US crypto needs clearer rules before punishment, says watchdog member

US financial regulators should provide more clarity on how cryptocurrency groups will be policed before punishing their alleged missteps, according to a member of the US Commodity Futures Trading Commission.

Dawn Stump, a commissioner on the CFTC, which has some oversight over cryptocurrencies along with other agencies including the Securities and Exchange Commission, has become a vocal proponent of clarifying guidelines for digital assets, as regulators have targeted some companies with fines or lawsuits.

“What I discourage here at the CFTC is bringing enforcement actions without giving [their targets] the tools they need to be compliant,” she said in an interview with the Financial Times, adding she was opposed to “regulating through enforcement”.

“I think there’s a lot of that happening right now,” she added.

Stump, who was nominated by President Donald Trump in 2018, is the lone Republican commissioner at the CFTC, serving with acting chair Rostin Behnam, a Democrat. The US derivatives markets regulator ordinarily has five commissioners but three seats are vacant.

The commissioner’s remarks highlight a fraught debate triggered by the advent of the crypto industry, which has left a complex regulatory network such as the one in the US scrambling to map how to oversee a ballooning sector.

She referred to crypto platform Kraken, which the CFTC in September fined $1.25m for failing to register as a futures broker, as an example of enforcement occurring ahead of clear rulemaking.

“We’ve never designed a regulation that explains to these entities how they could achieve that registration,” said Stump. “I would have preferred that we would not have brought those types of cases until we had better defined how they might achieve compliance.”

Many Republican lawmakers agree with Stump in arguing there is insufficient clarity on crypto regulation. Pat Toomey, the most senior Republican on the Senate banking committee, this week said that “failure” by Gary Gensler, SEC chair, “to provide clear rules of the road for cryptocurrencies underscores the need for Congress to act”.

Gensler, who was nominated by Joe Biden, has said that many crypto products could be defined as securities, but has stopped short of issuing further guidance, saying existing rules are sufficiently clear. In recent months he has urged crypto platforms to contact the SEC and discuss whether they should register with the agency.

“I do wish the SEC would [give] more specifics on how they arrive at the conclusion that some of these things [digital coins] are securities,” Stump said.

Meanwhile, regulators have accelerated enforcement action against crypto players. Coinbase in September said the SEC had warned that it would sue the company if it launched a digital asset lending product it ultimately scrapped. Tether, the world’s largest issuer of stablecoins, in October agreed to pay a $41m penalty to resolve CFTC’s claims that it had falsely represented its digital tokens as being fully backed by dollars.

When bringing cases like the one involving Tether, Stump said the CFTC has “missed the mark” in failing to state clearly that it is not responsible for day-to-day oversight of the cash markets.

“We’ve given the public a false sense of security when we bring these cases without including that clarification.” 

Stump also disagreed with the notion that digital commodity products automatically fall under CFTC jurisdiction, and stressed that the agency’s day-to-day regulatory responsibility includes derivatives on commodities, not commodities themselves: “We don’t regulate cattle. We regulate cattle futures.” 

While crypto oversight was important, the commissioner warned it might be pulling focus from lengthier, complex cases involving products more traditionally overseen by the CFTC, including more conventional futures, options and swaps.

“I just want to make sure we don’t inadvertently reallocate our resources in a way that the other things we focused on previously take a back seat,” Stump said. “If you have too many priorities . . . that also distracts from what we’re very good at, and what we’re good at is regulating derivatives products.”