the concept of cryptocurrencies or NFTs. Lawmakers, regulators, and even investors are thus at the crossroads over this matter. An important decision is at stake over appropriate classification: whether the US Securities and Exchange Commission (SEC) regulates these tokens or should the CFTC take the helm.
According to a rare bipartisan stance, both the Democrat and the Republican representatives lean towards the class of commodities, calling on the derivatives regulator to reign in controlling cryptocurrencies. In a recent letter to the Chairman of the CFTC, the bipartisan members on both the Senate and House Agriculture Committees have called on the ‘critical role’ of the derivatives watchdog in regulating these digital assets. Noteworthy Senators like Debbie Stabenow and John Boozman wrote: “It is imperative that customers stay protected from fraud and abuse and that these markets are fair and transparent.”
Reflecting a similar sentiment, Rostin Behnam – Chairman of the CFTC – stated that his powers are mostly limited to overseeing derivatives. The Agriculture Committees of the Congress oversee the CFTC regulating much of the expansive $610 trillion worth of the global derivatives market. Yet, he pointed out that with explosive growth in digital tokens, Congress ought to do more than merely direct the CFTC. It should also ensure that the CFTC has the tools and jurisdiction to function at its fullest potential. During his confirmation hearing before the Senate Agriculture Committee, Behnam stated: “We’ve been one of the few cops on the beat of limited statutory authority related to anti-fraud and anti-manipulation.” He also expressed his firm opinion to lawmakers regarding the “expansion of the authority of the CFTC.”
The jurisdiction, however, is contended by the SEC: claiming that the virtual currencies are securities; thus should fall in the purview of the SEC. The highlight of this supposed clash over regulatory authority is Gary Gensler – Chairman of the SEC. He has garnered attention for his stringent views rivaling the CFTC’s friendlier approach towards the crypto sphere. While Gensler classifies bitcoin as a commodity, he has confusingly refused to address the classification of Ether either as a commodity or a security. Nonetheless, the time is elapsing as players like Coinbase are rapidly expanding into the derivatives market, further blurring the line between traditional and virtual markets in the process. Until now, many of the US exchanges were skeptical from moving into the derivatives market due to regulatory uncertainty. Their global counterparts like Binance dabbled in leverage without the regulatory oversight feared by the US exchanges. However, more and more are now expanding into the fast-growing market. Meanwhile, the White House is weighing an executive order to draft a blueprint for regulating the market across the government. All while the broader classification is still questionable.
Whether to catalog digital tokens as commodities or securities, this debate is futile for institutions like Coinbase and FTX. These crypto exchanges lay the groundwork in diverse markets while operating the spot market. While the regulators are scrambling to define new digital phenomenons, these exchanges are preparing to dominate the bearish trends via diversification. And while the government is still envisioning tighter frameworks, these exchanges are hedging against the volatility that brings infamy to cryptocurrencies. The lawmakers should understand that while their fears of fraud and manipulation are justified, collaboration with these exchanges might actually solve this dilemma. The head of Coinbase Institutional, Brett Tajpual, hinted at such a notion: “We want to work with the regulators to make sure everything is in position to launch as early as we can.” He was talking about the recent acquisition of FairX, a CFTC-regulated crypto futures exchange.
Behnam also admitted that while the CFTC controls the $2.7 billion worth digital asset market, a strong collaboration with the SEC would be beneficial in regulating an industry of such colossal size and appeal to retail and institutional investors alike. The crypto expansion would continue to entice some, disenchant others. The right approach is collaborative engagement. Not just amongst regulators but on a broader scale, including these crypto exchanges and maybe even retail traders. The crypto sphere is still perplexing to lawmakers, these crypto visionaries might be the right tool for the regulators to maneuver through the complexities without hindering the financial revolution that is afoot.