Crypto Platforms Ask for Rules But Have a Favorite Watchdog

It may seem strange that a crypto magnate is seeking federal oversight. But as lawmakers and bureaucrats grapple with how to police a fast-growing and risky $2 trillion market, new rules seem inevitable. In March, President Joe Biden signed an executive order calling on federal agencies to work out policies on crypto. Bankman-Fried, whose company last year bought the naming rights to the Miami Heat’s basketball arena, is pushing his own ideas of what regulation ought to look like, as well as who his main watchdog should be.

He’s arguing for a bigger role for the U.S. Commodity Futures Trading Commission. The relatively small agency monitors futures contracts in basic goods such as crude oil, corn, and pork, as well as financial derivatives such as interest-rate swaps. It also oversees U.S. futures and options contracts on the popular cryptocurrencies Bitcoin and Ether. A U.S. affiliate of the Bahamas-based FTX offers such crypto derivatives, so part of its business is already under the CFTC’s purview.

Bankman-Fried wants Congress to expand the CFTC’s authority to cover trading in the coins themselves. Currently, the CFTC only claims jurisdiction over cash token markets in cases of suspected fraud or manipulation that could affect the performance of crypto derivatives. In February testimony to the Senate, he said this lack of clarity is bad for investors and the industry. Other trading platforms are also starting to see the merits of being overseen primarily by the CFTC, say industry leaders who asked not to be named talking about private discussions.

All this is happening as another regulator, the U.S. Securities and Exchange Commission, is flexing its muscles in crypto, and some industry watchers say it’s no coincidence: Expanding the CFTC’s role could put some digital assets beyond the SEC’s reach. “The exchanges are coming to a conclusion that the last thing they want is to be regulated by the SEC,” says Patrick McCarty, who teaches a class on crypto at Georgetown University’s law school.

The SEC is run by the Biden administration’s most prominent crypto expert, Gary Gensler. Although he has a fascination with crypto’s underlying blockchain technology—he taught a course on it at the Massachusetts Institute of Technology—he hasn’t been an industry booster. Instead, he’s scared a number of exchanges by warning them that they’re violating the law by selling coins that are, in his view, unregistered securities. And he reminds them they could face steep fines if they don’t register with the agency, according to people briefed on the discussions.

The ambiguous regulatory regime underscores how complicated it is for the government to get a handle on crypto. The situation, says Representative Josh Gottheimer, a New Jersey Democrat, “is totally chaotic and confusing.” He’s working on legislation to regulate stablecoins, tokens that typically are pegged to traditional currencies like the dollar. Spokespeople at the SEC and CFTC declined to comment.

The Biden executive order asks for cooperation among some two dozen agencies and government offices, including the U.S. Department of State, the U.S. Environmental Protection Agency, and the Office of Science and Technology Policy. The regulator of major banks, the Office of the Comptroller of the Currency, has argued that stablecoins that aren’t properly backed by reserves could produce something akin to a bank run, and thus should be subject to reviews by its examiners. The Consumer Financial Protection Bureau is eyeing crypto lending. Both stablecoins and crypto lending are also on the SEC’s radar. Importantly, the executive order doesn’t “clearly delineate regulatory responsibility between the SEC and the CFTC,” says Representative Don Beyer, a Virginia Democrat.

The big, largely unsettled question in crypto regulation is which digital assets count as securities. Some, like Bitcoin, seem to fall clearly into the commodities bucket. But a growing number seem similar to stocks, bonds, or funds. Their may depend on how money is invested or on the success of a technology project, much as a stock’s depends on how well a company performs. That may put them in SEC territory. Stablecoins could also potentially be considered securities. So might digital artworks, or nonfungible tokens, if owners sell fractions of them to investors. Ultimately, courts or Congress may have to draw the lines.

FTX says that in promoting more power for the CFTC, it’s not trying to box out Gensler, who ran the CFTC in the Obama administration. Brett Harrison, president of the U.S. arm, FTX US, says it just wants the CFTC to have clearer authority over the coins that are considered commodities.

But FTX appears to be placing its thumb on the CFTC side of the scale. Bankman-Fried has become a frequent visitor to Capitol Hill—holding meetings with lawmakers, testifying in favor of the CFTC, and circulating proposed legislation that would expand that agency’s crypto authority. He’s hired several top ex-CFTC officials, including former Democratic Commissioner Mark Wetjen, to press his case. And on Mar. 28, Bankman-Fried tweeted that it makes sense for the CFTC to have a bigger budget to police more of the crypto-sphere, some of which could come from industry user fees.

CFTC Chairman Rostin Behnam recently told the Senate Agriculture Committee that his agency is “a few steps ahead and ready to run” with heightened oversight. He said the watchdog was already experienced in the markets because of its role in crypto derivatives. Yet the SEC is the much larger agency and has more experience protecting retail investors. It has about 4,500 full-time workers; the CFTC has about 700. The SEC’s $1.9 billion budget dwarfs the CFTC’s $300 million. Behnam has told lawmakers that a boost of at least $100 million may be needed if the agency is to take on an expanded role.

Sheila Warren, CEO of the Crypto Council for Innovation, a trade group whose members include Fidelity Investments’ digital asset arm and the exchange Coinbase Global Inc., says it will be challenging for Congress and watchdogs to set a framework for an industry that “defies the boundaries” of existing rules. “My hope,” she says, “is that we wind up with a regulatory regime that makes sense, as opposed to one that’s just the result of some sort of turf war.”

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